Poverty and household spending in Britain

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)

11. Growth rates

12. Growth rates

13. Poverty rates

14. Poverty rates

15. Poverty rates

16. Poverty rates

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

24. The effect of increased benefit entitlements on pensioners’ spending Mike Brewer

25. 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]

26. Outline • Policy changes affecting pensioners • Method and data • Results • Conclusions

27. 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)

28. Changes to benefit entitlement for single pensioners (1996=1) Graph shows maximum entitlement to IS or BSP for single pensioner

29. 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”.

30. 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”)

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

32. 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

33. Impact of benefit changes on pensioners * = significant @ 10% *** significant @ 1%

34. Impact of benefit changes on pensioners * = significant @ 10% *** significant @ 1%

35. Impact of benefit changes on pensioners * = significant @ 10% *** significant @ 1%

36. 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

37. 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