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Analysing government fiscal forecasts and tax and spending.
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Reforming the tax system for the 21st century.
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It is widely known that income inequality has risen substantially over the past thirty years. During the 1980's, in particular, inequality rose dramatically - to levels from which it has never subsequently fallen. But what lies behind this increase in income inequality? In recent work, commissioned by the National Equality Panel, IFS researchers attempt to answer this question by 'decomposing' changes in inequality into the effects of various different forces.
For example, households' incomes derive from many different sources - earnings from employment, state benefits, pensions, investment income, and so on. By breaking income up into these constituent parts, we can investigate which income sources contributed most to changes in inequality. As the chart below shows, it appears that earnings from employment were the main culprit in driving up inequality, but that most sources of income - including investment income and income from self-employment - became more unequally distributed throughout the 1980's.
Income inequality by income source, 1968 to 2006-07
Our full report decomposes inequality according to many other factors (age, sex, region, occupation, etc.), in an effort to assess which contributed most strongly to changes in income inequality. Several factors which one might expect to be important drivers of inequality - Britain's ageing population, for example, or the inequality between the North and the South - turn out to explain very little of the changes in inequality over the past forty years. More surprisingly still, the earnings gap between men and women has actually acted to reduce inequality, as the relative earnings of women have 'caught up' with those of men.
The most important drivers of increased inequality appear to be occupation - with a widening earnings gap between unskilled workers and professional/managerial workers - and education, with increasing relative wages among better-educated members of the workforce throughout the 1980's. This finding is consistent with the idea that 'skills-biased technological change' was responsible for much of the increase in inequality - with new technologies complementing the work of skilled and educated workers, but substituting for the work of lower-skilled workers.
However, our analysis also provides grounds for humility - there is still much about inequality changes over the past four decades which remains unexplained. Individuals' observable characteristics (at least the ones we have in our data) account for only a fraction of total inequality - rarely as much as half. Indeed, the unexplained ('residual') portion of inequality increases over time, suggesting that incomes have become more dispersed even within tightly defined groups.
On the same day that our report was published, the Office for National Statistics announced the results of their Wealth and Assets Survey (WAS) - providing a snapshot of the wealth distribution in the UK between 2006 and 2008, and revealing stark disparities. The top 10% of wealth-holders have more than 44% of all wealth (compare this with the top 10% of income earners, who receive 'only' 29% of all income). Where the Gini coefficient for income inequality is currently around 0.36 (a higher Gini coefficient means more inequality), the Gini for net financial wealth is as high as 0.81. And education again appears important: households headed by an individual with a degree are nearly four times wealthier than households headed by an individual with no qualifications, on average. As striking as inequalities in income are, the WAS shows that inequalities in wealth are far greater.
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A give and take Autumn Statement?
The Autumn Statement is expected to contain a welcome upward revision to the forecast for economic growth this year and a welcome downward revision to the headline deficit. But any improvement will be small relative to the level of the deficit forecast in the Budget, and the deficit this year will still be very high by historical standards and relative to what was projected at the start of this Parliament and compared to what the Chancellor is ultimately hoping to achieve. So as the Chancellor George Osborne prepares for the Autumn Statement, if he is planning to make good on the promises of giveaways made during the party conference season he should also be considering new measures to pay for them.
Entry to grammar schools in England for disadvantaged children
New work by IFS researchers, funded by the Sutton Trust, suggests that grammar schools are disproportionately unlikely to admit students who are eligible for free school meals, even when conditioning on their academic performance in primary school. They are by contrast disproportionately likely to admit children who have attended private schools before age 11.
The crucial role of good evidence in evidence-based policymaking
In a time of continuing fiscal austerity, policymakers increasingly want to know ‘what works’ and for whom, in order to target scarce resources on those who will benefit most and to ensure that policy has the desired impact upon those it is designed for. Basing policy decisions on evidence is undoubtedly a good thing - but only if the evidence used is robust, unbiased and methodologically sound. This observation uses recent IFS work on the link between parents’ marital status and relationship stability and child development to illustrate the challenges of using research to inform policymaking.