From the TUC

Is higher government spending essential to the fight against poverty in the UK? (1)

11 Jul 2012, by in Economics, Society & Welfare, Uncategorized

Last week the government published the annual figures on The Effects of Taxes and Benefits on Household Income, making this a good time to think about how to cut poverty and inequality. In particular, I want to think about the prospects for poverty and inequality if governments aren’t able to increase spending on benefits and services (or not by much). This is a biggish task, so I’m going to spread it over more than one post.

Today, I want to concentrate on data we have to use a lot in this exercise. Most of the people I respect who argue that it will be a long time before governments can spend more on benefits and services are also committed to reducing poverty and inequality. For the most part, their answer to the question of how to progress towards social justice relies on ruthless prioritisation and greater efficiency. I want to argue that the figures I concentrate on today and some other evidence I plan to bring in at a later point suggest that this is not enough.The Effects of Taxes and Benefits on Household Income (ETBHI) is not as widely reported as it should be, because it is important for discussions about policy: it shows how taxes and benefits redistribute income between different groups.

ETBHI looks at households’ incomes at five stages:

  1. Original income – that is income from employment, investment and other non-government sources;
  2. Gross income – add in income from cash benefits, including tax credits;
  3. Disposable income – take away direct taxes, like income tax;
  4. Post-tax income – take away indirect taxes, like VAT;
  5. Final income ­ – add the value of services (‘benefits in kind’).

(There’s a very good ONS chart explaining this that I reproduced in my post on last year’s statistics.)

Original income is very unequal:

In this chart, households are ranked by their income and grouped into tenths (‘deciles’) and I have given for each of the categories of original income the value of the average for the bottom decile as a percentage of the top decile:

Category of original income

Bottom as % of top

Wages and salaries

2.8%

Imputed income from benefits in kind (mainly company cars)

1.5%

Self-employment income

3.8%

Private pensions, annuities

9.0%

Investment income

3.8%

Other income

12.9%

Total

3.4%

On average, the top decile’s original income is 29.6 times that of the bottom.

Turning to benefits and tax credits, the picture isn’t an exact mirror image. In cash terms, the benefits paid to the top decile are worth over 30 per cent of the benefits paid to people in the bottom decile but if we look at cash benefits as a proportion of each decile’s gross income there is a clear gradient:

The top decile’s average income as a multiple of the top decile’s has now fallen from 29.6 for original income to 11.2 for gross income.

For the most part, direct taxes are progressive, taking a higher proportion of richer groups’ gross income: 

Not all direct taxes, however, are progressive:

Direct taxes as a proportion of gross income by decile group and by tax, 2010/11

 

Bottom

2nd

3rd

4th

5th

6th

7th

8th

9th

Top

 Income tax

3.5%

3.4%

4.9%

6.4%

7.6%

9.7%

11.3%

13.2%

15.1%

18.2%

 Employees’ NI contributions

1.0%

1.7%

2.4%

3.0%

3.5%

4.5%

5.1%

5.7%

5.8%

4.1%

Council tax & N Ireland rates

7.1%

4.6%

4.2%

3.9%

3.8%

3.3%

3.0%

2.7%

2.3%

1.5%

National Insurance Contributions are progressive, except at the very top of the income distribution, where the Upper Earnings Limit reduces higher earners’ tax bills. Council Tax is particularly regressive.  

Income tax is the most important of these taxes, accounting for 64 per cent of an average household’s direct taxes. It is quite strongly progressive; as a result, the average disposable income of the top decile is 9.6 times that of the bottom decile.

In cash terms, indirect taxes fall most heavily on the richer deciles, but, as a share of disposable income, they hit poorer groups harder:

Indirect taxes in cash terms and as a proportion of disposable income by decile group, 2010/11

 

Bottom

2nd

3rd

4th

5th

6th

7th

8th

9th

Top

 Cash terms (£)

3 499

3 231

3 632

3 850

4 457

5 083

5 733

6 334

7 300

9 379

 Proportion of disposable income

41.2%

24.4%

22.3%

20.4%

20.4%

18.9%

17.8%

17.0%

15.9%

11.5%

Because of this, post-tax income is more unequal than disposable income with the top-to-bottom ratio rising to 14.5.

We now come to the effect of benefits in kind. By far the most important are education and the NHS, accounting for 39.0 and 57.3 per cent of spending under this heading. Benefits in kind are mildly progressive: spending on these services for the bottom decile is 31 per cent higher than for the top decile. But this is a massive element of public spending: benefits in kind account for 22 per cent of the average household’s final income. This means that the final income of the top decile is 6.3 times that of the bottom decile.

The effect of taxes and benefits is to reduce an original income disparity of 29.6 to 1 to a final income ratio of 6.3.

Another way to think of this is to ignore original income and look at the distribution of the benefits and taxes:

 Average per household (£)

Bottom

2nd

3rd

4th

5th

6th

7th

8th

9th

Top

Cash benefits

      6,049

8,031

8,469

8,175

7,322

5,987

4,708

3,488

2,362

1,868

Benefits in kind

      7,411

8,087

7,675

7,494

7,203

7,715

7,265

6,384

6,009

5,643

Direct taxes

-     1,122

-1,420

-2,109

-2,910

-3,816

-5,694

-7,746

-10,258

-13,885

-25,569

Total indirect taxes

-     3,499

-3,231

-3,632

-3,850

-4,457

-5,083

-5,733

-6,334

-7,300

-9,379

Net effect

      8,839

    11,467

    10,403

     8,909

     6,252

     2,925

-    1,506

-    6,720

-   12,814

-   27,437

A strategy for reducing inequality and poverty that doesn’t raise taxes and increase benefits and services looks as if it is starting off with a massive disadvantage. This is the issue I want to look at in my next post.

5 Responses to Is higher government spending essential to the fight against poverty in the UK? (1)

  1. Is higher government spending essential to the fight against poverty in the UK? » Tax Research UK
    Jul 12th 2012, 10:07 am

    […] Exell at the TUC has produced a first rate blog including a great deal of data on the way the UK tax system is working at present. It’s […]

  2. After Austerity: the widening gap between rich and poor -video | Think Left
    Jul 12th 2012, 1:55 pm

    […] Exell at the TUC has produced an elegant graphical analysis (1) of the way the UK tax  and benefit system operates to redistributes wealth.  His conclusion […]

  3. FCAblog » Read elsewhere 12 July 2012
    Jul 12th 2012, 11:37 pm

    […] at the Touchstone blog, they're reviewing the impact of benefits and taxes on household incomes. This is one of my favourite ONS publications and I've drawn some […]

  4. How much equality is enough? « westlancashirerecord
    Jul 16th 2012, 10:13 am

    […] question: how much income redistribution is enough? What is an acceptable level of equality in other words? The effect of taxes and benefits is to reduce an original income disparity of 29.6 to 1 to a final […]

  5. How much more money should a banker be allowed to spend than an idler on benefits? – Telegraph Blogs
    Sep 5th 2012, 5:16 pm

    […] statistics (that's how much money you can spend in comparison to others) as the TUC has provided here. The effect of taxes and benefits is to reduce an original income disparity of 29.6 to 1 to a final […]

TUC