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

2. Income and Expenditure Poverty
Andrew Leicester

3. 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

4. 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)

5. 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

6. 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)

7. 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?

8. 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”)

9. 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

10. 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

11. Growth rates

12. 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?

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

14. 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

15. 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

16. 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

17. Poverty rates, 1961 – 2004/5

18. Child poverty, 1961 – 2004/5

19. Pensioner poverty, 1961 – 2004/5

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

21. 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

22. 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

23. 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