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
8%
Income 1979 - 1990
Average annual growth rate
7%
6%
Spending 1979 - 1990
5%
4%
3%
2%
1%
0%
-1%
-2%
Poorest
2
3
4
5
Decile
6
7
8
9
Richest
Growth rates
8%
Income 1979 - 1990
Spending 1979 - 1990
Income 1996/7 - 2002/3
Spending 1996/7 - 2002/3
Average annual growth rate
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
Poorest
2
3
4
5
Decile
6
7
8
9
Richest
Poverty rates
2002/3
Overall
Self-employed
Jobseeker
Pensioner couple
Single pensioner
Income
Spending
poverty rate (%) poverty rate (%)
Poverty rates
2002/3
Overall
Self-employed
Jobseeker
Pensioner couple
Single pensioner
Income
Spending
poverty rate (%) poverty rate (%)
21.8
22.2
Poverty rates
2002/3
Income
Spending
poverty rate (%) poverty rate (%)
Overall
21.8
22.2
Self-employed
22.6
12.6
Jobseeker
70.1
50.4
Pensioner couple
Single pensioner
Poverty rates
2002/3
Income
Spending
poverty rate (%) 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
30
25
Income
Expenditure
Poverty rate (%)
20
15
10
5
0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
Child poverty, 1961 – 2004/5
35
Poverty rate (%)
30
Income
Expenditure
25
20
15
10
5
0
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Pensioner poverty, 1961 – 2004/5
45
40
35
Poverty rate (%)
30
25
20
15
10
Income
Expenditure
5
0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000
Non-pensioner, no-children poverty,
1961 – 2004/5
20
18
Poverty rate (%)
16
Income
Expenditure
14
12
10
8
6
4
2
0
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
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
The effect of increased benefit
entitlements on pensioners’ spending
Mike Brewer
Motivation
• State benefits for 60+ risen under Labour, yet spending
poverty of pensioners little changed
• Have extra benefits improved pensioners’ living
standards?
• Related work
• Meyer and Sullivan (2004) [US data, lone parents]
• Gregg, Waldfogel and Washbrook (2004, 2006) [UK
data, families with children]
• Blow, Walker and Zhu (2005), [UK data, families with
children]
• Munro, Walker and Zhu (ongoing) [UK data, winter fuel
allowance]
Outline
•
•
•
•
Policy changes affecting pensioners
Method and data
Results
Conclusions
Main benefit changes affecting
pensioners since 1997
• Rise in basic state pension (April 2001 &
2002)
• Increases in means-tested benefits (from
April 1999) and introduction of pension credit
(from 2003)
• Equalisation of pensioner premia in meanstested benefits (by 2001)
• Winter fuel allowance (from 1999)
Changes to benefit entitlement for
single pensioners (1996=1)
1.3
1.25
"Poor", 60-74
1.2
"Poor", 75-79
1.15
1.1
"Poor", 80+ or on
disability benefits
1.05
1
"Rich"
19
96
19
97
19
98
19
99
20
00
20
01
20
02
0.95
Graph shows maximum entitlement to IS or BSP for single pensioner
Overview of method
• Compare (changes in) spending of
pensioners affected by rise in benefits to
pensioners not affected
• Attribute difference to policy.
• Called “conditional difference-in-differences”.
Difference-in-differences: data
• FES/EFS from 1996/7 to 2002/3
• Single adults born before April 1936
• Aged 60+ in 1996, 66+ in 2002 (pseudo-panel)
• 3,056 “poor” pensioners (entitled to a meanstested benefit under 1996/7 system)
• 1,281 “young” & 1,775 “old”
• 1,778 “rich” pensioners (not entitled to a meanstested benefit under 2002/3 system)
• Some pensioners omitted entirely (neither “poor”
nor “rich”)
Changes in benefit entitlements,
income and spending, 1996/7-2002/3
35%
30%
Rich
25%
Young poor
20%
Middle
poor
Old Poor
15%
10%
5%
0%
Benefit
entitlement
Income
Spending
Difference-in-differences: overview
•
•
•
•
•
•
Compare spending before and
after rise in means-tested
benefits (April 1999)
Rich pensioners tell us about
general trends affecting
pensioners: B-A
Poor pensioners tell us about
general trends and impact of
policy: D-C.
Difference tells us about impact
of policy: (D-C) – (B-A)
• Assumes “common trends”
Control for various factors
(regression-adjusted DiD)
Also compare “young” and “old”
“poor” pensioners
Mean
spend
4/96
4/99 to
to 3/99 3/03
Rich
A
B
Poor
C
D
Impact of benefit changes on
pensioners
Impact of policy
on log( . )
Income
April 1999 MIG
(Poor vs Rich)
0.112 ***
April 2001 eq’n
(Young vs Old)
0.016
Spending (nonhousing)
Spending on
basics
0.096 ***
0.097 *
0.030 ***
-0.008
Spending on
non-basics
0.149 ***
0.184 ***
* = significant @ 10% *** significant @ 1%
Impact of benefit changes on
pensioners
Impact of policy
on log( . )
Income
April 1999 MIG
(Poor vs Rich)
0.112 ***
April 2001 eq’n
(Young vs Old)
0.016
Spending (nonhousing)
Spending on
basics
0.096 ***
0.097 *
0.030 ***
-0.008
Spending on
non-basics
0.149 ***
0.184 ***
* = significant @ 10% *** significant @ 1%
Impact of benefit changes on
pensioners
Impact of policy
on log( . )
Income
April 1999 MIG
(Poor vs Rich)
0.112 ***
April 2001 eq’n
(Young vs Old)
0.016
Spending (nonhousing)
Spending on
basics
0.096 ***
0.097 *
0.030 ***
-0.008
Spending on
non-basics
0.149 ***
0.184 ***
* = significant @ 10% *** significant @ 1%
Conclusions
• Pensioners look poorer when assessed using
spending than income
• Recent rises in means-tested benefit for
pensioners were translated into higher
spending
• Results rely on untested “common trends”
assumption: evidence stronger for
introduction of MIG than equalisation of agerelated premia
Summing up
• Living standards have risen whether
measured by income or spending
• Increased expenditure poverty rate since
1997 even as income poverty declined
• Reasons for different trends not yet clear
• Recent rises in means-tested benefit for
pensioners were translated into higher
spending