Poverty and household spending in Britain Mike Brewer Alissa Goodman Andrew Leicester Institute for Fiscal Studies 17th May 2006

Income and Expenditure Poverty Andrew Leicester

Motivation “… if we don’t raise the standard of living of the poorest people in Britain we will have failed as a government.” Tony Blair, 1997 Poverty debate has focused on income as financial measure of living standards Expenditure provides alternative / complementary measure

Measuring living standards Typical focus on income Correlation with welfare indicators Government targets Government policy Expenditure may have advantages Well-being depends on what we consume, not what money we bring in Saving and borrowing (smoothing)

Smoothing out living standards Short-term variability of incomes Unemployment / Illness Bonuses / Windfalls Self-employed have more volatile incomes Variability across life-cycle Student loans Pensioners run down accumulated assets Maybe spending reflects longer-term inequalities

Measuring living standards Typical focus on income Correlation with welfare indicators Government targets Government policy Expenditure may have advantages Well-being depends on what we consume, not potential consumption Saving and borrowing (smoothing) Incomes for poorest households badly measured? But also disadvantages Measurement problems Expenditure versus consumption (e.g. durables)

Key questions What would poverty story of recent years be had focus been on expenditure? Why might the two tell us different things? Does giving poor people more money translate into higher expenditure, and on what?

Measuring poverty Measure expenditure poverty in same way as income poverty in annual Households Below Average Income publication Define household as ‘poor’ if its income or spending below 60% of contemporary median (“relative poverty”)

Data Wish to obtain best available data on household incomes and expenditures Construct measures which are as conceptually similar as possible Expenditure Family Expenditure Survey / Expenditure and Food Survey 1974 – 2002/3 Weekly household spending, equivalised, real terms No housing (rent, mortgage, local tax) Income Households Below Average Income 1961 – 2004/5 (net income after housing costs) All reported at weekly household level, equivalised and in real terms

Poverty lines (2002/3) Weekly Income Weekly Spending Childless couple £173 £158 Single £95 £87 Couple + 8-year-old £213 £194 Couple + 1- and 3-year-old £216 £197 Lone parent + 8-year-old £135 £123 Lone parent + 1- and 3-year-old £138 £126

Growth rates

Growth rates The more recent period since Labour took office have been somewhat different, at least in terms of income. The green lines here show the 1980s values for comparison. Note how income growth since 1996/7 has been concentrated towards the bottom of the income distribution – this is very different from the 80s experience. Yet the spending growth pattern looks somewhat similar to the 1980s pattern, with growth rates rising towards the top of the distribution. This suggests a tightening of the income distribution unmatched by a similar move in the spending distribution. The implications of this for poverty?

Income poverty rate (%) Spending poverty rate (%) 2002/3 Income poverty rate (%) Spending poverty rate (%) Overall Self-employed Jobseeker Pensioner couple Single pensioner

Income poverty rate (%) Spending poverty rate (%) 2002/3 Income poverty rate (%) Spending poverty rate (%) Overall 21.8 22.2 Self-employed Jobseeker Pensioner couple Single pensioner

Income poverty rate (%) Spending poverty rate (%) 2002/3 Income poverty rate (%) Spending poverty rate (%) Overall 21.8 22.2 Self-employed 22.6 12.6 Jobseeker 70.1 50.4 Pensioner couple Single pensioner

Income poverty rate (%) Spending poverty rate (%) 2002/3 Income poverty rate (%) Spending poverty rate (%) Overall 21.8 22.2 Self-employed 22.6 12.6 Jobseeker 70.1 50.4 Pensioner couple 23.1 29.3 Single pensioner 19.7 42.1

Poverty rates, 1961 – 2004/5

Child poverty, 1961 – 2004/5

Pensioner poverty, 1961 – 2004/5

Non-pensioner, no-children poverty, 1961 – 2004/5

Poverty trends Rose sharply in later 1980s, particularly for income Income poverty rates stablised in early 1990s and fell in latter 1990s as policy measures enacted Expenditure poverty risen continually Recent falls in child income poverty not matched by falls in child expenditure poverty Pensioner income poverty pro-cyclical except recently pensioners now less likely to be income poor than non-pensioners Pensioner spending poverty much more stable, higher and not falling Other groups have seen rises on both measures

Why do trends differ? Some possibilities: Low income and low spenders are different people Only half of those income poor are also spending poor Increased means-tested benefits are targeted at low income households, not low spending households Suggests spending rises due to benefit increases may be reflected higher up the income distribution Changes in savings behaviour Low income households may not be spending all their new income Would happen if uncertainty over how permanent income changes are likely to be Middle income households maybe reducing savings or increasing borrowing by more than poorer households

Conclusions Living standards have risen whether measured by income or spending Income growth particularly strong for poorer people Expenditure growth strongest for higher spenders Relative position of poor improved if measured on incomes, worsened if measured on spending Shows up in increased expenditure poverty rate even as income poverty declined Reasons for different trends not yet clear Expenditure poverty ought to be monitored alongside other indicators