Poverty and household spending in Britain

Mike BrewerAlissa GoodmanAndrew 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

-2%-1%0%1%2%3%4%5%6%7%8%

Poorest 2 3 4 5 6 7 8 9 Richest

Decile

Ave

rage

ann

ual g

row

th r

ate

Income 1979 - 1990

Spending 1979 - 1990

Growth rates

-2%-1%0%1%2%3%4%5%6%7%8%

Poorest 2 3 4 5 6 7 8 9 Richest

Decile

Ave

rage

ann

ual g

row

th r

ate

Income 1979 - 1990Spending 1979 - 1990Income 1996/7 - 2002/3Spending 1996/7 - 2002/3

Poverty rates

2002/3 Income poverty rate (%)

Spending poverty rate (%)

Overall

Self-employed

Jobseeker

Pensioner couple

Single pensioner

Poverty rates

2002/3 Income poverty rate (%)

Spending poverty rate (%)

Overall 21.8 22.2

Self-employed

Jobseeker

Pensioner couple

Single pensioner

Poverty rates

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

Poverty rates

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

0

5

10

15

20

25

30

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Pov

erty

rate

(%)

IncomeExpenditure

Child poverty, 1961 – 2004/5

0

5

10

15

20

25

30

35

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

Pov

erty

rat

e (%

)

IncomeExpenditure

Pensioner poverty, 1961 – 2004/5

0

5

10

15

20

25

30

35

40

45

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Pov

erty

rate

(%)

IncomeExpenditure

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

0

2

4

6

8

10

12

14

16

18

20

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

Pov

erty

rat

e (%

)

IncomeExpenditure

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 means-tested benefits (by 2001)

• Winter fuel allowance (from 1999)

Changes to benefit entitlement for single pensioners (1996=1)

0.951

1.051.1

1.151.2

1.251.3

"Poor", 60-74

"Poor", 75-79

"Poor", 80+ or ondisability benefits

"Rich"

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 means-

tested benefit under 1996/7 system)• 1,281 “young” & 1,775 “old”

• 1,778 “rich” pensioners (not entitled to a means-tested benefit under 2002/3 system)

• Some pensioners omitted entirely (neither “poor” nor “rich”)

Changes in benefit entitlements, income and spending, 1996/7-2002/3

0%5%

10%15%20%25%30%35%

Benefitentitlement

Income Spending

Rich

Young poor

MiddlepoorOld Poor

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 to 3/99

4/99 to 3/03

Rich A B

Poor C D

Impact of benefit changes on pensioners

Impact of policy on log( . )

April 1999 MIG (Poor vs Rich)

April 2001 eq’n (Young vs Old)

Income 0.112 *** 0.016

Spending (non-housing)

0.096 *** 0.097 *

Spending on basics

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( . )

April 1999 MIG (Poor vs Rich)

April 2001 eq’n (Young vs Old)

Income 0.112 *** 0.016

Spending (non-housing)

0.096 *** 0.097 *

Spending on basics

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( . )

April 1999 MIG (Poor vs Rich)

April 2001 eq’n (Young vs Old)

Income 0.112 *** 0.016

Spending (non-housing)

0.096 *** 0.097 *

Spending on basics

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 age-related 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