The IFS answers… Who counts as poor?

The Institute for Fiscal Studies (IFS) has been much quoted and criticised by all sides over the last few months as the government has set out its willingness to be judged on how progressive or not its policies are and the IFS has become the default think tank of choice to turn to for information and supporting arguments by politicians, bloggers and pundits.

No-one is infallible, so it’s perfectly reasonable for people to sometimes agree with the IFS and sometimes disagree. However, some people from all parts of the political spectrum have not always covered themselves in glory by switching from agreeing to criticising always in line with whether or not the IFS agrees with their own previously expressed views.

So in an attempt to get beyond some of this political rhetoric and more stuck into the details, I’ve sent Mike Brewer and colleagues at the IFS seven questions. We’ll be running the answers in full in a series of posts over this week.

First up today are some of the basics. Graphs breaking people down into groups based on how well off they are and then showing the impact of policy changes on each group have become a staple of economic and political coverage. But should how well off someone is for these purposes be judged by sorting them by income or expenditure, and how reliable anyway is the underlying data?

Here then are my first three questions, along with the IFS’s answers:

Much of the IFS reporting of the likely impact of government policies  is based on sorting people into income and expenditure deciles. What is the source data for this sorting and how robust do think it is?

The data we use are from the Family Resources Survey (FRS) and the Living Costs and Food Survey (LCFS) (previously known as the Family Expenditure Survey and the Expenditure and Food Survey). These are large-scale household surveys commissioned by the government or the Office for National Statistics (ONS).

Both surveys are widely used in government and academic circles. The FRS is the basis for the official estimates of the extent of income inequality and poverty, and the LCFS is used for the widely-cited analysis by the ONS on the impact of taxes and benefits on the distribution of income. They are also used within government to analyse the impact of taxes and benefits on household income, such as the analysis produced by the Treasury in the June 2010 Budget and the October 2010 Spending Review.

The FRS has been designed by the Department for Work and Pensions to record households’ incomes as accurately as possible, and the LCFS  has been designed by the ONS to record households’ spending patterns as accurately as possible. They are not perfect, and we mention in later answers some studies of the apparent anomalies in the data. But we believe that they are the most accurate data sources available that contain the information needed to calculate how households’ tax liabilities and benefit entitlements would change under different tax and benefit systems.

Do you think people in the bottom income decile are all reasonably described as ‘poor’, and if not what is your estimate as to what proportion are poor?

No, we don’t think that people in the bottom income decile are all reasonably  described as ‘poor’. Poverty is a matter of overall living standards, and that is not perfectly measured by a snapshot of current income. Some of those who are recorded by the FRS or LCFS as having very low incomes during the month in which they are interviewed for the survey may nevertheless be able to maintain reasonable living standards. For example, some will be self-employed people having a brief below-par period, some will be temporarily unemployed, some will be living off large accumulated savings (e.g. in retirement), some will be students who are dependent on occasional contributions from parents, and some will be households who have simply mis-reported  their income to the survey.

We can see that many of those in the bottom income decile group have levels of spending that are far greater than their incomes, and similar, in some cases, to those of people towards the middle of the income distribution. A similar pattern emerges if we look at estimates of their level of savings, their housing tenure or their council tax band.

IFS researchers have examined this in past research projects. In one of those, we concluded that “one would get a more reliable picture of who those are with the lowest standards of living by examining those recorded at the bottom of the spending distribution than one would if one looked among those recorded at the bottom of the income distribution.”

This point was recognised by the Treasury in paragraph B.38 of the October 2010 Spending Review document, which said, “the bottom decile contains many households with temporarily low incomes, for whom income based analysis, as opposed to expenditure based analysis, may not give an accurate picture of living conditions.” It has also been recognised by the ONS, which found that one in five of the lowest-income fifth of households spends more than twice their current income (the figure would be higher in the lowest-income tenth), and concluded that “the peculiarities of [these] households can be associated with a temporary condition of low income, rather than with a permanency of poverty,” adding that “expenditure could be regarded as a better proxy for the standard of living of households with few resources”.

Do you think people in the bottom expenditure decile are all  reasonably described as ‘poor’, and if not what is your estimate as to what proportion are poor?

No, we don’t think that people in the bottom expenditure decile are all reasonably described as ‘poor’.  It is likely that some households in the bottom expenditure decile group are not reporting all of their actual expenditure, and others may have an unusually low level of expenditure in the fortnight in which they were surveyed. As suggested above, we think a snapshot of spending might be a better guide than a snapshot of income. But neither is perfect, so it is best to look at both together.

Check back tomorrow for the next in this series.

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  • “So in an attempt to get beyond some of this political rhetoric…”

    Most of the rhetoric I’ve heard from politicians in recent months has been appropriate to the topic in question: “those on the lowest incomes,” “the most vulnerable in our society,” etc.

    However you look at it, the bottom decile are being affected far more than the top decile. In fact, its arguable whether the top decile are affected at all. As Lord Young recently revealed, many have “never had it so good.” Warren Buffet made a similar comment in the US at the weekend, ” We have it better than we’ve ever had it.”

    Household wealth of the top 10% is £853,000 or above. The bottom 10% is £8,800 or below. We’re told we must deal with the budget deficit, we must suffer austerity and we’re all in this together – but where are the tax increases for the wealthy? If it’s OK for graduates to pay an additional 9% out of their income above £21000 – why isn’t OK for higher and additional tax rates to go up by 9%? Why is the banking levy a miniscule 0.07%? It’s not even a thousandth! And why are the rich able to put their money into Jersey and Guernsey (both crown dependencies) and avoid paying proper tax?

    We’ve got a cabinet where18 of the 23 members are millionaires. I don’t have a problem with millionaires, However, I do have a problem with them ring-fencing themselves from the austerity measures we face, and I hope the IFS continues to point this out.

  • @Mark Pack

    You’re right, I don’t attach much significance to those two measures. If you’re wealthy. the new annual limit of £50k doesn’t have much affect, as there is a lifetime limit of £1.5million. (Over 30 years equates to £50k per yr limit, so not much change there) The measure will only have an impact on those who hoped/planned to boost their pension by some large lump sum payments (probably those towards the end of their careers.) However, since the announcement, the tax-avoidance-accountants say there are “planning opportunites” that can be used to minimise the reduction of the pension allowance.

    CGT – well, lets face it, 18% was perverse. Earn a living by working and pay 50% tax, Earn a living by ‘transactions’ and pay just 18% – property speculators, for example. Many expected CGT would rise to 50% to put it on a par with the highest rate of income tax as it ought to be. Cable insisted it should at least be 40% if I recall correctly, but the Tories didn’t even meet him half way. Yes, its 28% – but that’s far lower than the 40% income tax payable (on the £37.5k band) which ordinary wage/salary earners have to pay. I don’t see why it shouldn’t be in line with income tax rates. If you worked full-time and earned £100k per annum for ten years, giving a total of £1m, crudely estimated you’d pay £500k tax. If you did one ‘transaction’ in ten years, made a £1m and lazed around the rest of the time, you’d only pay £280k tax. Almost half. Compared to CGT, work doesn’t pay!

  • If you are reduced to nitpicking over the definition of the word “poor” then it’s time to step back and ask yourself the searching questions rather than wallowing in semantics.

  • @George Kendall

    “…the enormous difference between the income and expenditure of the bottom decile. In figure 3.4 from the above document, the lowest spending tenth lose 8% of their expenditure but only 3% of their income.This implies that they are spending a bit over a third of their income.”

    That’s because you’ve assumed the bottom income decile and the bottom expenditure decile are the same households. Pensioners in paid-up house? Single parent with kids paying rent?

  • Ian Sanderson (RM3) 23rd Nov '10 - 9:00am

    Income or expenditure alone don’t necessarily give a good picture of how well off someone is. The full picture includes income, capital – money and goods – (and how accessible it is), borrowing capacity (and how expensive it is) and commitments (especially the unavoidable ones).
    Household A with £50k p.a. , owning their house and cars outright, and with all the consumer goods they need, and lenders anxious to lend them more than they want to borrow, is much better off than household B next door, also with £50k p.a. , paying a substantial rent and loan payments on the car needed to get to work, with no long credit record nor easy access to cheap credit.
    I take the point that not everyone has steady income, and many people don’t have steady outgoings, but the other factors are important too. So I am concerned when poverty or wealth is rated entirely in, say, income terms.

  • I cannot see any details of a post related to Nick Clegg’s speech last night? This is highly relevant to the topic under discussion here, and seems to be trying to redefine the Party’s values in terms of the preamble to the constitution. I say “seems”, as I have only read the summary of the speech so far, and have not done a quick read through of the preamble to remind me of the wording about poverty.

  • @Dane Clouston

    Source is the report, “Anatomy of Economic Inequality” – Chapter 2

  • @George Kendall

    Fig 3.4 is effect on *expenditure.* Those in lowest decile of *expenditure* will lose 3% income and expenditure will rise by 8%

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