Institute for Fiscal Studies | Press Releases To sign up to receive press releases, journalists should email Bonnie Brimstone. http://www.ifs.org.uk Sun, 26 Mar 2017 07:14:21 +0000 <![CDATA[New funding formula could imply further cuts to per-pupil spending of 7% for around 1,000 schools after 2019–20]]> New funding formula could imply further cuts to per-pupil spending of 7% for around 1,000 schools after 2019–20

In a consultation that closes today (March 22), the government has set out ambitious plans to implement a national funding formula (NFF) for schools in England. Its goal is to ensure that similar schools in different parts of the country receive a similar level of funding per pupil. Given current inequities, this is a long overdue and welcome change.

Moving to a single funding formula inevitably creates winners and losers, and this reform comes at a time when schools budgets overall are under pressure. It would have been preferable to have reformed the system in the 2000s when there was more money around.

The government has thus proposed putting in place protections for schools up until 2019–20, which will ensure no school sees a fall in its budget of more than 3% in cash-terms between 2017–18 and 2019–20 (or a real-terms cut of about 6%). Because of these protections, and the fact that a number of schools are currently a long way from their implied formula allocations, only about 60% of schools will be on the main formula by 2019–20. Around 1,000, or 5%, of schools would still be more than 7% above the funding level dictated by the main formula, and could expect cuts of that magnitude at some point after 2020.

These are among the findings from a briefing note by IFS researchers, published today and funded by the Nuffield Foundation, which explores the government proposals to replace 152 different local authority funding formulae with a single national formula. This reform comes at a time when schools are part way through making their first real-terms cuts to school spending since the mid-1990s. The planned real-terms cut of 6.5% in spending per pupil between 2015–16 and 2019–20 would be the largest cut in school spending per pupil over a 4 year period since at least the early 1980s and would return school spending per pupil to about the same real-terms level as it was in 2010–11. In looking at the effects of the NFF up to 2019–20, we complement findings from the recent report from the Education Policy Institute, and we also extend this to look at potential scenarios after 2019–20.

As in the government proposals, all figures provided in this release are in cash-terms, unless otherwise stated.

 

Key findings include:

  • There are significant transitional protections up to 2019–20. No school should see a cash-terms cut of more than 3% over this period (or 6% in real-terms). The government has also placed a cap on the gains schools can experience of 2.5% in 2018–19 and a further 3.0% in 2019–20. The net cost of these transitional arrangements is around £290 million in 2019­–20, which temporarily boosts spending per pupil by about 0.7% in cash-terms.
  • Only 60% of schools will be “on formula” in 2019–20. This is because of the transitional protections in place up to 2019–20 and because many schools are currently a long way from their formula allocations. However, this means that there would be a significant adjustment after 2019–20 to implement the NFF fully. Around 1,000 schools would still be more than 7% above the funding level dictated by the main formula.
  • The government has provided no guidance to schools about what will happen after 2019­–20. We model a number of potential scenarios. If the Minimum Funding Guarantee is kept at -1.5%, almost all of schools would reach their formula level of funding by 2029–30 if school funding per pupil were frozen in cash terms. If there is a real-terms freeze to overall spending, all schools get there by 2024–25 or by 2023–24 if there is 2% real-terms growth.
  • Inner London schools face a cash-terms cut in per pupil funding of 2.5% between 2017-18 and 2019-20. This is the direct result of implementing an adjustment for differences in school costs that takes better account of differences in teacher salaries than did the old formula. However, without transitional protections the government has put in place until 2019–20, Inner London schools would have faced a cash-terms per pupil cuts of around 9%. How the Government intends to move these schools to the main formula level remains unclear.
  • The new formula implies a small shift in funding from schools with the highest levels of deprivation to those with more typical levels of deprivation. The formula also targets more funding at schools with lower prior attainment and at small primary schools and larger secondary schools.

 

Luke Sibieta, an author of the report said:

“If fully rolled out across England, a national funding formula would ensure similar schools in different parts of the country receive a similar amount of funding. While this has been the ambition of successive governments, they have consistently shied away from the hard choices such a reform entails. The current government is to be applauded for making specific proposals and setting out the reasons for the choices it has made.”

Chris Belfield, another author of the report said:

“Somewhat inevitably, this reform creates winner and losers, and it comes at a time of severe pressure on school budgets as we are currently in the tightest four year period for per-pupil spending in English schools since at least the early 1980s. The government has put in place transitional protections to help smooth the transition process up to 2019–20. However, there is significant uncertainty about what will happen after 2019–20. This is a big omission considering only 60% of schools will be on the main formula in 2019–20. The formula could imply around 1,000 schools would face a further 7% cut to their budgets in the next parliament.”

 

ENDS.

Notes to Editors:

  1. ‘The short and long-run impact of the national funding formula for schools in England’ by Chris Belfield (IFS) and Luke Sibieta (IFS) was published on the IFS website ifs.org.uk at 00.01 Wednesday 22 March 2017. Please contact the press office with queries: Bonnie Brimstone 020 7291 4818 / 07730 667013, bonnie_b@ifs.org.uk.
  1. This research has been funded by the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org
  1. The government is currently consulting on its proposals for a national funding formula. This consultation closes on March 22 and can be found here (https://consult.education.gov.uk/funding-policy-unit/schools-national-funding-formula2/)
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http://www.ifs.org.uk/publications/9076 Wed, 22 Mar 2017 00:00:00 +0000
<![CDATA[No decline in educational achievement of graduates entering teaching and health jobs, despite squeeze on public sector pay]]> During the Great Recession, public sector pay increased relative to that of private sector workers. The gap in pay between public and private sector workers has since fallen back to pre-crisis levels as the pay and pensions of public sector workers have been squeezed since 2010.  Nevertheless, in new work published today, IFS researchers find little change in the educational achievement of new graduate entrants to teaching and health occupations over the last parliament.

In the new report, funded and published by the Office of Manpower Economics, we use the Destination of Leavers from Higher Education from 2006 through to 2014 (a survey of all higher education leavers in the UK each year) linked to students’ A-level or equivalent results. This allows us to look in detail at the educational achievement of graduates joining major public sector occupations over time (mainly health professionals and teachers). 

Key findings include: 

  • The average gap in pay between public and private sector workers is now back at pre-crisis levels. During the financial crisis, the pay premium experienced by public sector workers relative to those in the private sector grew from 3.7% in 2006-07 to 6.0% in 2010-11 (after accounting for key differences in the make-up of each workforce). Following the squeeze on public sector pay since 2010-11, this gap has come down to about 3.6% in 2015-16.
  • Despite the recent squeeze on pay, the average educational achievement of new graduate entrants to teaching has been steady over time. Amongst individuals who left university in 2014-15, the average A-Level results amongst those who went into teaching was equivalent to 3 A-levels and an AS level at grade B.
  • New trainee teachers in shortage subjects have relatively high levels of educational achievement. Amongst new trainee teachers, those with a degree in Physics, Maths, Computing and Modern Foreign Languages have average A-Level results well above the average for both teachers and graduates as a whole. Average educational achievement of new teachers in other subjects is lower on average, generally around the median or below for all graduates.
  • Since 2012, teachers in high-priority subjects have been eligible for large bursaries whilst training, which have grown over time. Trainee teachers with first-class degrees in Physics, Computing and Maths are now eligible for (tax-free) bursaries of over £25,000. Those with degrees in lower priority subjects (such as English and History) are not eligible for more than £9,000.
  • No evidence that larger bursaries led to an increase in average educational attainment amongst teachers in high-priority subjects, but they may have prevented a decline. The average educational achievement of trainee teachers in high-priority subjects has been largely constant over time.  For subject areas with the lowest bursaries (English, Classics and History), there is, however, evidence of a clear decline in educational achievement of new trainee teachers.
  • There are large differences in educational achievement of different health professionals. Amongst those leaving higher education in 2014-15, the average prior A-level results were equivalent to 4 A’s at A-Level for doctors, ABB at A-Level and an AS-level at grade B for NHS professions allied to medicine (e.g. radiologists), and 3 C’s at A-Level and AS-level at grade C for nurses/midwives.
  • There has been no change over time in the average A-level results of graduates becoming doctors, nurses or joining NHS professions allied to medicine (e.g. occupational therapists).

Luke Sibieta, an author of the report, said: “Despite the squeeze on the pay and pensions of public sector workers since 2010, there has been no decline in the prior educational achievement of graduates going into teaching or health occupations. However, between 2015 and 2020 public sector pay is set to decline more rapidly relative to that in the private sector. It is hard to believe this won’t affect the willingness of highly qualified individuals to choose these occupations”

Neil Amin-Smith, another author of the report, said: “Although there is clearly a quantity problem in terms of the number of Physics, Computing and Maths teachers, there is no evidence of a quality problem. Those who do go into teaching are relatively high achieving. There is some evidence that the large bursaries created for these subjects may have prevented declines in the educational achievement of new entrants, as has occurred in other subjects. Whether bursaries of over £25,000 (tax-free) represent genuine value for money for the taxpayer will be determined by whether these teachers stay in the profession beyond 1 or 2 years”

Ends


Notes to editors

1. ‘The Changing Educational Attainment of Graduate Recruits to Major Public Sector Occupations’ by Neil Amin-Smith (IFS), Ellen Greaves (IFS and University of Bristol) and Luke Sibieta (IFS) will be published on the Office for Manpower Economics website (https://www.gov.uk/government/organisations/office-of-manpower-economics) and IFS website (ifs.org.uk) in the morning of Monday 13 March 2017. Embargoed copies are available from Bonnie Brimstone 020 7291 4818 / 07730 667013, bonnie_b@ifs.org.uk.

2. The report was carried out under contract as part of the research programme of the Office for Manpower Economics (OME). The views and judgements expressed in this report are those of the authors and do not necessarily reflect those of OME. This work was also co-funded by the Economic and Social Research Council (ESRC) Centre for Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (IFS) (grant reference: ES/M010147/1).

3. The OME provides support for the eight independent Pay Review Bodies, which make evidence-based recommendations to the Government on levels of pay for their remit groups covering 2.5 million workers – around 45 per cent of public sector staff – and a pay bill of £100 billion. In making recommendations, Review Bodies consider the need to recruit, retain and motivate suitably able and qualified people as well as affordability. In supporting these bodies, one of OME’s key functions is to provide high quality research-based technical advice drawing on economic, pay, labour market, statistical and other technical data. More information about the OME, the bodies it supports, and the research it has undertaken, may be found on its website.

4. Our measure of educational attainment refers to individuals UCAS Tariff Point Score on entry into Higher Education, which includes A-Level, Scottish Highers and other equivalent qualifications. In this press release and the main report, we often express UCAS Tariff Point Scores in terms of the equivalent number of A/AS Levels at particular grades.

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http://www.ifs.org.uk/publications/8992 Mon, 13 Mar 2017 00:00:00 +0000
<![CDATA[Councils across England increasingly dependent on payments from London businesses]]> The business rates revaluation taking effect this April is designed to be revenue neutral across England as a whole. But business rates in London are set to rise by about 11% above inflation in the next five years while rates in the North will fall by 10%. Even so average rates bills in the North won’t start falling until April 2018 as cuts in bills for individual properties are being introduced only gradually to fund some transitional protection for those seeing higher bills.

Business rates revenues are redistributed between local authorities, “taxing” councils which would be winners and compensating losers from these changes. Following this revaluation London councils’ share of business rates will be taxed to the tune of an additional £400 million a year (raising their total ‘tariff’ to £730 million a year), to pay for bigger ‘top ups’ to northern councils. In addition, ratepayers in London will pay an additional £400 million into the central pot of business rates currently retained by central government. So, all-in-all, an additional £800 million of rates revenues will be raised in London to support services elsewhere in England. This reflects a more general trend towards greater reliance on London – and its stronger economy – for government revenues, which can then be redistributed to the rest of the country.

But going forward councils will get to keep the additional business rates revenue arising from new developments in their areas. The revaluation means that the value to councils of any additional development will now be greater in London. So in the longer-term London councils will enjoy a positive effect from this growth in their tax base when they retain the extra business rate revenues arising when new development takes place. In contrast, Northern councils will get less of a boost from any additional development.

These are among the main findings of a new briefing note by researchers at the Institute for Fiscal Studies, funded by The Local Government Finance and Devolution Consortium.

The report also shows:

  • As well as rising in London, rates bills are more likely in the South, centres of big cities like Greater Manchester and in some rural areas. Businesses located in the suburbs and in smaller cities will be more likely to see cuts in their bills.
  • While ultimately revenue-neutral for England as a whole, changes in the relative values of properties over the last seven years mean that individual ratepayers will see very large changes in bills. In April, above-inflation increases are capped at 5% for so-called ‘small’ properties, but 42% for ‘large’ properties. To pay for this, the scheme also caps cuts in bills at 20% for ‘small’ properties and just 4.1% for ‘large’ properties next year.

The government is expecting many businesses to appeal against their new valuations and so rates are rising by an additional 4.6% to fund the cost of these appeals. But individual councils will bear the risk that appeals in their area reduce bills by more than this.

  • Between 2013­-14 and 2015-16, 42 (out of 326) councils put away less than 3% of revenues to cover appeals costs, whereas 54 put away more than 8%, suggesting this could be a significant risk. If ratepayers are more likely to appeal in areas like London where rateable values and bills have gone up, councils in such areas would be more likely to find themselves bearing the cost of above-average appeals levels.
  • Going forward the government intends to handle the risk associated with backdated appeals centrally rather than locally when councils move to retaining 100% of business rates in 2019–20 (rather than 50% now). This will sensibly insulate councils and the services they provide from a risk – valuation error – that is largely outside their control.

“Revaluation will mean rates bills will go up, and revenues become more concentrated in London. This is part of a more general trend of greater reliance on the capital for revenues“ said Neil Amin-Smith, a researcher at the IFS and an author of the briefing note. “While some ratepayers’ bills will rise, in the long-run revaluation will cut average bills in the other regions of England, and especially the north. Bills will generally fall more in the suburbs and smaller cities than in both the central areas of major cities like Manchester and more rural areas.”

“By stripping out the overnight effects of the revaluation on the amount of business rates each council is able to retain, the government is stopping large overnight cuts (and increases) to council budgets and services,“ said David Phillips, Associate Director and another author of the briefing note. “But it means councils have less incentive to boost demand for existing properties: they do not benefit from the resulting increases in rents and values of these, only from new development. This suggests devolution of other revenues may need to be considered if broader incentives for growth, beyond promoting new property development, are seen as desirable for councils.”

Notes to editors

1. ‘Small’ properties are defined as those with a new rateable value of £20,000 or less outside London, and £28,000 or less inside London. ‘Large’ properties are defined as those with a new rateable value of more than £100,000.

Full information on the transitional relief arrangements and the number of properties benefitting and losing out as a result of these arrangements are available at: https://www.gov.uk/government/consultations/business-rates-revaluation-2017.

2. The report ‘The Business Rates Revaluation, Appeals and Local Revenue Retention’ went live on the IFS website on Saturday 4 March 2017. For queries, please contact bonnie_b@ifs.org.uk or one of the authors.

3. This research forms part of a major programme of work funded by The Local Government Finance and Devolution Consortium. This consortium is generously supported by Capita, CIPFA, ESRC and PwC and is also supported by the Municipal Journal and a large group of local government bodies, including 27 non-metropolitan counties and a number of unitary, district, metropolitan, and London councils.

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http://www.ifs.org.uk/publications/8963 Sat, 04 Mar 2017 00:00:00 +0000
<![CDATA[Historically weak growth in living standards set to continue; low-income households with children to fare worst]]> If the Office for Budget Responsibility (OBR)’s forecast for average earnings is correct, we project that median household income will not grow at all for the next two years, and will be just 4% higher in five years’ time than it is now. Following on from the deep recession and already-tepid recovery, this would leave median household income in 2021–22 18% lower than might reasonably have been expected back in 2007–08, based on the long-run trend growth rate of almost 2% per year (see Figure below). That 18% difference is equivalent to more than £5,000 a year. This sustained slowdown in income growth is unprecedented in at least the last 60 years. Of course, some households will see a bigger squeeze on their income than others. Pensioner incomes will continue to grow faster than those of the rest of the population, while low-income households with children are likely to fare worst.

The conclusion that we are in the middle of a historically weak period of growth in living standards is not dependent on ‘gloomy’ forecasts being correct. Even if real earnings growth each year turns out 1 percentage point faster than the OBR expects – which would imply stronger growth than almost all forecasters expect – median income in 2021–22 would still be 16% lower than it would have been had the long-run trend growth rate continued beyond 2007–08. And even under such an optimistic scenario, median income would grow by less than 7% over the next five years – still slow growth by historical standards. Of course, things could instead turn out worse than the OBR expects.

These are among the findings of a new report by IFS researchers published today, Living Standards, Poverty and Inequality in the UK: 2016–17 to 2021–22, funded by the Joseph Rowntree Foundation. The research uses data on household incomes from the Family Resources Survey, together with OBR macroeconomic forecasts and announced changes in tax and benefit policy, to project household incomes up to 2021–22.

Beyond the averages, different groups are faring very differently:

  • Median income among pensioners is projected to rise twice as quickly as that for the rest of the population, if earnings grow in line with the OBR’s forecast. By 2021–22, average pensioner income is likely to be 24% higher than it was in 2007–08. Once you account for their lower housing costs and smaller household size, median income is projected to be nearly 8% higher for pensioners than for non-pensioners by 2021–22, having been nearly 10% lower in 2007–08.
  • Looking over the next five years, if planned benefit cuts go ahead and earnings grow as the OBR forecasts, inequality will start to rise. This is in contrast to the recent past: unexpectedly weak earnings growth and strong employment growth have combined to keep income inequality lower than before the financial crisis.

All this has implications for poverty. Measuring incomes after housing costs, which is currently more appropriate when focusing on poverty:

  • If benefit cuts are implemented as planned then the poorest 15% of the population are likely to have lower incomes in five years’ time, on average. The four-year benefits freeze will cut the value of most working-age benefits by 6% given current inflation forecasts. Universal credit will be less generous than the benefits it is replacing, on average. And housing benefit is no longer designed to cover increases in rent for most recipients.
  • Low-income households with children are set to fare worse than other households. Absolute child poverty on the official measure (see notes below for poverty lines) is projected to rise from 27.5% in 2014–15 to around 30% in 2021–22, returning to roughly its pre-recession level. This increase is entirely explained by the direct impact of tax and benefit reforms – particularly the cuts to working-age benefits – planned for this parliament. Meanwhile, absolute pensioner poverty is projected to fall from 13% in 2014–15 to 11% in 2021–22.

 Tom Waters, an author of the report and a Research Economist at IFS, said:

“If the OBR’s forecast for earnings growth is correct, average incomes will not increase at all over the next two years. Even if earnings do much better than expected over the next few years, the long shadow cast by the financial crisis will not have receded – average incomes in 2021–22 are still projected to be £5,000 a year lower than we might have reasonably expected back in 2007–08.”

Andrew Hood, an author of the report and a Senior Research Economist at IFS, said:

“Weak earnings growth combined with planned benefit cuts means that the absolute poverty rate among children is projected to be roughly the same in 2021–22 as it was back in 2007–08. In the decade before that, it fell by a third. Tax and benefit changes planned for this parliament explain all of the projected increase in absolute child poverty between 2014–15 and 2021–22.”

ENDS

Notes to Editors

1. Living Standards, Poverty and Inequality in the UK: 2016–17 to 2021–22 by Andrew Hood and Tom Waters was published on the IFS website at 00.01 Thursday 2 March 2017.

2. Absolute poverty lines (£ per week) in 2016-17 prices for example families (assuming any children are under 14), measuring household income net of direct taxes, including benefits and after housing costs have been deducted:

Single individual

Childless couple

Lone parent, one child

Couple, one child

Couple, two children

Couple, three children

£139

£240

£187

£288

£336

£384

3. The Joseph Rowntree Foundation is an independent organisation working to inspire social change through research, policy and practice. For more information visit www.jrf.org.uk JRF is on Twitter. Keep up to date with news and comments @jrf_uk. For press releases, blogs and responses follow@jrfmedia

 

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http://www.ifs.org.uk/publications/8958 Thu, 02 Mar 2017 00:00:00 +0000
<![CDATA[FE and sixth forms to suffer from 30 years without additional funding]]> School funding is in the headlines again as the government tries to rationalise the current system. This rationalisation is long overdue but it is happening at a time when funding is tighter than at any time over the last 30 years. The inevitable result is that some schools will lose out. But the bigger story over the longer term is that schools have done rather well in terms of funding per pupil. Spending on sixth forms and further education, by contrast, has been continually squeezed. Spending per pupil in school is set to be at least 70% higher in 2020 than it was in 1990. Spending per pupil in sixth forms and FE is set to be no higher at all than it was in 1990.

These are among the findings from a new report by IFS researchers published today: Long-Run Comparisons of Spending per Pupil across Different Stages of Education, funded by the Nuffield Foundation. For the first time, this report provides consistent data on day-to-day or current spending per pupil on different stages of education in England over a long time period. The main graph for spending per pupil across different stages of education over time is shown in the notes to editors and all figures are presented in 2016–17 prices.

Key findings:

  • Early years education spending is now £2.3 billion a year, up from close to zero in the early 1990s. The government today spends £1,700 per child (aged 3 and 4) following the introduction and gradual expansion of the entitlement to free early education for 3 and 4 year olds over the late 1990s and 2000s.
  • Early-years spending is set to increase by 38% in real-terms between now and 2020 as the free entitlement for 3- and 4-year olds is increased from 15 to 30 hours for working parents. This will still, however, leave spending per child only around half the level of primary school spending per pupil.
  • The biggest real spending increases over the last two decades have been on school pupils.  Primary school and secondary school spending in England are currently £4,900 and £6,300 per pupil, respectively, both approximately double in real-terms compared with the mid-1990s. 
  • School spending per pupil is set to fall by 6.5% between 2015–16 and 2019–20, the biggest fall in at least 30 years. However, some growth over the last parliament means that spending per pupil will still be similar to its level in 2010. Over the decade this reflects a considerable focus on protecting per pupil funding in schools at a time of more general public spending cuts.
  • Spending per student in further education is set to fall by around 13% between 2010-11 and 2019-20. Following smaller increases than in other areas of education during the 2000s and larger cuts in the 1990s, this will leave spending per student approximately the same in real-terms as it was in 1990. This comes in spite of a near doubling of public spending and a 77% increase in national income over the same period.
  • FE spending per student was 45% higher than secondary school spending per student in 1990. It will be 10% lower in 2019-20. This is a result of further education and sixth forms spending growing more slowly than school spending during periods of expansion and being less well protected from recent cuts.
  • Up front government spending on teaching each full time undergraduate in higher education in England was about £9,200 per year in 2015-16, about 55% higher in real-terms than in 1990. However, this reflects a very odd pattern of growth; despite having risen substantially overall, the level of up front spending per student available to universities (including tuition fees and teaching grants) has fallen in 18 of the last 26 years.
  • Reforms in 2012 greatly increased the level of resources available to universities and reduced the government’s long-run subsidy to higher education, with increased graduate contributions making up the difference. We estimate the long-run government subsidy per higher education course (excluding maintenance grants) was around £10,500 in 2012–13, one third the level in 1990 and lower than at any point between 1990 and 2012.

Luke Sibieta, an author of the report and an Associate Director at IFS said:

“The last 30 years have seen huge changes in spending priorities in education. There is a strong case for the increased spending on early years’ education. The rationale for focussing cuts on 16-18 year olds and in further education is much less obvious. The actions – as opposed to the rhetoric – of both Labour and Conservative governments suggest that they are agreed this is a low priority area for spending. Why they think that is unclear”.

Chris Belfield, another author of the report and a Research Economist at IFS said:

“The amount of resources spent on higher education is much higher now than it was 25 years ago. But it has been a bumpy ride. Across most years, spending has tended to fall, only to be corrected with large and irregular tuition fee reforms. This uncertainty is a major hindrance to universities when making long-term resource decisions.” 

Notes to Editors

1. ‘Long-Run Comparisons of Spending per Pupil across Different Stages of Education’ by Christopher Belfield (IFS), Claire Crawford (IFS and University of Warwick) and Luke Sibieta (IFS) was published at 00.01 Monday 27 February 2017.

2. This research has been funded by the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org

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http://www.ifs.org.uk/publications/8940 Mon, 27 Feb 2017 00:00:00 +0000
<![CDATA[Spending cuts to accelerate as tax burden rises to highest level in over 30 years]]> The IFS Green Budget 2017, produced in association with ICAEW and funded by the Nuffield Foundation with analysis from Oxford Economics, is published today.

 The Chancellor, Philip Hammond, remains committed to his predecessor’s plans for cutting day-to-day public service spending, which is due to fall by 4% in real terms over the next three years, having fallen very little over the last three years. A particularly sharp cut is planned for 2019–20, immediately prior to the next general election. While spending cuts are playing a greater role than tax rises in reducing the deficit, tax is set to rise as a share of national income to its highest level since 1986–87.

The Chancellor has not set himself any fiscal targets that can be missed during the current parliament. But meeting his target of eliminating the deficit during the next parliament will probably mean an additional consolidation of up to £34 billion, extending the period of spending cuts and tax rises well in to the 2020s.

After nearly seven years of tax rises and spending cuts:

  • The deficit this year will be higher than in all but 13 of the 60 years before 2008, and remains the fourth highest of 28 advanced economies;
  • The national debt is at its highest level as a fraction of national income since 1965–66 and is higher than that faced by all but five other advanced economies;
  • Real spending on public services has fallen by 10% since 2009–10 – by far the longest and biggest fall in public service spending on record.

Looking forward, cuts are due to continue and the shape of the state is set to continue changing while taxes carry on rising:

  • By 2019–20, real departmental spending is due to be 13% lower than it was in 2010–11, with cuts of around 40% to the justice, business, culture and environment budgets;
  • By 2020–21, public spending on each of health, pensions and overseas aid will be higher as a share of national income than pre-crisis, while spending on schools, defence and, especially, public order and safety, will be lower;
  • By 2020–21, plans imply 21p of capital spending by central government for every £1 of day-to-day spending on public services: an historically high level and well above the recent low point of 13p reached in 2012–13;
  • £17 billion of tax rises are planned over this parliament relative to 2015–16. Tax (and non-tax) receipts are expected to rise above 37% of national income for the first time since 1986–87.

Mr Hammond wants to ensure the structural deficit – that is the deficit after adjusting for the estimated impact of any temporary weakness or strength in the economy – is no more than 2% of national income in 2020–21. That is a much easier target to hit than the previous aim of eliminating the deficit entirely by 2019–20. Even so, previous experience suggests there is a more than one-in-three chance that he will miss even this looser target.

  • Economic forecasts are subject to even more uncertainty than usual. Shaving just 1% off growth over the period to 2020–21 could see the deficit rise by £7 billion.
  • The official numbers include neither the promised increases to the income tax personal allowance and higher rate threshold, nor the apparently-inevitable failure to uprate fuel duties with inflation. Between them they will cost more than £4 billion by 2020–21.

Nearly three pounds in every ten spent by government goes on health, social care, and benefits to individuals with poor health or disabilities. A particular risk to the public finances may arise from pressure on health and social care spending.

  • The five years from 2009–10 to 2014–15 saw the slowest growth rate in health spending since the mid-1950s when comparable data first became available, even though it continued growing as a share of public service spending due to the large cuts faced by other services. Department of Health spending is planned to grow at a similar rate over the five years from 2014–15.
  • Plans imply that growth in Department of Health spending in the decade between 2009–10 and 2019–20 will be slightly less than required just to keep pace with population growth and ageing – and that ignores significant other likely cost and demand pressures
  • Adult social care spending has fallen by more than 6% since 2009–10 while the population aged 65 and over has risen by nearly 16%. Spending per person seems likely to continue falling.

Efforts to reduce spending on disability and incapacity benefits have delivered much lower savings than hoped. Government has now set itself an ambitious target to halve the gap in employment rates between the disabled and non-disabled populations.

  • Spending on incapacity benefits in 2015–16 was £15 billion, 45% higher than was forecast just three years before. Even so spending on incapacity benefits is a smaller share of national income than in any year since 1989–90, largely because average awards have fallen from a quarter to a fifth of average male full-time earnings.
  • In 2016–17 government will spend £24 billion – a quarter of non-pensioner benefit spending – on disability and incapacity benefits for working-age people.
  • Incapacity benefits have become increasingly focussed on those with low levels of education rather than older people. Low-educated men aged 25–34 are now twice as likely to receive incapacity benefits as high-educated men aged 55–64.
  • Success in halving the ‘disability employment gap’ would be a truly remarkable achievement. It would require reducing non-employment among working-age disabled people by a third.

Oxford Economics, with whom we are again collaborating, forecast that UK GDP growth will be a relatively disappointing 1.6% in 2017 and just 1.3% in 2018. The weaker outlook is largely driven by higher inflation, the bulk of which results from the recent sterling depreciation. Though prospects for wages are a little brighter, real earnings could rise by just 0.2% in 2017 compared with 1.7% in 2016. The four-year benefit squeeze also becomes more painful as inflation rises. On the plus side exports are likely to do better as a result of the weaker pound, but overall the negative effects from higher inflation on consumer spending are likely to outweigh these positive effects.

There is an unprecedented degree of uncertainty over longer term economic prospects. This is driven in particular by uncertainty over how Brexit negotiations will play out –what sort of trade agreement, if any, we reach with the EU; what sort of transitional agreement we come to - but also how the Government will use its newly repatriated powers. On the assumption that there will be a three-year transitional arrangement similar to the status quo, followed by a free-trade agreement, and that the Government will take a ‘populist’ approach in areas such as immigration policy Oxford Economics estimates that the UK economy could end up around 3% smaller in 2030 than it would have been if we had voted to remain in the EU.

Fiscal deficits over the next five years are expected to be £293 billion less than over the last five years yet ICAEW show how the government will need to raise £646 billion from external investors, £11 billion more than it raised over the last five years. This reflects the need to refinance debt as it matures, the financing of more student loans and the expected lack of additional quantitative easing going forwards. Thankfully, the Debt Management Office has successfully managed to issue debt that, on average, is more long-term than its counterparts in other advanced economies.

Paul Johnson, Director of the Institute for Fiscal Studies and an editor of the Green Budget, said:

“For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne. Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise. Even so the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament. Even on central forecasts that is going to require extending austerity towards the mid-2020s. If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”

Andrew Goodwin, Lead UK Economist at Oxford Economics and co-author of a chapter in the Green Budget, said:

“Though the UK economy has continued to achieve solid growth, it has been almost entirely reliant on the consumer. With spending power set to come under significant pressure from higher inflation and the welfare squeeze, the consumer will not be able to keep contributing more than its fair share. Exports should be a bright spot, but overall a slowdown in GDP growth appears likely.”

If the Government is able to agree a transitional arrangement with the EU and make progress on a free-trade agreement then the impact of Brexit is likely to be fairly modest within our forecast horizon of 2021. However, the negative effects of leaving the single market and the customs union are likely to become clearer over time and we estimate that the new trading arrangements could reduce UK GDP by around 3% by 2030, compared with remaining in the EU. Should we fail to secure a free-trade agreement then the outcome is likely to be worse still.”

Ross Campbell, ICAEW Director of Public Sector and co-author of two chapters in the Green Budget, said:  

“The total liabilities of £3.6 trillion reported at 31 March 2015 have now reached 191% of GDP and are almost two and half times the narrower measure of public sector net debt reported in the National Accounts of £1.5 trillion. Put into perspective, WGA debt is now equivalent to £130,000 per household - as opposed to £70,000 using statistical accounting. In order to restore trust in Government, and to give taxpayers a clear picture of how much liability the Government has assumed on their behalf, it’s important that more emphasis be placed on the WGA.”

Three chapters of the Green Budget were pre-released

Differences in the way the tax system treats the self-employed, owner-managers and employees are costly, inefficient and unfair

Over the last 8 years 39% of the growth in the workforce has come from the self-employed and owner managers. They pay a lot less tax than employees earning the same amount, leading the OBR to worry that tax revenues will be £3.5 billion less in 2021–22, relative to a world in which the small company population and employment grew at the same rate. The different tax treatments also create incentives for people to change legal form to avoid tax and create inequities between people earning the same amount for doing similar work. It is both desirable and practicable to reduce these differences.

The new apprenticeship levy will raise nearly £3 billion a year, but government spending on apprenticeships in England is only expected to increase by £640 million between 2016–17 and 2019–20

A combination of targets to ensure 600,000 apprenticeship starts each year, and a zero or near zero cost to employers, risks poor value for public money. Additional targets for every public sector employer with more than 250 staff are also likely to lead to costly and inefficient behaviour.

 On a Whole of Government Accounts measure, the accounting deficit fell only half as much as the traditional National Accounts measure in the five years to 2014–15

In a detailed analysis of WGA, ICAEW set out the importance of taking a wider view of government finances than the traditional National Accounts. Recent reductions in the deficit were offset by increases in liabilities associated with public service pensions. The WGA also illustrate the importance of taking account of other liabilities such as those for clinical negligence and nuclear decommissioning.

Ends


 Notes to editors

 1. The full Green Budget 2017 publication, with analysis from IFS and additional analysis from ICAEW and Oxford Economics, will be launched at 10:00am on Tuesday 7 February 2017 at the Guildhall, City of London (https://www.ifs.org.uk/events/1385). Please feel free to attend

2. Presentations will be live-streamed for those unable to attend. You can view the live stream from 10am at https://live.ifs.org.uk/.

3. The full report will go live on the IFS website shortly after 10am: ifs.org.uk. For embargoed copies or other queries, please contact Bonnie Brimstone on 07730 667013, bonnie_b@ifs.org.uk or Emma Hyman 020 7291 4850, emma_h@ifs.org.uk .

4. ICAEW is a world-leading professional membership organisation that promotes, develops and supports over 147,000 chartered accountants worldwide. They provide qualifications and professional development, share their knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession.

As leaders in accountancy, finance and business ICAEW members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together they contribute to the success of individuals, organisations, communities and economies around the world. Because of this, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance.

For queries on ICAEW chapters, please contact: Caroline Florence 020 7920 8564 / 07973 400 264

5. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org

6. Oxford Economics was founded in 1981 as a commercial venture with Oxford University’s business college to provide economic forecasting and modelling to companies and financial institutions. Since then, we have become one of the world’s foremost independent global advisory firms, providing reports, forecasts and analytical tools on 200 countries, 100 industrial sectors and over 3,000 cities. Our best-of-class global economic and industry models and analytical tools give us an unparalleled ability to forecast external market trends and assess their economic, social and business impact.

For queries on Oxford Economic chapters, please contact Andrew Goodwin 020 78031417 / 07795 382 910

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http://www.ifs.org.uk/publications/8891 Tue, 07 Feb 2017 00:00:00 +0000
<![CDATA[Differences in the way the tax system treats the self-employed, owner-managers and employees are costly, inefficient and unfair]]> Note: This press release was updated on 6 February 2017 to correct a small error with a figure in the second bullet point. The original and corrected figures are shown below. 

 Employees still make up 85% of the workforce. But over the last 8 years 39% of the growth in the workforce has come from the self employed and company owner-managers. Some of this may be due to growth in the so-called gig economy, but that is by no means the whole story.

Our tax system is much less favourable to the 85% in employment than it is the 15% who work for themselves. The tax differences are small at lower earnings levels but substantial for higher earners. For example:

  • At £15,000 (employer cost), tax on employees is £631 a year higher than if the income was earned by a self employed person and £818 higher than if earned by a company owner manager;
  • At £40,000 the differences are £3,442 and £4,502  £4,557 respectively;
  • At £100,000 the differences are £7,365 and £8,035 respectively.

Giving lower taxes to individuals who work for themselves is costly. The Office for Budget Responsibility estimates that rapid growth in the number of small companies will cost the Exchequer an additional £3.5 billion in 2021–22, relative to a world in which the small company population and employment grew at the same rate. It is inefficient because the tax system drives people to change their behaviour – to register themselves as a company rather than work as an employee, for example. And it is unfair because two people earning the same amount for doing similar work can pay different amounts of tax.

In a new report published today, IFS researchers set out how the labour market is changing, how employees, the self-employed and company owner-managers are taxed, and how the tax treatment can be made fairer and more efficient. This forms part of the forthcoming IFS Green Budget 2017, produced in association with ICAEW and funded by the Nuffield Foundation.

Key findings include:

  • The labour market is changing. Most of the 31.1 million strong workforce are still in permanent employment positions. But since 2008, a quarter of the growth in the workforce has come from the self-employed, who now number 4.0 million. In addition, the number of company owner-managers has doubled since 2008 and now stands at just under 580,000.
  • Lower tax rates are not justified by fewer employment rights. Employees benefit from minimum wages, sick pay and holiday pay, for example. This has two effects. First, it makes employment more attractive to the employee (relative to self-employment). But, second, it makes it less attractive for companies to employ people as opposed to hiring a self-employed contractor. By making employment less attractive and self-employment more attractive, the tax system offsets the first effect but exacerbates the second effect.
  • The self-employed get a tax advantage equal to an average of £1,240 per person per year as a result of lower National Insurance contributions relative to employees. This cannot be justified by what are now only very slight differences in benefit entitlements. The self employed pay £3 billion a year in NICs. If they were treated just the same as employees they would pay £8 billion a year.
  • Company owner-managers can get even lower tax rates by taking income out of a company in the form of (more lightly taxed) dividends rather than wages. This is easy to do. Some can reduce their tax rates still further if income is retained in the company and later realised in the form of capital gains, which, for most owner-managers, attract generous entrepreneurs’ relief.
  • Across-the-board lower tax rates are a poor way to boost entrepreneurship. The difficulty and risk associated with entrepreneurship do not in themselves justify favourable tax treatment. There may be other reasons we are not be producing ‘enough’ entrepreneurial activity, in which case we should consider other policies to promote entrepreneurial behaviour. But lower tax rates for certain legal forms are poorly targeted, inappropriately distort choices and create opportunities for avoidance.
  • Levelling the playing field requires a two-part solution. First, the money invested in a business should be deductible from taxable income. This is important. It would ensure that investment is not discouraged and help many businesses. Second, each additional pound of income should then be taxed at overall rates that are the same for an employee, self-employed person or company owner-manager and regardless of whether it comes in the form of wages, dividends or capital gains.

Helen Miller, an associate director at the IFS and a co-author of the report, said:

“There's a lot of very woolly thinking about how we should tax the self-employed and company owner managers relative to employees. The differences in entitlement to state benefits are now far too small to justify the lower rates given to the self-employed. And lower rates are not a good way to incentivise entrepreneurship. Changes in working patterns, including those related to the gig economy, make tackling current differences all the more important both to protect the public purse and to avoid giving incentives for big companies to treat people as self employed rather than as employees.

Stuart Adam, a senior research economist at the IFS and a co-author of the report, said:

The taxation of the self-employed and company owner-managers sits at the point where many different parts of the tax system meet. This makes it a tricky business because incentives are shaped by the interactions of taxes on wages, dividends, capital gains and corporate profits. Making changes to any one can be the policy equivalent of ‘whack-a-mole’; well-intentioned policies can lead to problems popping up elsewhere. To create a truly level playing field we must be bold and work towards a solution that sees the tax system for what it is: a system.”

ENDS


 

Notes to editors

1. ‘Tax, legal form and the gig economy’ by Stuart Adam, Helen Miller and Thomas Pope is a pre-released chapter from The IFS Green Budget 2017, edited by Carl Emmerson, Paul Johnson and Robert Joyce. It was published at 00.01 3 February 2017.

Please contact Bonnie Brimstone in the IFS press office 020 7291 4818 / 07730 667013 if you have any queries.

2. The full Green Budget publication, with analysis from IFS and additional analysis from ICAEW and Oxford Economics, will be launched at 10:00 on Tuesday 7 February 2017 at Guildhall London and will be published in full on the IFS website then.

If you wish to reserve a place at the launch event, please do so here https://www.ifs.org.uk/events/1385. The event will also be webcast in full, you can register to watch it here https://live.ifs.org.uk/ (pre-registration is required but is a very quick process).

3. ICAEW is a world leading professional membership organisation that promotes, develops and supports over 147,000 chartered accountants worldwide. They provide qualifications and professional development and share their knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession. As leaders in accountancy, finance and business ICAEW members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together they contribute to the success of individuals, organisations, communities and economies around the world. Because of this, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance.

4. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org.

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http://www.ifs.org.uk/publications/8873 Thu, 02 Feb 2017 00:00:00 +0000
<![CDATA[Target of 3 million apprenticeships and new funding system risk poor value for money]]> In April 2017, the government is introducing an ‘apprenticeship levy’ (a 0.5% tax on an employer’s paybill above £3 million per year), which is estimated to raise £2.8 billion in 2019–20. At the same time, it is introducing more generous subsidies for employers training apprentices in England. However, government spending on apprenticeships in England is only expected to increase by £640 million between 2016–17 and 2019–20. So most of the revenue raised is being spent elsewhere.

This new funding system is intended to help the government meet its commitment that there will be 3 million apprenticeships starting in England between 2015 and 2020. However, the significant expansion and design of the new system risks it being poor value for money. Specific elements of the system could end up being particularly damaging to the public sector.

It is already the case that 44% of new apprentices are aged 25 and over and the new target is likely to increase this fraction. There is a risk that the apprentice ‘brand’ is becoming just another term for training.

These are among the conclusions from new analysis of reforms to apprenticeship funding by IFS researchers, which forms part of the forthcoming IFS Green Budget 2017, produced in association with ICAEW and funded by the Nuffield Foundation. The analysis examines the new system for funding apprenticeships and its potential effects. It finds that:

  • Although the apprenticeship levy increases taxes on large employers, the new subsidies for employers to train apprentices mean that employers will have to pay nothing, or at most 10%, of off-the-job training costs for apprentices, up to certain price caps set by the government. This will increase the incentive to employers to hire apprentices, particularly those aged 19 and over for whom employers paid at least 50% of training costs prior to 2017.
  • This zero or near zero cost of training poses considerable risks to the efficient use of public money. Employers will have little incentive to choose training providers who can provide training at a lower price. Employers will also have a big incentive to re-label existing training schemes as apprenticeships.
  • The target of an average of 600,000 new apprentices a year in this parliament is a 20% increase on the level in 2014–15. This large expansion risks increasing quantity at the expense of quality. Although the government is trying to increase the quality of apprenticeships, the Institute for Apprenticeships may come under pressure to approve new apprenticeships quickly. Ofsted will take on an expanded (and welcome) role with respect to inspecting training providers and employers. However, it has already expressed serious concerns about the quality of apprenticeship schemes, particularly those created more recently.
  • The apprenticeship levy will put downward pressure on wages. The Office for Budget Responsibility assesses that it will reduce wages by about 0.3% by 2020–21. While only 2% of employers will pay the levy, at least 60% of employees work for employers who will pay the levy.
  • The government has set every public sector employer with at least 250 employees in England a target that 2.3% of their workforce must start an apprenticeship each year. This takes no account of big differences between organisations. Unless existing employees start apprenticeships, the targets imply around one-in-five new public sector hires must be an apprentice. Such a blanket policy cannot be an efficient way to improve skills in the public sector. It risks costly reorganisation of training and inefficient ways of working. These targets should be removed.
  • The government has also failed to make a convincing case for such a large and rapid expansion in apprenticeships. In seeking to justify these changes, it quotes statistics that show a collapse in employees’ training. However, better measures of training show a much more modest decline. The government also makes wildly optimistic claims about the extra economic activity or earnings such investment in apprenticeships could generate (with quoted benefit-to-cost ratios of over 20:1). While there is a clear need for a better-trained workforce, this cavalier use of statistics risks undermining what might be a perfectly sensible case for a gradual expansion of apprenticeships in areas where quality can be assured.

Neil Amin-Smith, an author of the report, said: “We desperately need an effective system for supporting training of young people in the UK. But the new apprenticeship levy, and associated targets, risk repeating the mistakes of recent decades by encouraging employers and training providers to relabel current activity and seek subsidy rather than seek the best training. There is a risk that the focus on targets will distort policy and lead to the inefficient use of public money.”

Jonathan Cribb, another author of the report, said: “With the subsidies for apprentices’ training costs at 90% or 100%, employers are encouraged to take on more apprentices. But this also provides them with little or no incentive to choose a training provider with a lower price. In addition, the specific targets for most public sector employers in England to employ apprentices could lead to costly, and potentially damaging, re-organisations, and should be dropped.”

Ends


 

Notes to editors

1. ‘Reforms to apprenticeship funding in England’ by Neil Amin-Smith, Jonathan Cribb and Luke Sibieta is a pre-released chapter from the IFS Green Budget 2017, edited by Carl Emmerson, Paul Johnson and Robert Joyce. The chapter is now available on the IFS website 

Please contact Bonnie Brimstone in the IFS press office 020 7291 4818 / 07730 667013 if you have any queries.

2. The full Green Budget publication, with analysis from IFS and additional analysis from ICAEW and Oxford Economics, will be launched at 10:00 on Tuesday 7 February 2017 at Guildhall London and will be published in full on the IFS website then.

If you wish to reserve a place at the launch event, please do so here. The event will also be webcast in full, you can register to watch it here

3.  ICAEW is a world leading professional membership organisation that promotes, develops and supports over 147,000 chartered accountants worldwide. They provide qualifications and professional development and share their knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession. As leaders in accountancy, finance and business ICAEW members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together they contribute to the success of individuals, organisations, communities and economies around the world. Because of this, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance. 

4. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org.

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http://www.ifs.org.uk/publications/8864 Tue, 31 Jan 2017 00:00:00 +0000
<![CDATA[Use new Budget as a springboard for wider tax policy reform]]> To reduce taxpayer confusion, cut down costly errors and avoid embarrassing u-turns, the Government must change the way it makes tax and budget decisions, argues a new report. The current tax policy making process is not fit for purpose. 

Published today by the Chartered Institute of Taxation (CIOT), Institute for Fiscal Studies (IFS) and Institute for Government (IfG), the Better Budgets report outlines ten steps toward making better tax policy. 

Welcoming the announced move to a single Budget each year – an interim recommendation from the institutes in September - specific recommendations include:

  • Publishing clear guiding principles and priorities for tax policy. Governments frequently give little sense of direction on tax policy making planning difficult;
  • Improving consultation, in particular ensuring that consultations happen before key decisions have been made;
  • Use external, public reviews of aspects of the tax system as a means of opening up public debate.

Processes within the Treasury and in Parliament also need to improve. The Treasury needs a more robust policy making process involving more challenge before measures make it into the Budget speech. And Parliament needs to improve the quality of its scrutiny of both the Chancellor’s proposals and of the impacts of measures once implemented. 

Taken together, these changes recommended in the report would mean fewer, better designed measures and a more coherent tax system commanding wider public support. 

Bill Dodwell, President, CIOT, said: 

"The sheer volume of tax changes makes it difficult for the Government to consult effectively, early and widely enough on all the measures they bring forward. Parliament and taxpayers struggle to keep up with all the changes. Review of the impact of measures is patchy at best. Holding, in effect, two Budgets a year has helped fuel this proliferation of tax measures. Moving to a single annual fiscal event provides a real opportunity to get off the treadmill of constant change – reducing the strain on the Government’s tax policy resources and freeing up time for better consultation and scrutiny of those proposals that are put forward." 

Jill Rutter, Programme Director, IfG, said:

"The quality of tax policy making matters to every citizen in the country, and currently too much about the way we make tax policy is taken for granted or thought to be the sole province of the Chancellor and the Treasury to decide. Philip Hammond has taken the first big step with his announcement of a return to a single main annual fiscal event – he needs to stick to that commitment and use this opportunity for further reform.  In particular we need to overhaul the internal Budget processes, to ensure there is more challenge from within and Parliament needs to improve the way it scrutinises tax proposals before they are implemented – and their effectiveness once they are." 

Paul Johnson, Director, IFS, said:

"Tax policy is too important to leave to the Chancellor alone. We need a more open policy making process as a route to a better tax system. The lack of any explicit tax strategy allows policy to be made on the hoof and makes it harder to engage the public in a much needed rational debate about tax. The prize of a better tax system is enormously valuable and a better policy making process would make that prize more attainable"


ENDS

For more information please contact:

George Crozier at CIOT (gcrozier@tax.org.uk / 020 7340 0569)

Bonnie Brimstone at IFS (bonnie_b@ifs.org.uk / 07730 667013)

Nicole Valentinuzzi at IfG (nicole@instituteforgovernment.org.uk / 07850313791)

Notes to editors

1. The full report can be found here

2. An earlier letter from the three organisations reflecting initial findings from the project recommended a move to a single principal annual fiscal event. The Chancellor accepted this recommendation in the Autumn Statement

3. The Institute for Government is an independent think tank that works to make government more effective.

4. The Institute for Fiscal Studies (IFS) is Britain’s leading independent microeconomic research institute. IFS was launched in 1969 with the principal aim of better informing public debate on economics in order to promote the development of effective fiscal policy. Its research remit is one of the broadest in public policy analysis, covering subjects from tax and benefits to education policy, from labour supply to corporate taxation. For more information please visit ifs.org.uk.

5. The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. It draws on its members’ experience to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities.

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http://www.ifs.org.uk/publications/8852 Mon, 16 Jan 2017 00:00:00 +0000
<![CDATA[Dramatic rise in proportion of low-wage men working part time]]> Twenty years ago only 1 in 20 men aged 25 to 55 with low hourly wages worked part-time. Today 1 in 5 of this group work part-time: a four-fold increase (see Figure). This is the result of a steady trend – not just the recent recession. Meanwhile the proportion of middle- and high- wage men working part-time remains extremely low, at less than 1 in 20. 

Hence, for men low hourly wages and low hours of work increasingly go together. This has become an important driver of inequality in their pay. 

These are among the findings from new IFS analysis on inequality in Britain over the past two decades, which forms part of a forthcoming article in the journal Economica, published today as an IFS Working Paper and summarised in a short accompanying Executive Summary.                                                                                                                  

Key findings on pay inequality among those in work include: 

Weekly earnings inequality among men has risen significantly. This is partly because the hourly wages of high-earners grew faster than those of middle-earners, and partly because men with low hourly wages are now working fewer hours per week (as highlighted above): for example, men in the second decile (tenth) of hourly wages work, on average, 5 fewer hours a week than they did 20 years ago. 

The rise of part-time work among men on low hourly wages far predates the recession and is widespread. The trend has been occurring consistently for 20 years and is observed for low-wage men across the age spectrum, for single men and men in couples, and for those with and without children. 

In contrast, inequality in women’s weekly pay fell. At the 10th percentile, weekly earnings rose by 60% between 1994-95 and 2014-15; at the 90th percentile they rose by 29%. This is because the proportion of women working part-time has fallen, especially among those with low hourly wages (the opposite of the trend for men). 

Combining the pay of men and women who live together, inequality in total earnings across working households has risen. At the 10th percentile, household earnings rose by 20% between 1994–95 and 2014–15, while at the 90th percentile, household earnings rose by 32%. This is primarily because of the rise in male earnings inequality, since male earnings remain the largest income source for working households on average. 

But trends in inequality have been different if we look at total net household incomes (including benefits and after taxes) across the whole population, rather than looking specifically at pay among working households: 

Despite rising earnings inequality among working households, inequality in total net household incomes (including benefits and after taxes) across the vast majority of the population is actually lower than 20 years ago. Key reasons for this include tax credits boosting the incomes of low earners, a catch-up of pensioners with the rest of the population, and falling rates of household worklessness. 

However, the top 1% have been different: their share of net total household income increased from 6% in 1994-95 to 8% in 2014-15. 

Jonathan Cribb, an author of the report and a Senior Research Economist at IFS, said,

“The number of low-wage men working part time has increased sharply over the last twenty years. To understand the drivers of inequality in the UK it is vital to understand the growing association between low hourly wages and low hours of work among men.” 

Chris Belfield, another author of the report and a Research Economist at IFS, said,

“In the last twenty years, the incomes of the top 1% have pulled further away from the rest. But across the vast majority of the population income inequality has actually fallen. However, in large part this is because the tax and benefit system has worked increasingly hard to offset disparities in the pay brought home by working households, and because of the catch-up of pensioners with those of working age, as well as falls in worklessness.”

Proportion of men aged 25-55 working part-time, by hourly wage level

Note: ‘Part-time’ defined as working less than 30 hours a week. Sample is male employees aged 25 to 55, excluding those with hourly pay in the bottom 5% or top 5% of the overall hourly pay distribution. To be in the lowest-paid group requires being in the lowest quintile (fifth) of hourly wages: equivalent to an hourly wage of less than £7.60 in 2014-15.The middle group are the those in the third quintile of hourly wages, and the highest-paid group are those in the top quintile of hourly wages. Hours are those in main job, and include paid but not unpaid overtime. Years are financial years.

Source: Labour Force Survey.

Notes to editors

 

  1. The working paper and an accompanying executive summary is available here on the IFS website.
  2. Please contact Bonnie Brimstone (020 7291 4818, 07730 667013 or bonnie_b@ifs.org.uk) if you have any queries.
  3. Funding for the research from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS is gratefully acknowledged ,as is support from the Joseph Rowntree Foundation (JRF), who have funded a series of projects on poverty and inequality at the IFS since 2010.

 

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http://www.ifs.org.uk/publications/8850 Fri, 13 Jan 2017 00:00:00 +0000
<![CDATA[Rising inheritances will deliver biggest benefit for those already well off]]> Younger generations are likely to inherit much more wealth than their predecessors did, both in absolute terms and relative to their other sources of wealth. But within each generation, those who are already well off tend to inherit the most – with implications for inequality and social mobility.

Ranking current pensioners by total lifetime income (excluding inheritance), those in the top 20% have inherited four times as much as the bottom 20% on average. Among younger generations, those with higher incomes are significantly more likely to expect an inheritance than those with lower incomes.

These are among the main findings of new IFS research published today, which looks at the impact of inheritances on inequality across and within different generations.

 Inheritances are going to be more important for younger generations ...

  • Between 2002–03 and 2012–13, the wealth of elderly households (those in which all members are 80 or older) increased by 45%, mostly as a result of higher homeownership and rising house prices. 72% of these households now expect to leave an inheritance, up from 60% a decade ago, with a particularly sharp increase in the proportion expecting to leave a large inheritance.
  • Younger generations look much more likely to inherit than their predecessors. Of those born in the 1970s, 75% have received or expect to receive an inheritance, compared with 61% of those born in the 1950s and less than 40% of those born in the 1930s.

... and are likely to benefit those who are already well off the most.

  • Future inheritances are likely to be highly unequal. Even excluding the super-rich (for whom we do not have reliable data), the richest half of elderly households hold 90% of the wealth and the richest 10% hold 40% of the wealth. Hence a ‘lucky half’ of younger generations look likely to get the vast majority of inherited wealth.
  • The largest inheritances tend to go to those who are already well off. Among current pensioners, more than half of those with families well enough off to leave them more than £250,000 in inheritance have lifetime incomes (excluding inheritances) in the top 20% of the population.
  • Among younger generations, higher-income individuals are more likely to expect an inheritance. Looking at those born in the 1970s, 9 in 10 of the top-income fifth have received or expect to receive an inheritance, compared with 6 in 10 of the lowest-income fifth.
  • But both low- and high-income households in younger generations are more likely to inherit something than their predecessors. In fact, the lowest-income fifth of those born in the 1970s are more likely to have received or expect to receive an inheritance than the highest-income fifth of those born in the 1930s.

Andrew Hood, an author of the briefing note and a Senior Research Economist at IFS, said:

“The wealth of younger generations looks set to depend more on who their parents are than was the case for older generations. Today’s elderly have much more wealth to leave to their children than their predecessors did, primarily as the result of higher homeownership rates and rising house prices. At the same time, today’s young adults will find it harder to accumulate wealth of their own than previous generations did, due to the sharp fall in homeownership for that group, the dramatic decline of defined benefit pensions in the private sector and the stagnation in their incomes.”

ENDS

Notes to editors 

  1. Inheritances and inequality across and within generations, by Andrew Hood and Robert Joyce, will be available on the IFS website ifs.org.uk from 00:01 on Thursday 5 January 2017. If you have any queries, please contact Bonnie Brimstone on 020 7291 4818 / 07730 667 013 / bonnie_b@ifs.org.uk 
  2. Funding for the research from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS (grant number ES/M010147/1) is gratefully acknowledged.
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http://www.ifs.org.uk/publications/8835 Thu, 05 Jan 2017 00:00:00 +0000
<![CDATA[30 hours of free childcare likely to boost parental employment only slightly]]> New research published today by researchers from the Institute for Fiscal Studies, the University of Essex and the University of Warwick suggests that the government’s plan to extend parents’ entitlement to free childcare from 15 to 30 hours a week for 3- and 4-year-olds in England is only likely to have a small impact on parents’ working patterns.

This conclusion arises from looking at how working patterns change when children start primary school. One can think of this as a moment when entitlement to childcare provided free of charge from the state increases from 15 hours a week to 30–35 hours a week.

The key findings of the research, funded by the Economic and Social Research Council, were: 

  • Increasing the offer of free childcare from 15 to 30–35 hours per week during term time (when children moved from part-time nursery to full-time school) had no noticeable impact on fathers’ working patterns or those of mothers with other children under the age of 4.
  • The effects were stronger amongst mothers who did not have other young children. Having the youngest child in the family start full-time school increased the proportion of mothers in work by 3.5 percentage points (from a base of 58%). This is equivalent to around 12,000 more mothers in work.
  • One reason why working patterns did not change more is that the total amount of childcare used did not increase much. This is because free childcare often substitutes for informal childcare – provided by grandparents, for example – or paid-for childcare. Providing a 4-year-old with an additional 15–20 hours per week of free childcare during term time – equivalent to between around 600 and 800 hours per year – increased the amount of time they spent in childcare of any type by just 76 hours a year, on average.
  • Free childcare does save parents money though. Parents save on average £410 a year in childcare fees when their children move from part-time nursery to full-time school.

There are some reasons to think that the government’s proposed childcare extension may have a somewhat larger impact on parents’ working patterns than this research suggests: for example, the intention is to offer more flexibility over when the extra hours of childcare can be taken. The additional hours will also only be available to families where all parents in the household work. On the other hand, the 30 hours of free care offered will be less than the time children spend at school, so there are also reasons why the impact might end up being smaller.

Dr Sarah Cattan, Senior Research Economist at the Institute for Fiscal Studies and one of the authors of the research, said “The government expects to spend close to £1 billion extending the number of free hours of childcare available to working parents of 3- and 4-year-olds in England from 15 to 30 a week during term time. Our research suggests that this is only likely to lead a modest number of mothers – and no more fathers – to move into paid work. Offering free childcare does, of course, save money for parents who already use formal childcare. But to facilitate parents’ ability to work further, the government’s various childcare subsidies may need to enable families to access sufficient hours of free or subsidised child care throughout the year.”

---

Ends

Notes to editors

1. These findings are published today as a new IFS working paper: ‘Free childcare and parents’ labour supply: is more better?’ by Mike Brewer, Sarah Cattan, Claire Crawford and Birgitta Rabe. A non-technical summary of the main findings from the research, together with further discussion of its likely implications for the planned increase in free childcare for 3- and 4-year-olds in working families in England, can be found in a new IFS briefing note, also published today: ‘Does free childcare help parents work?’ by Mike Brewer, Sarah Cattan, Claire Crawford and Birgitta Rabe.

2. The authors gratefully acknowledge funding from the Economic and Social Research Council (ESRC) through the Secondary Data Analysis Initiative under grant ES/K003232/1 (all), the ESRC Research Centre on Micro-Social Change at the University of Essex under grant number ES/L009153/1 (Brewer, Rabe), the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies under grant number ES/M010147/1 (Cattan, Crawford), and the British Academy through Cattan’s Postdoctoral Fellowship.

 

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http://www.ifs.org.uk/publications/8793 Thu, 01 Dec 2016 00:00:00 +0000
<![CDATA[Automatic enrolment boosts pension membership to 88% and pension saving by £2.5bn in 2015]]> Automatic enrolment – where employers have to enrol employees into a workplace pension scheme, from which employees can then choose to leave – increased pension saving by £2.5 billion per year by April 2015.

This is one of the main findings of new research, published today by the IFS and funded by the IFS retirement saving consortium.1 The research exploits data on almost half a million jobs from April 2011 to April 2015 to look at how contributions to workplace pensions by private sector employers and their employees have been affected by automatic enrolment.

The increase in pension saving arises from a big increase in pension membership. We find that automatic enrolment increased pension participation among those eligible by 37 percentage points, so that by April 2015, 88% of these private sector employees were members of a workplace pension scheme. In contrast, prior to automatic enrolment around half of these employees were members of a workplace pension and membership had been falling over time.

In 2012 there were around 5.4 million private sector employees who were a member of a workplace pension. By 2015 this had increased to 10.0 million. Of this increase of 4.6 million our estimates suggest 4.4 million was the result of automatic enrolment. At this point one-quarter of eligible private sector employees (3.4 million) worked for an employer that was still to be brought into the scope of the policy.

Further findings include:

  • Automatic enrolment boosted pension coverage by the most among those aged 22 to 29, those earning between £10,000 and £17,000 per year, and those who have been with their current employer for less than a year. For each of these groups, for whom pre-reform coverage rates were particularly low, automatic enrolment has increased membership rates in workplace pensions by over 50 percentage points. In 2015 coverage among all of these groups had risen to over 80%.
  • Most of those brought into workplace pensions as a result of automatic enrolment have, so far, only low levels of contributions. The minimum contributions to pensions under automatic enrolment are 2% of earnings between £5,824 and £42,385 (in 2015–16), with at least 1% coming from the employer. There has been a 24 percentage point increase in the proportion of eligible employees who have contributions around this level.
  • But automatic enrolment has also increased the numbers of employees placing considerably more than the current minimum amount into a workplace pension. The proportion placing 5% or more of their total earnings into a workplace pension has increased by 7 percentage points.
  • Automatic enrolment has more than doubled membership of workplace pensions among those not directly targeted by the policy. Those not eligible are: employees aged under 22, employees over the state pension age, those earning less than £10,000 per year, and those who just joined their employer. Automatic enrolment increased pension membership rates across these groups by 18 percentage points, compared to a baseline of 15% prior to the reform. The effect was a particularly large 28 percentage points among those earning under £10,000 per year (compared to a baseline of 18% prior to the reform).
  • Our estimates suggest that in April 2015 a total of £2.5 billion a year more was saved in workplace pensions as a result of automatic enrolment. This amount is highly likely to increase significantly over the next few years as more employers are brought into the scope of automatic enrolment and as the minimum contributions increases from 2% to 8% of qualifying earnings.

Jonathan Cribb, a Senior Research Economist at the IFS, and an author of the report said,

"Automatic enrolment has been very successful in boosting membership of workplace pensions. This has been particularly true of younger employees aged 22 to 29 and relatively low earners on between £10,000 and £16,000 per year. Significant numbers of those not directly targeted by the policy have also been brought into workplace pensions, such as those earning less than £10,000. The story of automatic enrolment is certainly a case of so far so good. A key issue is whether those brought into workplace pensions at low contribution rates will remain in when minimum contribution rates start rising."

Ends


Notes to editors

1. The IFS Retirement Saving Consortium comprises Age UK, Association of British Insurers, Chartered Insurance Institute, Department for Work and Pensions, HM Revenue and Customs, HM Treasury, Investment Association, Legal and General Investment Management, Money Advice Service, and Tax Incentivised Savings Association. Support from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy (CPP) at IFS, grant reference ES/M010147/1, is also gratefully acknowledged.

2. This research will be published on the IFS website at 00.01 on Thursday 17 November: www.ifs.org.uk. It will also be presented at a briefing, hosted by the Association of British Insurers in London, on the same day, 15:30 – 17:30. A response to the research findings will be given by Richard Harrington MP, the Parliamentary Under Secretary of State responsible for pensions at the DWP. Full details and a booking form can be found here: https://www.abi.org.uk/Events/2016/Automatic-enrolment-launch

3. Automatic enrolment into workplace pensions was legislated in the Pensions Act 2008 following the recommendations of the Pensions Commission. It means that employers must automatically enrol their eligible employees into a workplace pension. Eligible employees are those who are aged 22 to the state pension age, earn at least £10,000 per year and have been in their job for at least 3 months. Automatic enrolment began being rolled out to the largest employers in April 2012 and is gradually being extended to smaller employers with this scheduled to be complete in 2018.

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http://www.ifs.org.uk/publications/8735 Thu, 17 Nov 2016 00:00:00 +0000
<![CDATA[Outlook for the UK’s public finances has worsened by £25 billion since Budget]]> In this Autumn Statement lower growth forecasts will push up forecast government borrowing and debt.

By 2019–20 our central estimate is that, with no policy change, lower growth could result in tax revenues being £31 billion lower than forecast in the Budget. This might be offset by £6 billion lower spending if we stop any payments to the EU budget. The net effect of borrowing £25 billion more than forecast in the Budget, would imply a deficit of £14.9 billion rather than the £10.4 billion surplus that George Osborne was aiming for.

These figures assume all the challenging spending cuts announced by Mr Osborne are delivered, including £3.5 billion of unspecified “efficiencies” pencilled in for 2019–20. They don’t take account of the income tax cuts promised in the Conservative manifesto but not yet enacted. They do assume no EU Budget contributions in 2019–20.

These are the headline findings of a new report by IFS researchers published today and funded by the Economic and Social Research Council.

]]>
http://www.ifs.org.uk/publications/8719 Tue, 08 Nov 2016 00:00:00 +0000
<![CDATA[Council funding reform may mean big winners and losers]]> IFS PRESS RELEASE 

 

Council funding reform may mean big winners and losers

Major changes to councils’ funding are making councils much more dependent on the amount of council tax and business rates raised locally. The Business Rates Retention Scheme currently allows local areas in England to keep up to 50% of the growth in their business rates revenues that result from new developments. Our analysis, based on published revenue outturns and forecasts shows that:

  • 52 (mostly district) councils are forecast to see their overall funding boosted by 5% or more by the scheme between 2013–14 and 2016–17, compared to what they would have received if business rates had been pooled and the amount received by each council had instead increased in line with national growth in business rates revenues.
  • On the other hand, 119 councils, including most county councils and metropolitan boroughs, will be relative losers under the scheme, though none will have lost more than 2% of their funding.

As part of truly revolutionary reforms to local government in England, by 2020 councils will retain 100% of business rates revenues:

  • This will provide a stronger financial incentive for growth but also mean more budgetary risk: councils’ potential gains will be larger, but so too will their potential losses. Greater funding divergence could lead to greater divergence in council service quality across England;
  • If it works like the current system, some councils could gain and others lose significant sums, even if business rates revenues grow at the same rate across all councils. This rather counter-intuitive outcome could be addressed via some simple technical changes to the way the scheme works, without blunting the financial incentives for growth it is meant to provide.

These are among the findings in a new report by researchers at the Institute for Fiscal Studies launched today. It is the first report in a major new programme of research, funded and supported by The Local Government Finance and Devolution Consortium, consisting of private sector and public sector organisations. In coming months and years, researchers will examine the key issues, opportunities and risks arising from major changes to local government finance systems across Great Britain.

 

The report looks at councils’ budgets since 2009–10, and finds:

 

  • Excluding education spending, councils in England plan to spend around 22% less on service provision in 2016–17 than they did in 2009–10.
  • Cuts in Scotland and Wales, at 15% and 11.5% respectively, have been smaller. This is partly because of the devolved governments’ decisions to protect health spending to a lesser extent than in England allowing smaller cuts to other areas. And in Wales’ case council tax bills have risen substantially more than in England.
  • In England, cuts have been much larger for poorer, more grant-dependent councils than their richer neighbours, who can raise more of the money they need via their own council tax revenues.
  • The mainly urban and poorer councils among the tenth which are most grant-reliant have had to cut their spending on services by 33% on average, compared to 9% for those richer councils among the tenth which are least grant-reliant.
  • This pattern arose directly from the way central government allocated grants. Tweaks made between 2011-12 and 2013-14, which were supposedly intended to mitigate this, were largely ineffective. They were abandoned in 2014–15 and 2015–16.
  • Overall this period was characterised by a lack of consistency and transparency in the allocation of funding to councils, and outcomes that were sometimes at odds with stated intentions of protecting poorer councils
  • In 2016–17, the grant formula was changed again and will now deliver much more equal cuts to overall spending power across councils.
  • More generally though, reforms in England over the last few years have represented a move away from funding equalisation and towards the provision of fiscal incentives for economic and housing development via the Business Rates Retention Scheme and the New Homes Bonus.

 

As the scope of the business rates retention scheme expands there will be difficult trade-offs to make between providing financial incentives and preventing dramatic divergence in funding. Government also has some difficult decisions to make over which additional services to devolve to councils alongside their new business rates revenues: it will be easier to ensure the new revenues match new spending responsibilities in year one than it will in the years ahead.

 

“The changes to local government finance in England during the 2010s will be truly revolutionary. We will have moved from a system where equalisation and insurance was paramount, to one with much more emphasis on incentives for growth, but also more financial risk for councils.” said David Phillips, a senior research economist, and an author of the report, “Along the way there will be lots of tricky policy decisions. And there are big picture questions, such as whether these changes will actually empower councils to deliver more growth, or just burden them with additional revenue and spending risks. The IFS’s new programme will look at both types of issues, in an effort to ensure this revolution is subject to proper public scrutiny.”

 

______________________________________

 

ENDS

 

Notes to Editors:

 

  1. Table 1 shows the estimated relative gains/losses under the BRRS by type of council and by region of England. Note that figures reported in the Table and in the press release are based on revenue outturns for 2013–14 and 2014–15, and January 2016 forecasts for 2015–16 and 2016–17 (which are subject to revision).

Table 1. Relative gains and losses as a result of the BRRS (2013–14 to 2016–17), expressed as a percentage of councils’ overall funding, by council type and region

Council Type

Mean

10th percentile

Median

90th percentile

Shire Districts

3.5%

0.5%

3.2%

6.7%

County Councils

-0.2%

-0.3%

-0.2%

0.0%

Metropolitan Boroughs

-0.2%

-0.9%

0.0%

0.7%

Unitary Authorities

0.2%

-0.7%

0.2%

1.0%

Fire Authorities

-0.3%

-0.6%

-0.3%

0.1%

London Boroughs (inc GLA)

-0.3%

-0.6%

0.8%

5.4%

 

 

 

 

 

Region

 

 

 

 

East of England

0.4%

N/A

N/A

N/A

East Midlands

0.7%

N/A

N/A

N/A

London

-0.3%

N/A

N/A

N/A

North East

-0.4%

N/A

N/A

N/A

North West

-0.1%

N/A

N/A

N/A

South East

0.4%

N/A

N/A

N/A

South West

0.1%

N/A

N/A

N/A

West Midlands

0.0%

N/A

N/A

N/A

Yorkshire & The Humber

0.4%

N/A

N/A

N/A

Note: 10% of councils of a specific type have lost more / gained less than the 10th percentile, 50% have lost more / gained less than the median, and 90% have gained less than the median. Distributions of gains/losses by region are not reported as they are strongly affected by the number of different types of councils (e.g. UAs versus shire districts), making comparisons across regions potentially misleading.

Source: Authors calculations using business rates revenues outturns (NNDR3) for 2013–14 and 2014–15 and forecasts (from NNDR1 2016–17) for 2015–16 and 2016–17, and other revenues from revenue expenditure and financing outturns (2013–14 to 2015–16) and estimates (2016–17).

 

  1. A time of revolution: British local government finance in the 2010s will be published on the IFS website at 00.01 Wednesday 26 October 2016. For embargoed copies, please contact Bonnie Brimstone at bonnie_b@ifs.org.uk or 020 7291 4818 / 07730 667 013.

The findings of this report will be presented at an event, 09:00-11:00 on Wednesday 26 October. For more information and to reserve your place, please go to https://www.ifs.org.uk/events/1379

  1. This research is the first output from a major programme of work funded by The Local Government Finance and Devolution Consortium. This consortium is generously supported by Capita, CIPFA, ESRC and PwC and is also supported by the Municipal Journal and a large group of local government bodies, including 27 non-metropolitan counties and a number of unitary, district, metropolitan, and London councils.

Drawing on funding and expertise from the consortium, and working with partners in Wales and Scotland, over the next few years, IFS researchers will engage in a wide-ranging programme of research on local government finance and devolution. This includes assessing the impact of changes to funding and funding systems so far, and a range of live policy issues related to 100% business rates retention in England, and reform of local taxes in Scotland and Wales. The programme will also look beyond current policy proposals to examine the rationale and potential effects of alternative or broader changes to local tax and spending powers. And it will bring together existing, and if possible, new evidence, on the extent to which the financial incentives inherent in local financial incentives affect local economic growth and service provision.

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http://www.ifs.org.uk/publications/8706 Wed, 26 Oct 2016 00:00:00 +0000
<![CDATA[IFS analysis of today’s public finance figures]]> Today the Office for National Statistics and HM Treasury published Public Sector Finances September 2016. We now have details of central government receipts, central government spending, public sector net investment, borrowing and debt for the first half of financial year 2016−17.

Thomas Pope, a Research Economist at the IFS, said:

"At the half way point in the financial year, tax receipts have disappointed while central government spending has been slightly lower than official forecasts for the year imply. Overall, borrowing looks set to be higher than the OBR forecast in March, possibly by a reasonable margin. The trend so far suggests that, over the year as a whole, receipts could undershoot by £14 billion.  

The next few months might however contain some better news on receipts. The recent rise in income tax on dividend income is likely to have led to some owner-managers bringing forward their dividend payments. As a result we can expect strong growth in income tax receipts on dividend payments to arrive around the self-assessment deadline at the end of January. Therefore a better estimate for receipts this year is for an undershoot of £8 billion, driven by with weak receipts from income tax and National Insurance on earnings, and from VAT on purchases. 

On November 23rd, the new chancellor will present his response to a much changed economic outlook at the Autumn Statement. Borrowing looks likely to be larger this year than his predecessor expected in March, which will make the challenge he faces more difficult."

Further analysis

Receipts

Extrapolating from the year to date, government receipts are on course to be £14 billion down on the OBR’s forecast from March (see Table). In particular, PAYE, NICs and VAT receipts look set to disappoint, while strong Corporation tax receipts offset this a little. Due to strong expected growth in Self-Assessment receipts (which mostly come in January and February) this year, a better central estimate would be that receipts might miss their forecast by around £8 billion.

This month, and for the year to date, Stamp Duty Land Tax receipts have grown less quickly than the OBR forecast for the year as a whole, likely due to a reduction in property transactions. The OBR highlights a slowdown in high end residential and commercial purchases, particularly in London. On the other hand, stamp duty on shares has been buoyed by the increase in share prices and volatility in the market (which leads to more transactions). These two effects broadly offset one another.

Table: Growth in receipts, spending and borrowing over the year to date

 

% growth

£ billion

 

Year-to-date

(outturn data)

Forecast for year as a whole

(OBR, March 2016)

Forecast for 2016–17

(OBR, March 2016)

Implied difference

Central government receipts

3.6%

5.9%

672.6

–14

Of which:

 

 

 

 

PAYE

1.6%

5.0%

153.4

–5

NICs

7.0%

10.9%

126.5

–5

VAT

2.3%

3.3%

134.8

–1

Corporation tax

3.5%

-2.0%

43.5

+2

 

 

 

 

 

Central government spending

1.7%

2.4%

686.7

–5

Total

–8.7%

–23.4%

55.5

+10

Note: PAYE = Pay As You Earn; NICs = National Insurance Contributions; Total growth figures refer to Central government only. Numbers may not sum due to rounding

Spending

Central government spending is running below forecast to the tune of around £5 billion. Broadly, this is explained by reductions in grants to Local Authorities, with their borrowing running ahead of forecast.

The full picture

For the public sector as a whole, a simple extrapolation implies a deficit £17 billion above the OBR forecast. However, some of this is driven by changes in the timing of spending and revenues for local government, which should unwind by March.

For a best estimate of public sector borrowing for the year, we focus on the central government numbers. Here a simple extrapolation implies a £10 billion increase in the deficit compared to forecast. If receipts were to progress as we expect, and spending caught up with the forecast over the next six months, the deficit would be around £8 billion higher than the OBR forecast in March.

Further information and contacts

For further information on today’s public finance release please contact: Carl Emmerson or Thomas Pope on 020 7291 4800, or email carl_e@ifs.org.uk or thomas_p@ifs.org.uk.

Next month’s public finances release is due to be published on Tuesday 22nd November 2016.

Relevant links

This, and previous editions of this press release, can be downloaded from http://www.ifs.org.uk/publications/browse?type=pf

Office for National Statistics & HM Treasury, Public Sector Finances, September 2016: http://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/sept2016   

Office for Budget Responsibility analysis of monthly Public Sector Finances, September 2016: http://budgetresponsibility.org.uk/monthly-public-finances-briefing/

Office for Budget Responsibility, Economic and Fiscal Outlook, March 2016: http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2016/

HM Treasury Budget 2016: https://www.gov.uk/government/topical-events/budget-2016  

Notes to Editors

1. Central government current spending includes depreciation.

2. Where possible we compare figures on an accruals basis with the Office for Budget Responsibility forecasts

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http://www.ifs.org.uk/publications/8703 Fri, 21 Oct 2016 00:00:00 +0000
<![CDATA[It's time to talk about tax, experts tell Hammond]]> Ahead of his first major speech as Chancellor at the Conservative Party Conference, Phillip Hammond is being urged to overhaul the way tax policy is made in the UK.

Institute for Fiscal Studies (IFS), The Institute for Government (IfG),  and Chartered Institute of Taxation (CIOT) have written to the Chancellor listing immediate changes they believe will improve and simplify the making of tax policy and ultimately improve the UK’s tax system. These include:

  1. Returning to a single annual fiscal event, to stop Autumn Statements becoming second Budgets, leading to a proliferation of measures and very long finance bills.
  2. Starting the consultation process for tax changes at an earlier stage, to avoid the surprises that lead to costly errors and embarrassing U-turns.
  3. Establishing clear guiding principles and priorities, to give a clear indication of the direction of travel for tax policy the rest of the Parliament.
  4. Extending the roadmap approach, pointing to a clear direction for the future in areas where individuals and businesses need to plan and make long-term decisions, such as pensions and savings.
  5. Preparing the ground for future policy changes through external reviews to open up public debate about the tax system.

Jill Rutter, Programme Director, IfG, said:

“When she launched her leadership campaign, Theresa May said it was time to talk about tax. We agree. And the first thing we need to discuss is how to reform the Budget process to make tax policy fit for post-Brexit Britain. That means clearer direction, fewer surprises, a radical reduction in the number of measures and a willingness to engage the public on the big choices.”

Paul Johnson, Director, IFS, said:

“Nearly £4 in every £10 earned in the economy is taken in tax. How the tax system works matters enormously to us all. The current system for tax policy making is not fit for purpose. Too many changes are sprung on the country in too many fiscal events with too little sense of direction, consultation or evaluation.”

Bill Dodwell, President, CIOT, said: 

“Good tax policy comes from an open, consultative process in which all those affected have a voice, and consultation starts at an early enough stage of the policy development process to be meaningful. The reforms we suggest would help achieve this. We hope the Chancellor will take them on board.”

The open letter reflects initial findings from a project being carried out by the IFS, IfG & CIOT looking at how to improve budgets and tax. A full report will be published later in the year.

ENDS

Notes to editors

  1. The full letter can be found here.
  2. The Institute for Government is an independent think tank that works to make government more effective.
  3. The Institute for Fiscal Studies (IFS) is Britain’s leading independent microeconomic research institute. IFS was launched in 1969 with the principal aim of better informing public debate on economics in order to promote the development of effective fiscal policy. Its research remit is one of the broadest in public policy analysis, covering subjects from tax and benefits to education policy, from labour supply to corporate taxation. For more information please visit ifs.org.uk.
  4. The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. It draws on its members’ experience to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities.
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http://www.ifs.org.uk/publications/8691 Mon, 03 Oct 2016 00:00:00 +0000
<![CDATA[Those born in early ‘80s have about half the wealth that those born in ‘70s had at same age]]> In their early 30s, people born in the early 1980s have average (median) net household wealth of £27,000 per adult – including housing, financial and private pension wealth. This is about half the median wealth that those born in the 1970s had at around the same age (£53,000).

This is among the main findings of new IFS research published today, which for the first time looks at both the overall household wealth and total income of different generations.

It looks like those born in the early 1980s are likely to find it harder than their predecessors to build up wealth in housing and pensions as they age. They have much lower home-ownership rates in early adulthood than any other post-war cohort, and – outside the public sector – have much less access to generous Defined Benefit pension schemes than previous generations did at the same age.

Other findings include: 

  • Those born in the early 1980s were the first post-war cohort not to enjoy higher incomes in early adulthood than those born in the previous decade. This is partly the result of the overall stagnation of working-age incomes, but it also reflects the fact that the Great Recession hit the pay and employment of young adults the hardest.
  • Those born in the early 1980s have much lower home-ownership rates in early adulthood than any generation for half a century. At the age of 30, only 40% of those born in the early 1980s were owner-occupiers, compared to at least 55% of the 1940s, 1950s, 1960s and 1970s cohorts.
  • In their late 20s, renters born in the early 1980s spent nearly 30% of their net income on housing costs (largely rents) on average, compared to 15% for homeowners (largely mortgage interest). At the same age, renters and homeowners born in the 1960s both spent around 20% of their income on housing costs on average. Hence, the decline in homeownership has been accompanied by a divergence in the costs paid by renters and homeowners
  • Outside of the public sector, those born since 1970 have much less access to generous Defined Benefit (DB) pensions than previous generations did. In their early 30s, less than 10% of private-sector employees born in the early 1980s were active members of a DB scheme, compared to more than 15% of those born in the 1970s and nearly 40% of those born in the 1960s. The recent introduction of ‘auto-enrolment’ means that younger cohorts have higher overall pension membership than their predecessors did but at much lower levels of generosity.  

Andrew Hood, an author of the report and a Research Economist at IFS said: “By the time they hit their early 30s, those born in the early 1980s had about half as much wealth as those born in the 1970s did at the same age. Sharp falls in home-ownership rates and in access to generous company pension schemes, alongside historically low interest rates, will make it much harder for today’s young adults to build up wealth in future than it was for previous generations.”

ENDS

Notes to Editors:

The Economic Circumstances of Different Generations: The Latest Picture by Jonathan Cribb, Andrew Hood and Robert Joyce has been published on the IFS website here: https://www.ifs.org.uk/publications/8583 

Funding for the research from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS (grant number ES/M010147/1) is gratefully acknowledged.

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http://www.ifs.org.uk/publications/8593 Fri, 30 Sep 2016 00:00:00 +0000
<![CDATA[Welsh Government faces difficult budgetary trade-offs and uncertain times]]> Given the plans and forecasts set out in the UK government’s March 2016 budget, the Welsh Government’s budget could be cut by 3.2% in real terms over the next three years, with cuts largest in 2018-19 and 2019–20. If the Welsh Government chooses to protect the NHS budget in the same way as the English NHS budget then other spending would face cuts averaging 7.4% in real terms.

The new chancellor might reduce these cuts in the short run. But that would likely come at the cost of additional – and possibly even larger – cuts later on.

Complete Loss of EU grants, if not made up by additional grants from Whitehall, would see the Welsh Government losing over £500 million a year following Brexit. This would more than double the overall budget cut.

Local councils in Wales are likely to face a particularly tough time. Budgets may fall by an additional 5.9% or more in real terms, on top of recent cuts.

These are among the main findings of a new report by researchers at the Institute for Fiscal Studies, published as part of the Wales Public Services 2025 programme, hosted at Cardiff Business School. Other key findings in relation to the Welsh Government’s budget include:

  • Increases to the NHS budget of 2% a year (well below historic norms) while protecting funding for councils’ education and social services responsibilities would lead to ‘unprotected’ areas facing cuts averaging 18% over the next 3 years given current plans and forecasts.
  • If income tax were to be partially devolved increasing rates across-the-board by 1p in the pound could offset almost half the overall cuts to the Welsh Government’s budget.
  • However, in the run up to the 2016 Assembly elections there was more talk of tax cuts than tax rises. An across-the-board 1p in the pound cut in income tax rates would increase overall budget cuts from 3.2% to 4.7% by 2019-20.

The report also considers the costs the Welsh Government may face if the EU funding Wales currently receives is not fully replaced:

  • The UK government has stated that funding for payments to farmers will be guaranteed until 2020 but funding for areas like rural development and regional development projects will not be guaranteed unless projects were signed off by the time of the upcoming Autumn Statement. Later projects will instead be funded on a case-by-case basis. If only half were funded, real terms cut to the Welsh budget by 2019–20 could rise from 3.2% to 4.3%.
  • It is even less clear what funding will be available for schemes currently funded by the EU after 2020. If no additional funding was provided, the Welsh Government would have to find over £500 million a year from its existing budget if it wanted to continue to fund these schemes. This could more than double average budget cuts to 6.9% in 2020–21 (assuming the remainder of the Welsh Government’s funding was unchanged).

Finally, the report considers the implications for Welsh councils:

  • If the Welsh Government protects NHS funding and cuts grants to councils in line with the rest of its spending, grants would be cut by 7.4% in real terms by 2019–20. The OBR forecasts Welsh councils will increase council tax bills by an average of 4% a year in each of the next 3 years. Accounting for the resulting increases in their council tax revenues, this would result in an overall drop in councils’ budgets of 5.9% in real-terms over the same period, unless they drew down their reserves (which is unsustainable in the long term).
  • If councils were to protect education and social services from real-terms cuts, other service areas could need real-terms cuts averaging 23% to deliver a 5.9% overall budget cut. This would come on top of the real-terms cuts of between 20% and 50% that areas like housing, culture and leisure, and planning and development, have already faced since 2009–10.
  • Because council tax revenues make up very different portions of councils’ budgets, council tax increases can do much more to offset budget cuts in some areas than others. For instance, raising council tax bills by an additional 10% by 2019–20 – taking average annual increases in bills to over 7% – could reduce the scale of cuts by more than half in Monmouthshire but little more than one-fifth in Caerphilly.

Polly Simpson, a research economist at the IFS and an author of the report said “This research highlights the difficult budgetary tradeoffs the facing the Welsh Government. Protecting such large areas of spending as health, social care and education would require substantial cuts to other areas of spending that have often already had to absorb 7 years of real-terms cuts. It is also important to realise that increases in the taxes under Welsh Government or councils’ control is unlikely to be a panacea. For instance, even increasing council tax by over 7% a year, could still leave some council services facing double-digit cuts over the next 3 years.”

Michael Trickey, director of Wales Public Services 2025 added “The tough times for public services in Wales are far from over: austerity still has some way to run and further cuts seem unavoidable over the next 3 years. This will intensify the pressure on public services to increase the scale of change and mitigate the impact on communities. But there are also big questions for politicians and the public about the services and priorities we want for the future.”

ENDS

Notes to editors

  1. For queries, please contact: Bonnie Brimstone at IFS: 020 7291 4818 / bonnie_b@ifs.org.uk;
  1. ‘Welsh Budgetary trade-offs to 2019–20’ will be launched at Ty Hywel, Cardiff Bay at 12:30 on Wednesday 14th September, 2016 and is available here on the IFS website;
  1. Wales Public Services 2025 provides independent analysis of the fiscal, economic and policy challenges facing public services in Wales.  Hosted by Cardiff Business School, the Programme is co-funded by Cardiff University and five national bodies in Wales (the Welsh Local Government Association, the Wales Council for Voluntary Action, SOLACE Wales, Community Housing Cymru, and the NHS Wales Confederation
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http://www.ifs.org.uk/publications/8471 Wed, 14 Sep 2016 00:00:00 +0000
<![CDATA[Gender wage gap grows year on year after childbirth as mothers in low-hours jobs see no wage progression]]> On average, women in paid work receive about 18% less per hour than men. IFS research published today, funded by the Joseph Rowntree Foundation, shows that the wage gap is smaller when comparing young women – before they become mothers – with their male counterparts. But the gap widens consistently for 12 years after the first child is born, by which point women receive 33% less pay per hour than men (see Figure).

The widening of the hourly wage gap after childbirth is associated with reduced hours of paid work, but not because women see an immediate cut in hourly pay when they reduce their hours. Rather, women who work half-time lose out on subsequent wage progression, meaning that the hourly wages of men (and of women in full-time work) pull further and further ahead. In addition, women who take time out of paid work altogether and then return to the labour market miss out on wage growth.

 

Detailed findings include:

The gap in average hourly wages between male and female employees has been falling over the past two decades ...

 

  • The current gap of 18% compares with 28% in 1993 and 23% in 2003.

 

... but not among graduates or people with A levels

 

  • For the mid- and high-educated, the gender wage gap is essentially the same as it was 20 years ago. It is only among the lowest-educated (those with less than A levels) that the gender wage gap has been steadily declining. The other main driver of the fall in the overall gender wage gap has been an increase in the education levels of women relative to men.

 

The gender wage gap increases gradually after the arrival of children. Possible explanations include mothers missing out on promotions or simply accumulating less labour market experience

 

  • A big difference in employment rates between men and women opens up upon the arrival of the first child and is highly persistent. Before the first child is born, the employment rates of men and women are almost identical. But between the year before and the year after the birth of the child, women’s employment rates drop by 33 percentage points for those with GCSEs, 19ppts for those with A levels and 16ppts for graduates – while barely changing for men. By the time that child is aged 20, women’s employment rates still have not caught up again with men’s.
  • By 20 years after the birth of their first child, women have on average been in paid work for four years less than men and have spent nine years less in paid work of more than 20 hours per week.

 

Taking time out of paid work is associated with lower wages when returning ...

 

  • Comparing women who had the same hourly wage before leaving paid work, wages when they return are on average 2% lower for each year spent out of paid work in the interim.
  • This apparent wage penalty for taking time out of paid work is greater for more highly educated women, at 4% for each year out of paid work. The lowest-educated women (who actually take more time out of paid work after childbirth) do not seem to pay this particular penalty, probably because they have less wage progression to miss out on.

 

... and working low numbers of hours is associated with less wage progression 

 

  • There is no immediate drop in hourly wages on average when women reduce their hours to 20 or fewer per week. Instead, the lower hourly wages observed in lower-hours jobs appear to be the cumulative effect of a lack of wage progression.
  • The hourly wages of women working half-time (or less) appear to do no more than change in line with economy-wide wages. In other words, the wages of these women appear not to benefit at all from increases in labour market experience. This is true for high- and low- educated alike.

 

Robert Joyce, Associate Director at IFS and an author of the report, said:

 “The gap between the hourly pay of higher-educated men and women has not closed at all in the last 20 years. The reduction in the overall gender wage gap has been the result of more women becoming highly educated, and a decline in the wage gap among the lowest-educated.

 “Women in jobs involving fewer hours of work have particularly low hourly wages, and this is because of poor pay progression, not because they take an immediate pay cut when switching away from full-time work. Understanding that lack of progression is going to be crucial to making progress in reducing the gender wage gap.”

  

 

ENDS

 _______________________________________

Notes to Editors:

 For embargoed copies of the report or other queries, contact the IFS press office on 020 7291 4800 or 07730 667013, thomas_h@ifs.org.uk  

  1. The briefing note ‘The gender wage gap’, by Monica Costa Dias, William Elming and Robert Joyce, will be published online at http://www.ifs.org.uk/publications/8428
  2. The Joseph Rowntree Foundation is an independent organisation working to inspire social change through research, policy and practice. For more information visit jrf.org.uk JRF is on Twitter. Keep up to date with news and comments @jrf_uk. For press releases, blogs and responses follow @jrfmedia
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http://www.ifs.org.uk/publications/8429 Tue, 23 Aug 2016 00:00:00 +0000
<![CDATA[Big historical increase in numbers did not reduce graduates' relative wages]]> The number of graduates has increased substantially over time. One in seven (14%) of those born in 1965-69 had obtained first degrees by their late 20s. That figure had more than doubled to 31% of those born ten years later. Despite this huge increase in the supply of graduates, the graduate wage premium over GCSE holders has remained the same at all ages across birth cohorts.

A new IFS briefing note published today shows how the historical increase in the graduate proportion did not lower graduates’ relative wages. However, the research also suggests that further expansion of higher education in the future could lower graduates’ relative wages.

Key facts

  • In 1993, 13% of 25- to 29-year-olds were graduates. This had risen to 41% by 2015.
  • Comparing across birth cohorts, the sharpest increase in the graduate proportion occurred between those born in the late 1960s and those born in the late 1970s.
  • Despite this big rise in graduate numbers, the wage differential between graduates and school-leavers (those with GCSEs of at least grade C and without degrees) does not vary much across cohorts. The chart shows the ratio of the median wage of graduates to the median wage of school-leavers against age by birth cohort. The premium is largely the same across cohorts.

Source: Authors’ calculations from Labour Force Survey 1992-2015.

  • Real wages have fallen significantly among all education groups since the Great Recession. Relative to the Consumer Price Index, the median hourly wage of 25- to 29-year-old graduates fell by nearly 20% between 2008 and 2013. The real level in 2015 is back to roughly the same level as in the mid 1990s.
  • The real median wage among 25- to 29-year-old school-leavers fell by a similar percentage so that the wage differential between graduates and school-leavers has essentially stayed flat.

Our research suggests that the main reason for the lack of a decline in the graduate wage premium has been because firms have used the increased supply of highly-educated workers to switch to a different, less hierarchical and more decentralised management structure. This has had the effect of creating more graduate jobs and left the graduate wage premium unchanged.

This process cannot go on forever and there are now signs that it might be reaching a natural end, with some small falls in the wages of graduates in the private sector relative to school leavers in the most recent years. Further increases in the number of graduates could start to erode the graduate wage premium in the future. This does not, however, imply that getting a degree will not be worth it any more. It’s just that the gain might be smaller in the future than it is now.

Wenchao Jin, PhD Scholar at the IFS, says "the fact that the dramatic increase in the number of graduates in the early 90s did not have any discernible negative impact on graduates' wages relative to school-leavers is remarkable. Our research suggests the increasing supply of graduates induced firms to decentralise more decision-making and create more graduate jobs. As most firms have now made such a change, we believe future increases in graduate numbers could reduce the graduate wage premium in the future."


ENDS

Notes to Editors:

1. For embargoed copies of the briefing note or other queries, contact: Emma Hyman at IFS: 020 7291 4800 or 07730 667013, emma_h@ifs.org.uk

2. The briefing note 'The puzzle of graduate wages', by Richard Blundell, David Green and Wenchao Jin, will be published at http://www.ifs.org.uk/publications/8409.

3. The full IFS working paper on which the briefing note is based, 'The UK wage premium puzzle: how did a large increase in university graduates leave the education premium unchanged?', by Richard Blundell, David Green and Wenchao Jin, can be found at http://www.ifs.org.uk/publications/8322

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http://www.ifs.org.uk/publications/8426 Thu, 18 Aug 2016 00:00:00 +0000
<![CDATA[Brexit options: budget contributions pale against wider trade and economic impacts]]> The UK public has voted to leave the European Union. But the economic choices that still face us are very big. Perhaps the most important is the choice over whether the UK retains membership of the single market. Despite the efforts of some to confuse the issue “membership of” the single market is entirely different to “access to” it. Membership may come at the cost of continuing to contribute to the EU Budget and accepting future regulations designed in the EU. Those costs are salient and the benefits of membership are diffuse – but the financial benefits are real and, at the moment at least, likely to outweigh the financial costs.

A new report by IFS researchers, funded by the ESRC and published today: The EU Single Market: The Value of Membership versus Access to the UK looks at what membership of the single market brings in terms of the potential benefits for trade, especially in services, and the likely obligations. It also considers the potential for new trade deals beyond the EU and the economic and public finance implications of potential options.

The report finds:

  • Single Market Access is virtually meaningless as a concept. Any country in the World Trade Organisation (WTO) – from Afghanistan to Zimbabwe – has ‘access’ to the EU as an export destination. Single Market ‘membership’ by contrast involves elimination of barriers to trade in a way that no existing trade deal, customs union or free trade area achieves. In particular it means reducing “non-tariff” barriers like licensing and other regulatory constraints to supplying goods or services. These sorts of barriers have become relatively more important to trade than tariffs (taxes on trade), and especially so for services.
  • UK service exports are especially important. They accounted for 31% of all exports in 1999 and 44% of exports in 2015. The UK runs a significant trade surplus in services and the EU is the UK’s largest service export destination, accounting for 40% of service exports whereas emerging economies such as Brazil, Russia, India and China together account for less than 5%.
  • Single Market Membership is particularly important for financial services. So-called ‘passporting rights’ mean that UK-based financial firms can service EU businesses and customers directly. To maintain these rights would likely require membership of the European Economic Area (EEA). But that would come at the potentially considerable cost of submitting to future regulations designed in the EU without input from the UK. The UK may have to make some very difficult choices between the benefits from passporting and the costs of submitting to external imposed regulation.
  • New trade deals unlikely to compensate fully for EU trade. The EU accounts for 44% of our exports and 39% of our service exports. If the UK we are able to access the European Free Trade Association’s existing deals they would cover over 10% of UK exports which is more than the EU's current third-country deals. Countries such as China and India together account for 4.6% of all exports, and 2.6% on services. Even small proportionate losses in trade (or lost growth in trade) with the EU would require quite dramatic – and probably implausible –increases in trade with such countries.
  • Single Market membership could be worth 4% on GDP relative to reliance on WTO terms. Free trade agreements short of single market membership would have economic effects intermediate between these options.
  • Direct budget impacts are secondary relative to overall economic outlook. No large country currently enjoys membership of the Single Market without free movement of people alongside a financial contribution. While leaving the EU will free the UK from having to make a budgetary contribution, loss of trade could depress tax receipts by a larger amount.

Ian Mitchell, Research Associate at the IFS and an author of the report said:

“From an economic point of view we still face some very big choices indeed in terms of our future relationship with the EU. There is all the difference in the world between ‘access to’ and ‘membership of’ the single market. Membership is likely to offer significant economic benefits particularly for trade in services. But outside the EU, single market membership also comes at the cost of accepting future regulations designed in the EU without UK input. This may be seriously problematic for some parts of the financial services sector. Choices in these domains will most likely be far more important than any deal on budget contributions.”

ENDS

Notes to Editors:

1. ‘The EU Single Market: The Value of Membership versus Access to the UK’ by Carl Emmerson, Paul Johnson and Ian Mitchell will be available on the IFS website ifs.org.uk from 00.01 on Wednesday 10 August 2016.

2. This work was produced with funding from the Economic and Social Research Council through the The UK in a Changing Europe

 

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http://www.ifs.org.uk/publications/8413 Wed, 10 Aug 2016 00:00:00 +0000
<![CDATA[The big challenge on living standards is to boost incomes for those in work]]> Recent years have seen a truly remarkable transformation in patterns of low income in the UK. One great success is that pensioner incomes have grown so much and, after housing costs, they are now the least likely major demographic group to be in income poverty. Another is that more people are in work than ever before. The proportion of children living in a household where no-one works has fallen from nearly one in four in 1994–95 to less than one in six in 2014–15. 

The “new poor” tend to live in households where there is someone in work. Only a third of children below the government’s absolute poverty line now live in a workless household – two thirds of those classified as poor are poor despite the fact that at least one of their parents is in work. So if the new Prime Minister takes forward the ‘life chances’ strategy started by her predecessor, that strategy needs to focus on lifting the incomes of working households.

These are among the findings of a new report by IFS researchers published today: Living Standards, Poverty and Inequality in the UK: 2016, funded by the Joseph Rowntree Foundation. The research uses data on household incomes from the government’s Households Below Average Income series, recently made available up to and including the financial year 2014–15.

The falls in household worklessness have important implications:

  • The incomes of poor households are increasingly sensitive to what happens in the labour market. Income from employment made up half of income for the poorest fifth of households in 2014–15 (excluding pensioners), up from less than a third 20 years ago. While this is good news it does mean that the poorest are now more vulnerable to any downturn in the labour market than they would have been in the past.
  • Further falls in worklessness have much less scope to reduce child poverty than in the past. The falls in worklessness that we’ve already seen, plus the fact that rates of poverty rates among working families have risen, mean that only one third of children in income poverty now live in workless households.

Other key findings include:

  • Median income overall has finally moved 2% above pre-crisis (2007–08) levels, but for adults aged 31 to 59 it is at its pre-crisis level and for those aged 22 to 30 it is still 7% lower. It is highly unusual to see no growth in working-age incomes over a seven-year period.
  • Inequality in workers’ weekly earnings has fallen during the recovery. This was the result of a recovery in the number of hours worked by those with low hourly wages. Between 2011–12 and 2014–15, real weekly earnings grew by 4.4% at the 10th percentile, but fell by 1.2% at the 90th percentile.
  • Strong employment growth and weak earnings growth have combined to hold down inequality in recent years. Since 2011–12, falls in household worklessness and increases in the number of second earners both mainly boosted the incomes of poorer households. Meanwhile weak pay growth has held back the incomes of higher income households.
  • In key respects middle income families with children now more closely resemble poor families than in the past. Half are now renters rather than owner occupiers and, while poorer families have become less reliant on benefits as employment has risen, middle- income households with children now get 30% of their income from benefits and tax credits, up from 22% 20 years ago.
  • Mothers’ earnings are increasingly important for households with children. For middle-income children the fraction of household income coming from women’s earnings rose from less than a fifth in 1994–95 to more than a quarter in 2014–15; and it doubled from 7% to 15% for the poorest fifth. 

 

Robert Joyce, an author of the report and an Associate Director at IFS said:


“Tackling low income is increasingly about tackling the problems faced by low-earning working households. In the short term this would be aided by a continued recovery in the number of hours worked by those on low wages or by more second earners entering work. Ultimately substantial progress will depend crucially on economic policies that push up productivity. Economic uncertainty following the Brexit vote will only serve to make these challenges all the tougher”.


Andrew Hood, an author of the report and a Research Economist at IFS said:


“Given the economic recovery and cuts to benefits over the last few years we might have expected inequality to rise. But the combination of strong employment growth, some earnings growth for low-paid workers, and a lack of earnings growth for others, has kept inequality below its pre-recession level”.

______________________________________________________________________ENDS


Notes to Editors:


1. For embargoed copies of the “Living Standards, Poverty and Inequality in the UK: 2016” report or other queries, contact: Bonnie Brimstone or Emma Hyman at IFS: 020 7291 4800 / 07730 667 013, emma_h@ifs.org.uk, bonnie_b@ifs.org.uk;


2. This report will go live on the IFS website at 00.01 Tuesday 19 July. Authors will then present the findings at a launch event at 10am: http://www.ifs.org.uk/events/1320. To reserve your place, please complete a booking form: http://www.ifs.org.uk/events/booking


3. The Joseph Rowntree Foundation is an independent organisation working to inspire social change through research, policy and practice. For more information visit www.jrf.org.uk JRF is on Twitter. Keep up to date with news and comments @jrf_uk. For press releases, blogs and responses follow@jrfmedia

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http://www.ifs.org.uk/publications/8373 Tue, 19 Jul 2016 00:00:00 +0000
<![CDATA[High costs result from four in ten trainee teachers not teaching five years later]]> Teacher recruitment and retention are increasingly challenging for schools as the pools of graduates in key subjects decline and pupil numbers grow. New IFS research released today reveals around 40% of teachers who begin their initial training are not in a state school job five years later. That means of 35,000 or so individuals training to become teachers each year some 14,000 are not teaching five years later. Initial teacher training is expensive, costing an average of £23,000 per trainee taking into account costs to government and schools. The high drop-out rate means that on average more than £38,000 is spent on training for every teacher still in post five years after completing training.

This new research, funded by the Nuffield Foundation, also shows how routes into teaching have changed in recent years, and looks at the costs, benefits and retention rates for each route. School-led routes have grown quickly, with ‘School Direct’ accounting for around one-third of trainees in 2015–16. Teach First has also expanded now accounting for 5% of entrants, although more than 40% of trainees are still trained through traditional university-led postgraduate courses.

Key findings from the report include:

  • The average total cost of initial teacher training (including costs to central government and schools) is currently around £23,000. This, however, masks a lot of variation: from around £17,000 for primary school teachers via an undergraduate degree to around £38,000 per trainee coming via Teach First (£14,000 higher than any other route).
  • 40% of those who begin teacher training are not working as teachers in a state school five years later and there is variation by route of training: around 60% of Teach First trainees have left teaching within five years.
  • Higher initial costs and lower retention rates for Teach First mean that the cost per teacher in school five years after training is more than £60,000 for a Teach First recruit. This compares with between £25,000 and £44,000 for those entering via other routes. This additional cost may be justified by the fact Teach First trainees are disproportionately likely to teach in disadvantaged schools and Teach First may be able to attract graduates who would not otherwise have gone into teaching. The majority of schools involved with training believe the benefit to them outweighs their school’s cost. But the substantial additional cost does need to be weighed against these possible benefits.
  • The introduction of large tax-free bursaries for trainee teachers in shortage subjects represents a significant cost. The highest bursary is now £30,000 (for physics trainees with a first class degree), equivalent to a gross salary of £39,000, which is £17,000 higher than a teachers’ minimum starting salary outside London. There is little evidence on the effectiveness of these high-cost bursaries in terms of recruiting and retaining high-quality teachers. Such evidence is urgently needed.
  • Retention rates are lower where there is an excess supply of trainees. This highlights the need for local demand for teachers to be taken into account in teacher trainee allocations. Places have been allocated on a national ‘first-come first-served’ basis, which means places have not always been taken where they are most needed or by the highest quality applicants, and significant uncertainty from year-to-year.
  • Teacher retention is lower in areas where the pay of other workers is higher. Our research suggests that retention is affected by the relative pay of teachers and other local workers, so national pay restraint for teachers has the potential to reduce retention.
  • Most schools believe that the benefits of initial teacher training are greater than the costs for their school. A non-negligible proportion of school leaders in our survey believe that the benefits of involvement with ITT are lower than the costs, however, particularly for some routes. For example, around 30% of primary school head teachers involved with School Direct salaried reported that the benefits were less than the costs, in comparison with 6% for its predecessor, the Graduate Teacher Programme (GTP).

“The different routes to achieving qualified teacher status in England cost the taxpayer different amounts per trainee. The longer term costs are even more varied, due to differences in retention rates across routes. Dramatic changes to the system of initial teacher training should be based on assessments of the costs of each route in comparison to the benefit it brings, which has evidently not occurred to date. Greater policy attention is also need on how to retain teachers in the long-run. ”, said Ellen Greaves, a co-author of the report.

“A significant and increasing cost of training teachers is the tax-free bursaries awarded to graduates on certain routes, which are not conditional on ever entering the teaching workforce. The effectiveness of these grants needs to be evaluated, both in terms of the quality of graduates they attract and how long these graduates remain as teachers”, said Chris Belfield, a co-author of the report.

ENDS


Notes to Editors:


1. For embargoed copies of the report or other queries, contact: Bonnie Brimstone at IFS: 020 7291 4800/07730 667013, bonnie_b@ifs.org.uk


2. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to     build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at www.nuffieldfoundation.org.


3. Notes to Table 1:


a) HEI refers to Higher Education Institution
b) Central costs refers to the average costs to central government, in 2013–14. These
costs include the cost of direct grants paid to schools, providers and trainees, the cost
of providing student finance, and the cost of bursaries for trainees in priority
subjects. The average cost is calculated using the number of trainees with particular
characteristics that affect funding (such as degree class for bursary funding).
c) School costs refer to the indirect and direct monetary costs reported by schools, and
calculated from external sources, net of monetary benefits to the school.
d) Retention rate refers to the proportion of trainees that are ‘in service’ in state
schools in England the fifth year following expected ‘qualified teacher status’ date.
This is the latest possible retention rate it is possible to calculate using the data
available to us. It is not possible to observe longer-run retention rates for School
Direct, given the timing of the introduction of these routes.

 

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http://www.ifs.org.uk/publications/8369 Fri, 15 Jul 2016 00:00:00 +0000
<![CDATA[Middle income families receiving more benefits and increasingly living in rented housing]]> Twenty years ago over two thirds of children in middle-income households (which we define as being in the middle 20%) lived in owner-occupied housing. Just 22% of their households’ income came from benefits. Today only half of middle-income children are in owner-occupied housing and 30% of their household income comes from benefits.

In terms of their sources of income and their home-ownership rates, middle-income families with children are now more similar to low-income families than they were 20 years ago and are increasingly unlike higher-income families. This is not because middle-income families are poorer than 20 years ago. The median (middle) household income of children is around 40% higher than in 1994–95, though only 2% above its pre-recession (2007–08) level.

These are some of the main findings from new IFS analysis on inequality in childhood released today, which form part of the IFS’s forthcoming flagship annual report on Living Standards, Poverty and Inequality in the UK, funded by the Joseph Rowntree Foundation.

Key findings from the analysis include:

  • In 2014–15, middle-income families with children got 30% of their income from benefits and tax credits, up from 22% in 1994–95. This was driven by increasing generosity of benefits for middle-income families with children, particularly for those in work.
  • Home ownership rates for middle-income families with children have fallen substantially. The proportion of middle-income children living in an owner-occupied home has fallen from 69% to 50% since 1994–95. There has been a corresponding increase in the share living in private rented housing, from 11% to 27%.
  • Household worklessness is much less prevalent than it was 20 years ago. Between 1994–95 and 2014–15 the proportion of children living in a workless household fell steadily from 23% to 15%. For the poorest fifth of children household worklessness fell from 60% to 37% over the same period.
  • Falling worklessness means that a much greater proportion of income for low-income children now comes from parental employment compared to 20 years ago. For the poorest fifth of children, the proportion of their household income coming from parents’ employment has risen steadily from 27% in 1994­­–95 to 42% in 2014–15.
  • The incomes of the poorest children have grown faster than those in the middle over the last 20 years. In 1994–95, the child at the median had a household income 80% higher than the child at the 10th percentile. By 2014–15, this had fallen to 70%. Falls in household worklessness were an important driver of this change. Meanwhile, benefit growth in the middle prevented an increase in inequality between middle-income and high-income children over this period.
  • Overall, despite weak growth in incomes of families with children since the recession, the household income of the average child has risen substantially over the last 20 years. Median net household income for children (which now equates to £30,000 per year for a couple with two children) rose by 39% between 1994–95 and 2014–15, although it is only 2% higher than in 2007–08.

Andrew Hood, an author of the report and a Research Economist at IFS, said,

“Over the last twenty years, remarkable falls in household worklessness have played an important role in reducing inequality between low- and middle-income children. Meanwhile rising benefit incomes for many working families acted to prevent an increase in inequality between high- and middle- income children.”

Jonathan Cribb, another author of the report and a Senior Research Economist at IFS, said,

“In a number of ways, middle-income children are more similar to low-income children than they were 20 years ago. This is partly due to higher income growth for poor families with children, driven by falls in worklessness. Combined with increases in the generosity of benefits for middle-income families, this means that the relative importance of employment income has increased for poor children, but has decreased for middle-income children. Moreover, falls in homeownership have affected middle-income families much more than their high- or low-income counterparts.”

Table. Composition of income and household owner-occupation rates for children in the poorest, middle and richest income quintiles

 

Percentage of income from employment

Percentage of income from
benefits

Lives in owner-occupied home

Poorest 20%

 

 

 

1994–95

27%

73%

40%

2014–15

           42%         

61%

37%

Middle 20%

 

 

 

1994–95

77%

22%

69%

2014–15

70%

30%

50%

Richest 20%

 

 

 

1994–95

93%

4%

94%

2014–15

95%

3%

87%

Notes: Income from benefits and employment will not necessarily because of other small income sources and deductions from income. Source: IFS calculations using the Family Resources Survey, 1994–95 and 2014–15.

ENDS

Notes to Editors:

  1. If you have any queries, please contact Bonnie Brimstone or Emma Hyman at IFS: 020 7291 4800 / 07730 667 013, emma_h@ifs.org.uk, bonnie_b@ifs.org.uk;
  1. This press release is based on a pre-released chapter from our forthcoming flagship “Living Standards, Poverty and Inequality in the UK: 2016” report. The full report will include a detailed analysis of poverty and inequality trends across households and will be released at a launch on the Tuesday 19th July at the Building Centre, Store St, London: http://www.ifs.org.uk/events/1320.
  1. The Joseph Rowntree Foundation is an independent organisation working to inspire social change through research, policy and practice. For more information visit jrf.org.uk JRF is on Twitter. Keep up to date with news and comments @jrf_uk. For press releases, blogs and responses follow@jrfmedia

 

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http://www.ifs.org.uk/publications/8364 Thu, 14 Jul 2016 00:00:00 +0000
<![CDATA[Brexit could add two years to austerity]]> Leaving the EU could directly free up about £8 billion a year, which is the UK’s likely net contribution to the EU budget over the next few years. This would help the public finances. But the overall public finance impact would depend on the economic effects of the UK leaving the EU. A fall in national income of 0.6%, relative to what it otherwise would have been, would be enough to offset this direct effect.

There is near consensus that leaving the EU would have a greater negative effect on the UK’s economy than that. The National Institute of Economic and Social Research, whose comprehensive analysis has produced estimates that are in the middle of the available range, suggests GDP in 2019 could be between 2.1% and 3.5% lower as a result of a Brexit. A hit to GDP of this magnitude would imply a hit to the public finances, after taking account of the reduced EU contribution, of between £20 billion and £40 billion in 2019–20.

These are among the main findings of a new report published today and funded by the ESRC’s UK in a Changing Europe initiative. The report examines both the direct and indirect effects of Brexit on the UK’s public finances, based on a comprehensive review of studies analysing the short- and long- term economic effects of Brexit.

Looking at the direct impacts of leaving on the public finances:

  • The UK’s gross contribution to the EU budget, after our rebate, is about £14 ½ billion a year (or £275 million a week);
  • The net contribution, after taking account of money received back from the EU, is about £8 billion a year (or £150 million a week). So leaving the EU would have the direct effect of strengthening the public finances by this amount;
  • Claims that we would have an additional £350 million a week to spend are wrong. They imply that following a UK exit other EU countries would continue to pay a rebate to the UK on contributions it was not making. Such claims also imply we would simply stop all existing EU subsidies to farming and poorer regions (such as Cornwall and west Wales).

If, on leaving the EU, the UK were to join the European Economic Area, like Norway, its net contributions might be about halved. In this case the benefit to the public finances might be around £4 billion a year – though that would depend on the exact deal reached.

A vote to leave the EU would increase uncertainty in the short run and make trade more expensive in the long run. It would likely make the UK less attractive foreign direct investment (FDI). That is why nearly all estimates suggest leaving would reduce national income relative to what it would otherwise have been, both in the next few years, and in the longer term. Focusing on the shorter-term impact:

  • On a relatively optimistic scenario of national income being just 2.1% lower in 2019 (this is NIESR’s most optimistic estimate), borrowing would be more than £20 billion higher than currently planned;
  • In this scenario, just to get to budget balance, as the government aims to do, in 2019–20 would require the equivalent of an additional £5 billion of cuts to public service spending, an additional £5 billion of cuts to social security spending and a tax rise of more than £5 billion;
  • On less optimistic scenarios, borrowing could be £40 billion higher in 2019–20 than currently planned;
  • It is unlikely that government would respond with bigger spending cuts and tax rises in the short run. More likely “austerity” would be extended by another year (optimistic scenario) or another two years;
  • In any of these scenarios public sector debt would be significantly higher than planned by the end of the parliament.

Carl Emmerson, IFS deputy director and an author of the report, said: “The precise effects of leaving the EU on the British economy and hence the knock-on impact on the public finances is uncertain. But the overwhelming weight of analysis suggests that the economy would shrink by more than enough to offset the positive effect on the public finances of the reduced financial contribution to the EU budget”. 

Paul Johnson, IFS director and an author of the report said: “Leaving the EU would most likely increase borrowing by between £20 and £40 billion in 2019–20. Getting to budget balance from there, as the government desires, would require an additional year or two of austerity at current rates of spending cuts. Or we could live with higher borrowing and debt. These are real costs, but they are costs we could choose to bear if it was felt that they –and other costs – were outweighed by advantages from Brexit in other realms”.

Notes to Editors:

  1. ‘BrExit and the UK’s public finances’ by Carl Emmerson, Paul Johnson, Ian Mitchell and David Phillips went live at 00.01 on Weds 25 May and is available here. If you have any queries, please contact: Bonnie Brimstone at IFS: 020 7291 4818 / bonnie_b@ifs.org.uk;                      
  1. This work was produced with funding from the Economic and Social Research Council through the The UK in a Changing Europe

 

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http://www.ifs.org.uk/publications/8297 Wed, 25 May 2016 00:00:00 +0000
<![CDATA[School spending focused more on poorest schools over past 20 years; even more radical reforms over next decade]]> School spending in England has become increasingly targeted at schools with pupils from poorer backgrounds over the past 20 years. As a result, spending per pupil in 2013–14 amongst the 20% of secondary schools with the poorest pupils was £1,800 more than spending per pupil in the richest 20% (£7,400 compared with £5,600). This gap of more than 30% now compares with a gap of just 15% in the late 1990s. This is one of the main findings from a new report written by IFS researchers and funded by the Nuffield Foundation on long-run changes to school spending in England since the late 1970s.

That said, there is also a lot of variation in funding between schools with similar pupil intakes. Among the 20% poorest schools, 10% spent more than £9,000 per pupil while 10% spent below £6,200. Some of these differences are readily explained by other features of the schools, but many are not. That is why the government is currently consulting on radical plans for the gradual introduction of a national school funding formula in England from 2017–18 onwards. This would replace the 152 different funding formulae used by local authorities with one single, simple formula applying across all state-funded schools in England. As a result, schools in similar circumstances would, for the first time, receive similar levels of funding. Although we cannot detail the precise effects of this reform as the government has not yet proposed an exact formula, our report published today seeks to set these reforms in a proper historical context.

Key findings include:

  • Current school spending per pupil across England is expected to fall by at least 7% in real terms between 2015–16 and 2019–20. This would be the largest real-terms fall over any period since at least the late 1970s. However, due to the substantial growth in the 2000s, real school spending per pupil in 2019–20 would still be more than 50% higher than in 2000–01.
  • There are substantial differences in spending levels per pupil between schools in England, and these differences have grown over time. In 2013–14, 10% of secondary pupils attended secondary schools that spent more than £7,800 per pupil while 10% attended schools that spent less than £5,100.
  • A key driver of this variation is the increased spending in the most deprived set of schools and areas. In 2013–14, the poorest fifth of secondary schools (in terms of the proportion of pupils eligible for free school meals) spent 31% more per pupil than the richest fifth, up from around 15% in the late 1990s. This difference has grown from 10% to 25% for primary schools. It is likely such differentials will be preserved in the national funding formula.
  • Local authorities can and do make different choices in the way they fund different sorts of schools in their area. In 10% of local authorities, secondary schools spend at least 40% more than primary schools per pupil; but in 10% of local authorities, the difference was less than 30%. A national funding formula would eradicate such differences and would therefore lead to substantial changes in spending per pupil within individual local authorities. It would also imply a loss of discretion for local authorities to respond to particular local circumstances.
  • Differences in average spending levels between local authorities are, however, largely explained by characteristics of the local authorities: 80% of the variation in spending per pupil across local authorities can be explained by whether they are in London and their level of deprivation. A national funding formula therefore need not lead to significant redistribution between local authorities.

It is the total amount of spending that pupils experience over all their years in schooling that is likely to matter most for educational outcomes. This report provides the first estimates of total school spending received by each cohort in England: 

  • On average, students taking their GCSEs in 2015 had £57,000 spent on them over the course of their schooling career between Reception and Year 11. However, there is considerable variation: of pupils taking their GCSEs in 2013, 10% had less than £49,000 spent on them and 10% had more than £67,000.
  • Changes in school spending policy take a long time to affect the amount different cohorts experience in total school spending. For example, total spending per pupil will continue to grow over the current parliament, even though annual spending per pupil will fall in real terms.

“Over the past two decades, school spending has become increasingly targeted at the schools with the most deprived intakes; the Pupil Premium continued rather than started this trend. This represents a major shift in the role of the state, with the school funding system playing an increasingly important role in redistribution,” said Chris Belfield, one of the authors of the report.

“The introduction of a national funding formula for schools in England looks set to be one of the most radical shake-ups of school funding in at least the past 30 years. Replacing 152 different formulae with one single, simple formula will inevitably lead to substantial changes in funding across schools and, for good or bad, will almost completely remove local authorities from the school funding system,” said Luke Sibieta, the other author of the report.

ENDS

Notes to Editors:

 

  1. ‘Long Run Trends in School Spending in England’ by Christopher Belfield (IFS) and Luke Sibieta (IFS) will be published on the IFS website ifs.org.uk at 00.01 Friday 15 April 2016.
  1. This research has been funded by the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org
  1. The Department for Education is currently consulting on plans for a national funding formula for all state-funded schools in England that would be gradually introduced from 2017-18 onwards (https://www.gov.uk/government/consultations/schools-national-funding-formula). The first stage of this consultation (which closes on April 17th) sets out the overall principles for a national funding formula. A second stage will then set out the precise details.
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http://www.ifs.org.uk/publications/8237 Fri, 15 Apr 2016 00:00:00 +0000
<![CDATA[What and where you study matter for graduate earnings – but so does parents’ income]]> Graduates from richer family backgrounds earn significantly more after graduation than their poorer counterparts, even after completing the same degrees from the same universities. This is one of many findings in new research published today which looks at the link between earnings and students’ background, degree subject and university attended.

The research used anonymised tax data and student loan records for 260,000 students up to ten years after graduation. This is the first time a ‘big data’ approach has been used to look at how graduate earnings vary by institution of study, degree subject and parental income. The data set includes cohorts of graduates who started university in the period 1998–2011 and whose earnings (or lack of earnings) are then observed over a number of tax years. In the paper, we largely focus on the tax year 2012/13.

Funded by the Nuffield Foundation, this work was carried out by researchers at the Institute for Fiscal Studies (IFS), UCL Institute of Education, Harvard University and the University of Cambridge. The full working paper is available here and we also have an accompanying executive summary.

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http://www.ifs.org.uk/publications/8235 Wed, 13 Apr 2016 00:00:00 +0000
<![CDATA[Scotland’s Fiscal Framework does not satisfy Smith’s “Taxpayer fairness” principle]]> Scotland’s Fiscal Framework – an essential part of the devolution of new tax and welfare powers – was finally agreed one month ago, after many months of tortuous negotiations. The most difficult thing to agree was how to adjust the Scottish Government’s block grant funding to account for its new revenues and spending responsibilities.

The Fiscal Framework Agreement states that for the first five years of devolution the block grant adjustments (BGAs) will first be calculated using the UK government’s Comparable Model but then adjusted to “achieve the outcome delivered by the Indexed Per Capita (IPC) model”.

All this means, of course, is that it is the IPC approach that will ultimately determine the BGAs. Under this method, if Scotland’s devolved revenues and welfare spending per person grow at the same percentage rate as those in the rest of the UK (rUK), then the Scottish Government’s budget will be exactly the same as if devolution had not happened.

  • This is the approach that the Scottish Government wanted and satisfies its interpretation of the Smith Commission’s principle that there should be ‘no detriment [simply] from the decision to devolve’ a power.
  • But it does not satisfy the Commission’s ‘taxpayer fairness’ principle, which the UK government placed more weight on. Scotland’s budget could fall a little if income tax rates are cut (or thresholds increased) in rUK and vice versa.
  • The Agreement also means that part of the growth in devolved tax revenues in rUK will continue to be redistributed to Scotland to help fund its higher levels of government spending: something that the UK government said should no longer happen once a tax is devolved. This means that compared to today, by 2021–22 around £900 million of additional revenues from rUK could be redistributed to Scotland (as would also happen without tax devolution).
  • Use of the IPC method means Scotland’s budget may be around £300 million a year more by 2021–22 than it would have been had the UK Government’s proposed Comparable Model been used instead. There seems little rationale for adopting the convoluted process of adjustments set out in the Fiscal Framework other than to highlight this difference.

These are among the findings of a new report released by researchers at the Institute for Fiscal Studies and the University of Stirling, funded by the Nuffield Foundation and the Economic and Social Research Council. The report appraises Scotland’s new Fiscal Framework, considering whether it meets the Smith Commission’s principles, which government got the deal they wanted, and the impact that tax and welfare devolution could have on Scotland’s budget and the budget risks it faces.

The report also finds that:

  • The deal agreed will protect the Scottish budget from revenue and welfare spending risks associated with Scotland’s lower population growth. Equally, Scotland will not benefit from the higher revenues that might result if its population grows more quickly than expected.
  • The method agreed for adjusting the block grant also largely insulates Scotland from the impact of any shocks that hit the whole of the UK – such as the global financial crisis and associated recession.
  • But the Scottish Government’s budget will be exposed to long- and short-term economic risks that affect Scotland differently from the rest of the UK. Illustrative scenarios (based on historic data) show that if Scotland’s devolved revenues and welfare spending per capita grow more or less quickly than those in rUK, the potential impacts on the Scottish budget could be sizeable: over £500 million a year after five years and over £2 billion a year after 15 years.
  • Borrowing would not be an appropriate response to long-term declines in revenues or increases in welfare spending, but it can be an important tool in managing shorter-term risks. The Scottish Government got less in the way of new borrowing powers than it hoped for: capital borrowing limits were barely increased, for instance.
  • Recent experience suggests the resource borrowing limits and reserves limits agreed should be large enough to smooth temporary fluctuations in devolved revenues. But two issues may arise. First, Scotland will only be allowed to borrow to cover forecast falls in its revenues when Scottish GDP growth is less than 1% and at least 1 percentage point lower than UK growth – this could be constraining, as Scottish revenues may be temporarily depressed even if these conditions do not hold. Second, the borrowing limits are currently fixed in cash terms: there is a case for increasing these limits in line with the growth in devolved revenues and spending (i.e. the amounts of cash at risk).

David Phillips, a senior research economist at the IFS and one of the authors of the report, says “It was never going to be possible to design a Fiscal Framework that satisfied all the Smith Commission’s principles: they are mutually incompatible. In the end, the Scottish Government’s preferred approach was chosen, which prioritises the ‘no detriment’ principle. During the negotiations, the UK government had claimed this approach was unfair because it violates the ‘taxpayer fairness’ principle. This begs the question of whether the UK government has changed its mind or merely conceded the point.”

“The Scottish Government did not get everything it wanted though”, says Professor David Bell of the University of Stirling and the Centre on Constitutional Change. “It has had to agree to economic and fiscal forecasts being made by the independent Scottish Fiscal Commission, rather than its own economists as it had wanted. And it has much lower borrowing limits than it had hoped for. These limits look like they should be enough to cope with fluctuations in its revenues and welfare spending. But the rules about when the borrowing powers can be used may be more constraining.”

David Eiser, also of the University of Stirling and the Centre on Constitutional Change and another of the report’s authors, says “Many features of Scotland’s funding regime look unusual in an international context. The Scottish block grant will continue to be determined largely by historical accident through the Barnett Formula, and will still bear no relation to Scotland’s relative spending need. The Scottish budget will be protected from the effects of UK-wide economic downturns and the Scottish Government will have some powers to borrow during short-term shocks that hit Scotland disproportionately. However, the Fiscal Framework Agreement offers virtually no protection against the risk of Scotland’s devolved revenues under-performing, or its welfare spending growing more rapidly than in the rest of the UK in the longer term.”


 

Notes to Editors:

1. ‘Scotland’s Fiscal Framework: Assessing the Agreement’ by David Bell and David Eiser of the University of Stirling and the Centre on Constitutional Change and David Phillips of the Institute for Fiscal Studies (IFS) is being launched at an event in Edinburgh on 22 March 2016 and will also be presented in London on 23 March 2016: http://www.ifs.org.uk/events.

2. This paper was supported by funding from the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org

3. The paper was also supported by funding by the Economic and Social Research Council (ESRC) through the Centre for the Microeconomic Analysis of Public Policy at IFS (grant reference ES/H021221/1) and through the Centre on Constitutional Change.

4. The ESRC Centre on Constitutional Change is the hub for research of the UK’s changing constitutional relationships. Its fellows examine how the evolving relationships between governments and parliaments in London, Edinburgh, Cardiff, Belfast and Brussels impact on the polity, economy and society of the UK and its component nations.

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http://www.ifs.org.uk/publications/8214 Tue, 22 Mar 2016 00:00:00 +0000
<![CDATA[Incomes of the poor being boosted by strong employment growth, but will be hit by benefit cuts]]> Strong employment growth has reduced the number of people living in households with incomes below a fixed poverty line over the last two years, but planned cuts to benefits and tax credits will mean no growth in the incomes of poorer households on average over the next five years. These are among the main findings from a new IFS Report funded by the Joseph Rowntree Foundation, published today, that examines the prospects for incomes and poverty until 2020.

The latest official data on household income only run up to 2013–14. The report first estimates what has happened since then, given labour market trends and changes in tax and benefit policy:

  • Household incomes have been growing right across the income distribution. Between 2013–14 and 2015–16, we estimate real (CPI-adjusted) growth of 4.1% at the 10th percentile, 4.9% at the median (50th percentile), and 3.2% at the 90th

 

  • This income growth partly reflects strong employment growth, particularly towards the bottom of the income distribution. Without any employment growth we estimate that incomes at the 10th percentile would have grown by 2.5% rather than 4.1% and at the median would have grown by 3.3% rather than 4.9%. Ultra-low inflation has also been key, boosting the value of workers’ pay and of benefits.

 

  • All the major demographic groups have seen falls in the number in ‘absolute’ poverty – that is, the number falling below a fixed real poverty line. In 2015–16 we estimate that there were about 400,000 fewer children, 300,000 fewer working-age adults without children, and 200,000 fewer pensioners in absolute poverty than in 2013–14.

 

  • Relative poverty rates have not changed as the incomes of poorer households have grown at a similar rate to median income.

 

  • Young adults will have seen particularly strong income growth over the last two years, though this only represents a partial bounce-back following severe income losses for this group between 2008–09 and 2012–13. Median income among those aged 22 to 30 is estimated to have increased by 10.5% between 2012–13 and 2015–16; but this comes after a 13% fall in incomes for this group since 2007–08.

The report also looks at what would happen to incomes over the next few years if current policy plans remain and the Office for Budget Responsibility’s economic forecasts are correct:

 

  • Incomes are likely to continue growing for many households as earnings rise faster than inflation. The pace of growth will be relatively slow though, with median income increasing at an annual average of 1.5% between 2015–16 and 2020–21.

 

  • The outlook looks less favourable for low-income households. In contrast to the stability of inequality over the past two years (and the decline in inequality since the recession), incomes at the 90th percentile are projected to increase by 2.3% per year while incomes at the 10th percentile are expected to remain constant in real terms.

 

  • Even so, by 2020–21 we project that income inequality will be little changed over the 13 years from 2007–08 as a whole, with incomes at the 10th percentile projected to be 8% higher than they were in 2007–08 and incomes at the 90th percentile 8.9% higher.

 

  • But poverty trends will vary across groups. Child poverty rates are expected to rise between 2015–16 and 2020–21: by 3 percentage points (ppts) for absolute poverty and by 8ppts for relative poverty. And that in itself is driven almost entirely by rising poverty among families with at least 3 children, who are hit relatively hard by benefit cuts. Meanwhile, pensioner poverty is likely to continue its long-run downward trend.

 

  • Increases in relative poverty and inequality are not just caused by benefit changes. Less than a third of the projected increase in overall relative poverty, and around 40% of the increase in relative child poverty, is attributable to planned reforms.

 James Browne, one of the authors of the report said “Following an historically slow recovery in living standards after the recession, stronger growth in household incomes at all income levels over the last two years will have been welcome news. For some, particularly the better off and pensioners, this is likely to continue over the next five years as earnings and state pensions grow more quickly than inflation. But the prospects are not so good for others, including large families with low incomes, who will bear the brunt of planned benefit cuts”.

ENDS

Notes to Editors

If you have any queries please contact: Bonnie Brimstone at IFS: 020 7291 4818 / 07730 667 013, bonnie_b@ifs.org.uk

The Joseph Rowntree Foundation is an independent organisation working to inspire social change through research, policy and practice. For more information visit www.jrf.org.uk JRF is on Twitter. Keep up to date with news and comments @jrf_uk. For press releases, blogs and responses follow@jrfmedia

The report measures income in the same way as the official HBAI statistics: at the household level, after deducting taxes and adding on state benefits and tax credits, rescaled (‘equivalised’) to take into account the fact that households of different sizes and compositions have different needs. The report only considers incomes measured before housing costs are deducted (BHC). It follows official statistics in defining the absolute poverty line as 60% of inflation-adjusted 2010–11 median income and the relative poverty line as 60% of contemporaneous median income. However, the figures calculated in the report differ from official statistics as they use the Consumer Prices Index (CPI) to adjust the absolute poverty line over time rather than the Retail Prices Index (RPI) used by official statistics. This is because the RPI is known to significantly and systematically overstate inflation, meaning that using it to adjust incomes over time would understate growth in real incomes. The table below shows the absolute and relative poverty lines in 2015–16 used in the report.

 

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http://www.ifs.org.uk/publications/8182 Wed, 02 Mar 2016 00:00:00 +0000
<![CDATA[Millions to be taken out of the savings tax net, but taxes and charges continue to make decisions hard for savers]]> Savers face a complex and changing array of different tax treatments. These differences are big and can make the cost of choosing the ‘wrong’ savings vehicle very large. In addition apparently small differences in fees and charges can outweigh the effects of different tax treatments. Meanwhile pension auto-enrolment arrangements, which compel matching contributions from employers, will make saving through pensions auto-enrolment much more attractive than almost any other option with the same underlying return.

These are among the main findings of new work by IFS researchers on how taxes and charges can affect the attractiveness of different forms of savings.

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http://www.ifs.org.uk/publications/8165 Tue, 16 Feb 2016 00:00:00 +0000
<![CDATA[Boxed in by his own rule, Mr Osborne has to pull off a precarious balancing act]]> The IFS Green Budget 2016, produced in association with ICAEW and funded by the Nuffield Foundation with analysis from Oxford Economics, is published today.

November’s Spending Review was not the last chapter in the Chancellor’s fiscal consolidation. Having set himself a very inflexible target to get to budget balance by 2019–20, Mr Osborne could be forced into additional spending cuts or tax rises if economic and fiscal forecasts again turn out unfavourably. He also has some big promised tax cuts to finance, faces considerable uncertainty over key tax revenues, and may yet find the spending squeeze hard to maintain, even though it is less severe than previously expected.

The fiscal mandate requires the government to run a surplus every year from 2019–20 “in normal times”:

  • This is radically different from the UK’s previous fiscal rules, and like most big economies the UK has only rarely run a surplus – just 8 times in the last 60 years.
  • Even with steady growth and a surplus of 0.5% of national income by 2019–20, it would take until the mid-2030s to get debt back to pre-crisis levels as a share of national income (40%). Borrowing to cover investment could leave debt still at 60% of national income in the mid-2030s. The faster debt falls, the more room for manoeuvre future governments might have in the face of another recession.
  • The rule has the merit of simplicity and transparency but is very inflexible and this could come at a cost. It could require big tax rises or spending cuts with very little notice in order to ensure it is met. Even if the Chancellor gets to the March 2019 Budget with his plans intact, past errors in official forecasts suggest that there would be more than a one-in-four chance that he would need to implement in-year tax rises or spending cuts to deliver a budget surplus in 2019–20.
  • The fiscal mandate also rules out borrowing to invest even where low interest rates mean such investment would be economically beneficial and would not otherwise occur. And because it is based on a narrow definition of borrowing, there is a danger that Chancellors will game the rule, just as they have gamed rules in the past.

The more immediate concern is with achieving surplus by 2019–20. Official forecasts are for a surplus of 0.5% of national income, or £10 billion, in that year. The biggest question facing Mr Osborne is how he will respond if forecasts change and he needs greater tax rises or spending cuts to make the books balance. He faces a number of challenges on the tax side:

  •  He is banking on tax revenues rising, largely in response to big tax increases announced since the general election. But tax revenues are volatile and uncertain. Last week’s Bank of England inflation report downgraded forecast average earnings by more than 1% just since November. If average earnings do rise 1% less by 2019–20 than the November forecast, he could expect to lose £5 billion of income tax and National Insurance revenues. The fall in equity prices seen just since the Spending Review could, unless it proves purely temporary, cost the government £2 billion in lower capital tax receipts in 2020.
  • Mr Osborne has promised £8billion per year of income tax cuts in the form of a higher personal allowance and an increased higher-rate threshold. These promises are currently unfunded. Other things equal, delivering them will require equivalent tax rises or spending cuts elsewhere.
  • His forecasts depend on him raising fuel duties in line with the RPI – something he has failed to do since 2011. Freezing them for a further five years would cost £3 billion.
  • His forecasts also depend on keeping the £150,000 threshold, at which the 45% income tax rate kicks in, frozen. The number of additional-rate taxpayers has already increased by 40% since the additional rate was introduced in 2010. Similarly, current policy implies a 50% increase in the numbers losing some or all of their child benefit within five years, as the point at which this happens stays fixed in cash terms.

Public service spending by central government and local authorities is forecast to be cut by 1% in real terms between 2015–16 and 2019–20. This compares with a cut of more than 8% between 2010–11 and 2015–16, but even so it won’t be easy:

  • On current plans, total public spending in 2019–20 will reach its lowest share of national income for over 60 years with the exception of 1999–2000 and 2000–01. Spending on public services other than health will be at its lowest level as a fraction of national income since at least 1948–49, at a time when the population continues to grow and age.
  • Public sector employers, such as the NHS and schools, will need to find more than £3billion a year from 2016–17 to pay higher National Insurance contributions.
  • Spending plans are based on pay in the public sector rising by at most 1% a year for the rest of this parliament. If official forecasts for private sector pay are right, this will take public sector pay to easily its lowest level relative to that in the private sector for at least 25 years. This may prove difficult to sustain.

Oxford Economics, with whom we are again collaborating, forecast that UK growth will be a relatively disappointing 2.2% in 2016, similar to growth in 2015. On the plus side, the forces driving strong consumer spending growth last year are still present, while the environment for business investment remains favourable. However, significant tightening of fiscal policy and problems in the international environment will continue to hold growth back, even though UK exporters’ focus on other advanced economies will offer some insulation from problems in emerging economies. Nevertheless, these problems in emerging economies mean that the risks to growth – both at home and in the global economy – are very much skewed to the downside.

Looking further ahead, Oxford Economics say that the combination of a sizeable output gap and solid prospects for potential output should provide the conditions for firm growth and low inflation over the medium term. However, the planned fiscal consolidation is so large that it will exert a significant drag on growth prospects and mean that the UK’s spare capacity is eroded more slowly than it otherwise could be.

ICAEW provide a detailed analysis of Whole of Government Accounts (WGA), which illustrates the importance of taking a wider view of government finances than the traditional National Accounts. On a WGA measure, the accounting deficit fell by just 20% between 2009–10 and 2013–14 compared with a fall of 35% in the traditional National Accounts measure. The WGA also provide further insight when considering the vulnerability of the public finances to future economic shocks, with total liabilities at 31 March 2014 of £3.2 trillion, or 177% of GDP. This is substantially higher than public sector net debt, the National Accounts measure typically referred to in this context, which stood at £1.4 trillion, or 78% of GDP, at that date.

Paul Johnson, Director of the Institute for Fiscal Studies and an editor of the Green Budget, said: “Mr Osborne’s new fiscal charter is much more constraining than his previous fiscal rules. Uncertainty in the fiscal forecasts means that he may well have to cut spending further or raise taxes to get to surplus in 2019–20. With public spending reaching historically low levels relative to national income, promises on tax cuts to keep and pay for, and pressure on revenues from a number of taxes, there may be more tough decisions to come. How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as Chancellor.”

Andrew Goodwin, Lead UK Economist at Oxford Economics and co-author of a chapter in the Green Budget, said: “The renewed fall in the oil price promises to keep inflation lower for longer and should prolong the ‘sugar rush’ enjoyed by UK consumers over the past year. This is a very welcome development given the substantial headwinds to global growth. But once this ‘sugar rush’ has faded, GDP growth is likely to slow as the welfare cuts and cuts to government departmental spending exert a significant drag. This will mean that the pace of growth remains underwhelming and that the economy still has some spare capacity left at the end of the parliament.”

Ross Campbell, ICAEW Director of Public Sector and co-author of two chapters in the Green Budget, said: “The Government was elected on the promise to reduce borrowing. But currently it does not have a comprehensive view of the UK’s financial accounts. Getting the best outcomes for the public finances in challenging times, means being supported by modern financial management as well as having the full economic picture. Without these, the consequences of policies decided cannot be seen in their full context.”

Conclusions from other chapters in the Green Budget include:

ICAEW’s view is that government decision-making needs to change to protect infrastructure investment

Current accounting measures and the desire to reach a surplus on a relatively narrow measure of government borrowing will favour public–private finance partnerships over simply borrowing to invest. Favourable treatment of these arrangements in the National Accounts is no good reason to favour funding infrastructure spending in that way. PFI and PF2 should be brought on balance sheet to avoid decisions being driven by accounting rules.

At the same time, government should consider adjusting its fiscal rules to allow borrowing for infrastructure investment where it can be demonstrated that the investment will provide a financial return to government in the form of revenues – from additional taxes or charges – that more than offset the cost of the investment.

It’s time to think seriously about the structure of excise duties

Having accounted for more than one pound in ten of tax revenues at the end of the 1970s, duties on road fuel, tobacco and alcohol are forecast to account for just 6% by 2020–21, down from 7.2% now.

Alcohol taxes are very badly targeted at the social harms caused by alcohol consumption. They are not focused on heavy drinkers and charge very different rates of tax on the same alcohol content depending on the form in which it is consumed. For example, the excise duty on a litre of 7.5% strength cider is 39p; a litre of beer of the same strength attracts duty of £1.38. The government is said to be considering introducing a minimum price for alcohol. If it wants to tackle harmful drinking, it would be better to sort out these anomalies in duty rates and to reverse the long-term trend to lower duties on spirits, which are disproportionately consumed by heavy drinkers.

There is a case for extending excise duties to other products, excess consumption of which can cause social harm; hence the recent calls for a sugar tax. Implementing such a tax successfully may be much harder than for traditional excise duties because diets are complicated and multifaceted. Just imposing the tax on sugary drinks, for example, could simply lead people to increase other sugar consumption – perhaps by eating more chocolate, which also contains saturated fats – and in any case could not on its own bring sugar consumption down to recommended levels. A more broad-based sugar tax is an alternative but its effect on consumption of other nutrients, and hence overall diet, is uncertain. Careful, evidence-based design and a clear understanding of its role alongside other initiatives are needed before any such policy is rolled out.

The Green Budget also contains chapters on universal credit and tackling tax avoidance by multinational companies, which were pre-released last week and the week before, respectively.

ENDS

We are delighted to have produced this year’s Green Budget in association with ICAEW and with funding from ICAEW and the Nuffield Foundation. Additional analysis will be provided by Oxford Economics and ICAEW. We are also grateful to the Economic and Social Research Council for funding much of the day-to-day research at IFS that underpins the analysis in this report.

Notes to Editors:

1. The full Green Budget 2016 publication, with analysis from IFS and additional analysis from ICAEW and Oxford Economics, will be launched at 10:00 on Monday 8 February 2016 at the Guildhall, City of London (http://www.ifs.org.uk/events/1252). Please feel free to attend.

2. Presentations will be live-streamed for those unable to attend. You can view the live stream from 10am at http://www.ifs.org.uk/publications/8129.

3. The full report will go live on the IFS website shortly after 10am. For embargoed copies or other queries, please contact Bonnie Brimstone on 07730 667013, bonnie_b@ifs.org.uk.

4. ICAEW is a world-leading professional membership organisation that promotes, develops and supports over 146,000 chartered accountants worldwide. They provide qualifications and professional development, share their knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession.

5. As leaders in accountancy, finance and business ICAEW members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together they contribute to the success of individuals, organisations, communities and economies around the world. Because of this, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance.

6. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org.

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http://www.ifs.org.uk/publications/8161 Mon, 08 Feb 2016 00:00:00 +0000
<![CDATA[Universal credit cuts support for working families, but helps make work pay where current system creates worst problems]]> During this parliament the government plans to replace most of the means-tested benefits system for working-age families with a single payment called universal credit (UC). A series of pre-emptive cuts means that introducing UC will in the long run reduce the generosity of the benefit system – including to working families, in a reversal of the original intention. But it will still do a lot to help make work pay for many of those who currently face the most severe disincentives.

These are among the findings of new analysis by IFS researchers which forms part of the forthcoming IFS Green Budget 2016, produced in association with ICAEW and funded by the Nuffield Foundation. It is the first comprehensive analysis of UC’s effects since the cuts to its generosity announced in the July Budget: cuts that were left untouched in the Autumn Statement, despite the U-turn on cuts to tax credits. The analysis focuses on the long run impact of introducing UC: transitional measures mean that existing claimants will not see their entitlements cut at the point when they are moved onto UC.

Considering first the long run impact of universal credit on work incentives, we find that it strengthens financial work incentives only slightly on average, but this masks significant effects in both directions for different groups:

  • UC will dramatically reduce the number facing very weak financial incentives to move into or stay in work. The number of people who lose more than 70% of their pay in taxes and withdrawn benefits (or would lose that much if they moved into work) will fall by two-thirds from 2.1 million to 0.7 million.
  • UC will tend to weaken the incentive for single parents to be in work, and to strengthen the incentive for couples to have one person in work (rather than none or two). On average, working single parents will effectively keep 8% less of their earnings under UC than under the system it is replacing, because of the way UC is withdrawn as their earnings rise (a disincentive to work made significantly greater by the July Budget cuts).
  • Looking at the financial incentive for those in work to earn more (e.g. by increasing hours of work or moving to a better paid job), UC again tends to strengthen incentives where they are currently weakest. The 800,000 working individuals who would currently keep less than 20p of an additional pound earned (of whom 600,000 would keep less than 10p) would all keep at least 23p if the long run UC system applied now.

Turning to the long run impact of universal credit on incomes:

  • Introducing UC will cut annual benefit spending by £2.7 billion in total. (This is on top of other benefit cuts such as the four-year freeze to most benefit rates.) When first proposed UC was intended to be more generous than the current system, but cuts to how much recipients can earn before their benefits start to be withdrawn have reversed this.
  • Among working households, 2.1 million will get less in benefits as a result of UC’s introduction (an average loss of £1,600 a year) and 1.8 million will get more (£1,500 average gain). Among the 4.1 million households of working age with no-one in paid work, 1 million will get less (average loss of £2,300 a year) and 0.5 million will get more (average gain of £1,000 a year).
  • Working single parents and two-earner couples are relatively likely to lose, and one-earner couples with children are relatively likely to gain. Among those currently receiving one of the benefits being replaced by UC, working single parents would be over £1,000 a year worse off on average if the long run UC system applied now, but one-earner couples with children would gain over £500 a year on average.
  • Owner-occupiers and those with assets or unearned income are relatively likely to lose, but working renters are relatively likely to gain. This has the implication that UC will likely focus support more on those with long-term (rather than just temporary) low incomes, but it also weakens the incentive for some to save.

There are many other changes associated with UC which could also be significant. Expanding job search conditions to more people and removing the need to start new benefit claims when moving into work could act to increase employment and earnings. Early evidence suggests UC has had a positive impact on employment among the small group already affected, but it is not possible to draw firm conclusions from this about its impact when fully in place. Moving towards monthly benefit payments to one member of the household and removing direct payments to landlords may be riskier.

Robert Joyce, an Associate Director at the IFS and an author of the report, said: “The long run effect of universal credit will be to reduce benefits for working families on average – a reversal of the original intention. However, the potential gains from simplifying the working-age benefit system remain mostly intact: universal credit should make the system easier to understand, ease transitions into and out of work, and largely get rid of the most extreme disincentives to work or to earn more created by the current system.”

ENDS

We are delighted to have produced this year’s Green Budget in association with ICAEW and with funding from ICAEW and the Nuffield Foundation. We are also grateful to the Economic and Social Research Council for funding much of the day-to-day research at IFS that underpins the analysis in this report.

Notes to Editors

1. ‘The (changing) effects of universal credit’ by James Browne, Andrew Hood and Robert Joyce is a pre-released chapter from the IFS Green Budget 2016, edited by Carl Emmerson, Paul Johnson and Robert Joyce. It is available here

2. The full Green Budget 2016 publication, with analysis from IFS and additional analysis from ICAEW and Oxford Economics, will be launched at 10:00 on Monday 8 February 2016 at the Guildhall, City of London (http://www.ifs.org.uk/events/1252). Please email events@ifs.org.uk if you wish to attend.

3. ICAEW is a world leading professional membership organisation that promotes, develops and supports over 146,000 chartered accountants worldwide. They provide qualifications and professional development and share their knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession. As leaders in accountancy, finance and business ICAEW members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together they contribute to the success of individuals, organisations, communities and economies around the world. Because of this, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance.

4. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org.

 

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http://www.ifs.org.uk/publications/8135 Wed, 03 Feb 2016 00:00:00 +0000
<![CDATA[New website to bridge the gap between international research in microeconomics and public policy]]> Distilling microeconomics research into direct policy implications will be the focus of a new website developed by researchers at the Institute for Fiscal Studies, University College London, Princeton University, Harvard University, London School of Economics Northwestern University, University of California, San Diego, University of Manchester and Yale University.

Microeconomic Insights – which was launched this week while economists gathered at the American Economic Association’s annual conference in San Francisco – will bridge the gap between academia and policy by publishing short, non-technical summaries of economic research for a public policy audience.

The summaries, which will be written by academics and edited by journalists, will cover all areas of microeconomics including development, health economics, environmental economics, international trade, public finance, industrial organisation and labour economics.

"In microeconomics, there are many new methodologies relevant to policy, but they don’t always filter down to the public policy debate," said Rachel Griffith, a member of the editorial board, research director at the Institute for Fiscal Studies and professor of economics at the University of Manchester. "Our goal is to fill that missing market."

Like an academic journal, content featured on the website will be chosen by an editorial committee that will select the best research in microeconomics, irrespective of institution and political or ideological viewpoints. Particular emphasis will be placed upon the work of young researchers working at the research frontier.

The editorial committee will work with its academic authors to produce short research briefs intended for public policy practitioners. These summaries will be handed off to a team of editors and journalists adept at writing for the public. The final results will be distributed through the website, social media accounts and dedicated distribution email lists.

"Our site will give new research ideas an independent and accessible home," Rachel Griffith said. "It will provide a public good by getting top academic research into the hands of leading policy practitioners."

In addition to Rachel Griffith, the editorial board is comprised of Joseph Altonji, Thomas Dewitt Cuyler Professor of Economics at Yale University; Orazio Attanasio, research director at IFS and Jeremy Bentham professor of economics at University College London; Oriana Bandiera, professor of economics at the London School of Economics; Richard Blundell, director of the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS and Ricardo Professor of Political Economy at University College London; Roger Gordon, professor of economics at the University of California, San Diego; Ariel Pakes, Steven McArthur Heller Professor of Economics at Harvard University; Robert Porter, William R. Kenan, Jr. Professor of Economics at Northwestern University; and Steven Redding, Harold T. Shapiro ’64 Professor in Economics at Princeton.

Support for the website is provided by the Economic and Social Research Council (via the Centre for the Microeconomic Analysis of Public Polict at IFS and the Institute's Impact Acceleration Account), Princeton’s Woodrow Wilson School, the University of Southern California Dornsife Center For Economic and Social Research and the Alfred P. Sloan Foundation.

The first three articles featured on the website cover these issues:

Climate change: the potential impact on global agricultural markets

Many fear that climate change will have severe effects on the global economy, particularly through the threat to food production and farmers’ earnings. This research suggests that much of the potential harm could be avoided if farmers can switch their crops in response to changing relative yields. But it is 'intra-national trade' – trade among farmers and between farmers and consumers within countries – rather than international trade that will be crucial in alleviating the consequences of climate change.

Healthcare: how competition can improve management quality and save lives

NHS hospitals in England are rarely closed in constituencies where the governing party has a slender majority. This means that for near random reasons, those areas have more competition in healthcare – which has allowed Nicholas Bloom and John Van Reenen to assess its impact on management quality and clinical performance.

The impact of consumer financial regulation: evidence from the CARD Act

Does greater regulation of consumer financial products actually benefit consumers? This research, analysing the CARD act enacted in the U.S. in 2009, suggests that it does. In particular, the act’s restrictions on hidden credit card fees were found to reduce borrowing costs (especially for consumers with low credit scores) without increasing interest charges and other fees and without reducing access to credit.

For more information, visit the Microeconomic Insights website or follow the Twitter feed - @micro_econ.

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http://www.ifs.org.uk/publications/8116 Mon, 04 Jan 2016 00:00:00 +0000
<![CDATA[Fiscal Framework is key to Scottish tax and welfare devolution]]> The House of Lords Economic Affairs Committee, in its report “A Fracturing Union?” published today, argues that the process for determining the fiscal framework is flawed and that its design principles may not be workable and are not mutually compatible. A new joint paper by researchers at the IFS, the University of Stirling and the Centre for Constitutional Change, funded by the Nuffield Foundation looks at these issues.

It confirms it is not possible to satisfy all of the Smith Commission’s ‘no detriment’ principles. It also find that the precise way in which the remaining block grants are calculated and indexed over time could mean differences of over a billion pounds a year in the Scottish Government’s budget in the space of a decade or so.  It concludes by suggesting the time may now have come for a more fundamental reassessment of devolved finance – including the operation of the Barnett Formula.

The paper analyses the different options for adjusting Scotland’s block grant. In particular it:

  • Uses historical tax revenues data from between 1999–00 and 2013–14 to get an idea of just how big a difference to the Scottish Government’s budget the different options could make. While these figures are approximate and refer to the past rather than the future, they show these differences can be substantial: well over £1 billion a year after a period of just over a decade is possible.

  • Finds that while an unreformed Barnett Formula remains in place it is impossible to design a system that simultaneously satisfies the Smith Commission’s principles that there should be ‘no detriment as a result of the decision to devolve a power’, and that post-devolution, changes to a devolved tax in the rest of the UK should not affect the amount of public spending in Scotland.

  • Argues that reform of Barnett may remove some of the conflicts between the Smith Commission’s principles. But if the Barnett Formula were reformed, a more comprehensive assessment of the UK’s system of devolved government finance than the Smith Commission was tasked with would be needed.

David Bell, Professor of Economics at the University of Stirling and Fellow of the Centre on Constitutional Change and a co-author of the report, says, “The options available for calculating the block grant adjustments, and other elements of the fiscal framework will have major effects on Scottish Government’s budget and the fiscal risks and incentives it faces. These issues should be part of the public and parliamentary debate, as much as the tax and welfare powers set out in the Scotland Bill itself have been.”

David Phillips, a senior research economist at the IFS and another author of the paper, adds, “It may now be time for a more fundamental reassessment of how the devolved governments are financed: including whether the Barnett Formula should be reformed. Reform of Barnett may remove some of the conflicts between the Smith Commission’s principles that we have identified. The Smith Commission parked these issues to one side by committing to the current Barnett Formula. Making the UK’s fiscal framework sustainable for the long term may require reopening the debate.”

ENDS

Notes to Editors:

  1. The paper, published in an early ‘Mimeo’ format, is available at: http://www.ifs.org.uk/publications/8060

  2. An ‘Observation’ article or blog post summarises the main findings here: http://www.ifs.org.uk/publications/8061

  3. This paper was supported by funding from the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at www.nuffieldfoundation.org

  4. The paper was also supported by funding by the Economic and Social Research Council (ESRC) through the Centre for the Microeconomic Analysis of Public Policy at IFS (grant reference ES/H021221/1).
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http://www.ifs.org.uk/publications/8062 Fri, 20 Nov 2015 00:00:00 +0000
<![CDATA[Younger cohorts at risk of being less wealthy than earlier generations]]> Wealth among working-age households increased on average by more than inflation over the late 2000s, despite the financial crisis. This was driven by increases in pension wealth, which on average more than offset the declines in housing wealth resulting from falling house prices. However, younger cohorts are on course to have less wealth at each point in life than earlier generations did at the same age – unless the rate at which they are accumulating wealth picks up.

These are among the findings of a new report published today by the Institute for Fiscal Studies (IFS), funded by the IFS Retirement Savings Consortium and the Economic and Social Research Council.

The IFS researchers explored changes in household wealth and individuals’ attitudes towards saving over the period 2006–08 to 2010–12. They used detailed data covering the whole of Great Britain from the Wealth and Assets Survey.

Some of the main findings on how households’ wealth holdings changed over this period are:

  • Increases in average wealth for working-age households over this four-year period were driven by increases in pension wealth. After stripping out changes in how future pension income is valued, mean pension wealth increased in real terms (i.e. after adjusting for inflation) by around £13,000 for households aged 25–34, £32,000 for households aged 35–44 and £38,000 for households aged 45–54.

  • Increases in average financial wealth were much smaller (around £4,000, £1,000 and £6,000 for households aged 25–34, 35–44 and 45–54, respectively). Few households hold the relatively risky financial assets that saw volatile returns over this period. For example, only 12% of households directly held UK shares in 2010–12.

  • For virtually all age groups, average property wealth fell in real terms over the period due to declines in house prices. The exception is households aged 25–34, among whom average property wealth increased as some moved into home ownership.

  • Taking all wealth together, the majority of working-age households saw a real terms increase in their total wealth over this period. However, the range of experiences is vast – for example, a quarter of households aged 45–54 saw wealth fall by more than £69,000, while a quarter say their wealth increased by more than £138,000.

  • The rate of increase in real wealth over the four-year period 2006–08 to 2010–12 suggests that younger cohorts are on course to have lower real wealth on average at each age than earlier generations.

“Despite the financial crisis, household wealth on average increased in real terms over the late 2000s, driven by increases in private pension entitlements,” said Dave Innes, a Research Economist at the IFS and an author of the report. “Even with these increases in average wealth, working-age households are at risk of being less wealthy at each age than those born a decade earlier.”

The report also explored individuals’ attitudes towards saving. Some of the main findings are:

  • Nearly half of individuals (47%) in 2010–12 reported saving some income in financial assets over the previous two years. There is little difference in this prevalence of reported saving with age.

  • 30% of individuals reported saving for an unexpected expense, 23% reported saving for holidays or leisure, 15% for planned expenses, 10% for other people and 10% to provide a retirement income.

  • Between 2006 and 2012 the odds of reporting saving for investment purposes halved, while the odds of reporting saving for an unexpected expense increased by 20% and the odds of saving for a housing deposit increased by nearly 60%.

  • Only 35% of individuals who had not yet retired in 2010–12 expected private pensions to be their largest source of retirement income. One third expected their largest source of income to be the state pension, while 8% expected it to be saving or investments, 6% their primary housing and 5% an inheritance.

  • Among households aged 25–34, nearly one-quarter (24%) do not expect to receive any income from the state pension in retirement, while nearly half (44%) do not expect to receive any income from a private pension. However, 28% of individuals expect an inheritance to provide them with some retirement resources.

Rowena Crawford, a Senior Research Economist at the IFS and one of the authors of the report, said: “It is striking how many individuals do not expect private pensions to have a role in financing their retirement, let alone be their main source of income. It will be interesting to see how these attitudes change as auto enrolment into workplace pensions is rolled out.”

ENDS

Notes to Editors

1. Embargoed copies of the full report, ‘The evolution of wealth in Great Britain: 2006/08 to 2010/12’, are available on request from Jonathan Wood, IFS Press & Communications Manager, on 020 7291 4818, 07730 667013 or jonathan_w@ifs.org.uk

The report will be available on the IFS website from 00:01 AM on Thursday 19th November 2015.

2. The report will be launched at an event ‘Evolution of wealth and attitudes towards saving’ at the IFS at 10.00am on Thursday 19th November. Details: http://www.ifs.org.uk/events/1220

3. The authors are very grateful to the IFS Retirement Savings Consortium and the Economic and Social Research Council for funding this research. The IFS Retirement Savings Consortium comprises Age UK, Department for Work and Pensions, Financial Conduct Authority, HM Treasury, Institute and Faculty of Actuaries, Investment Association, Just Retirement, and Money Advice Service.

4. The Wealth and Assets Survey (WAS) is a longitudinal survey of the household population in Great Britain. The data are collected by the Office for National Statistics, and the survey is funded by Office for National Statistics, Department for Work and Pensions, Department for Business, Innovation and Skills, HM Revenue and Customs, Department for Communities and Local Government, Scottish Government and Financial Services Authority. Each edition (wave) of the data covers a two-year period. The field work for the first wave covered 2006-08 and interviewed 71,268 individuals in 30,595 households. Data from that wave and two subsequent waves (covering 2008-10 and 2010-12) are analysed in the report published today. 

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http://www.ifs.org.uk/publications/8052 Thu, 19 Nov 2015 00:00:00 +0000
<![CDATA[Cuts to social rents will benefit exchequer more than tenants, but will strengthen work incentives]]> Reductions in social rents announced in the July Budget will be of little or no direct benefit to most of the 3.9 million households in England living in social housing. Most of those renting their home from councils or housing associations have low incomes and hence receive housing benefit to cover all or part of their rent. Entitlement to housing benefit will typically be reduced pound-for-pound as their rent falls.

The reduction in housing benefit will save the exchequer money, and will strengthen tenants’ work incentives as they have less means-tested support to lose by entering work or increasing their earnings. Social landlords – housing associations and local authorities – will lose money.

These are among the conclusions of a new report on social rent policy, published today by the Institute for Fiscal Studies (IFS) and funded by Trust for London.

After many years of real increases in social rents, the July Budget announced a 1% annual reduction in social rents in England for the next four years. Given that previous policy was to raise rents by CPI inflation + 1% each year, this means that social rents are expected to be 12% lower than they would otherwise have been by 2019–20.

  • The policy largely represents a transfer from social landlords (councils and housing associations) to the exchequer, rather than to social tenants. This is because the reduction in social rents will automatically trigger an offsetting fall in housing benefit entitlements of £1.7 billion. Tenants’ disposable incomes will rise by only £0.7 billion. These figures assume that all social tenants entitled to housing benefit take it up.

  • Tenants who do gain from the rent cut will tend to be around the middle of the income distribution. Low-income tenants are the most likely to be on housing benefit, while better-off households are less likely to be in social housing at all. Of the 3.9 million households in social housing in England, 1.6 million will gain an average of £420 per year (again assuming full take-up of housing benefit). 1.0 million of the households that gain have someone in work.

  • The cut to social rents will strengthen the financial work incentives of social tenants, on average. With lower rents, tenants will have less means-tested housing benefit to lose if they move into work or increase their earnings. But lower rents also increase the financial incentive to seek access to social housing, and for existing tenants to remain there rather than, for example, exercising the Right to Buy their home. Today’s report does not assess the extent to which people will respond to these incentives.

  • By reducing the annual rental income of social landlords by £2.3 billion, the cut in social rents could reduce the amount of new housing supply. The Office for Budget Responsibility assumes that 14,000 fewer social sector properties will be built between now and 2020–21 as a result.

The report also analyses a second Budget announcement: ‘Pay to Stay’. From April 2017, social landlords will be required to charge market or ‘near market’ rents to tenants in England with incomes above £30,000 (£40,000 in London).

  • We expect Pay to Stay to hit around 250,000 households per year (about 7% of social renting households in England). Four-fifths of those households are in the top half of the income distribution.

  • Important decisions about Pay to Stay have yet to be taken, including how sharply rents increase as incomes rise beyond the threshold. The effects on tenants’ disposable incomes and work incentives, and on revenue for housing associations and the exchequer (which will require councils to hand it the extra rental income), are sensitive to these choices.

  • If rents jump straight up to market levels when income reaches the threshold (a ‘cliff edge’), people earning £1 more could pay thousands of pounds more rent. That would be inequitable and create perverse incentives: any pay rise that meant crossing the threshold would trigger a rent increase averaging about £3,000 a year.

  • Increasing rents gradually as incomes rise above the threshold would be more sensible. Work incentives would still be weakened on average, and this might be more complex to administer, but it would avoid the extreme disincentive effects associated with a cliff edge. Choosing how gradually to increase rents involves delicate trade-offs over revenue, incentives and targeting of support.

  • Pay to Stay will increase the incentive for higher-income social tenants to leave the sector, perhaps by exercising their Right to Buy. This would lead to a further reduction in economic diversity among social tenants.

‘Recent policy on social rents displays a worrying lack of consistency,’ said Robert Joyce, a Senior Research Economist at the IFS and an author of the report. ‘The government had committed to increasing social rents for ten years; but after just one of those ten years, it announced that rents will instead fall for the next four years. This instability could damage the ability of social landlords to plan and finance new house-building.’

Andrew Hood, a Research Economist at the IFS and another author of the report, said: ‘There are trade-offs between the targeting of support and tenants’ incentives to increase their incomes. Pay to Stay will target the rent subsidy more closely on those in current need, but at the expense of weakening tenants’ work incentives.’

 

Notes to Editors

  1. Embargoed copies of the full report, Social Rent Policy: Choices and Trade-Offs, are available on request from Jonathan Wood, IFS Press & Communications Manager, on 020 7291 4818, 07730 667013 or jonathan_w@ifs.org.uk.

    The report will also be available on the IFS website from 00:01 AM on Thursday 5 November 2015.

    An accompanying briefing note being published at the same time offers a factual background to social housing in the UK.

  2. The authors are very grateful for financial support from the Trust for London for the project ‘Social Rent Policy: Choices and Trade-Offs’. Co-funding from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS is also very gratefully acknowledged.
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http://www.ifs.org.uk/publications/8037 Thu, 05 Nov 2015 00:00:00 +0000
<![CDATA[High levels of income for current retirees shouldn’t blind us to future challenges]]> The current generation of pensioners is better off than ever before, and for the first time have incomes higher on average than the rest of the population, the director of the Institute for Fiscal Studies (IFS) Paul Johnson will say in giving the inaugural Pensions Management Institute annual lecture later today (18.30 Tuesday 20 Oct 2015).

Johnson will set out how modelling by IFS researchers suggests that pensioners’ incomes will continue to rise for at least the next decade. However, it is unlikely that later generations will do as well. Future state pensions will be less generous on average, there has been an extraordinary fall in rates of home ownership, and, in the private sector, a collapse in membership of defined benefit occupational pension schemes. Younger generations are also likely bearing some of the cost of these generous occupational pension schemes from which they themselves will never benefit.

Johnson will also use his lecture to outline some policy priorities for making state and private pensions more stable and sustainable, for example ending the so called triple lock on the state pension and bringing stability to the taxation of private pensions.

Drawing on work by IFS researchers, Johnson will show how: 

  • Pensioners now have higher incomes on average than the rest of the population, once housing costs and family composition are taken into account. Pensioners’ incomes have continued to rise post-recession as the incomes of working-age households have fallen;
  • This represents a remarkable transformation, Johnson will say. Just 30 years ago pensioners were are at least three times as likely to be poor as non-pensioners. They are now less likely to be poor;
  • A large proportion of those retiring now will actually be better off in retirement than they were on average during their working life.

On state pensions Johnson will suggest that the new single tier pension for those reaching the state pension age on from next April will represent the logical culmination of 30 years of policy aimed at undoing the introduction of the State Earnings Related Pension Scheme (SERPS) in 1978. Johnson says the single tier pension represents a stable basis for future provision but: 

  • The “triple lock” policy, whereby the pension rises by the higher of inflation (as measured by the consumer prices index (CPI)), earnings growth, and 2.5%, needs to end. At some point it will prove to be prohibitively expensive; the OBR estimates that it will add well over one per cent of national income to pension spending by the middle of this century relative to the cost of earnings indexation. It also adds a bizarre degree of randomness into the future level of state pensions which will depend not on overall increases in prices or earnings but on the timing of those rises;
  • Continuing increases in pension age, in order to help drive up the age at which people actually stop work, is likely to be vital to the sustainability of the system.

Johnson says that rather greater change is needed in the private sector to make it work better:

  • When most pension income came from state pensions and defined benefit occupational pensions risks of poor investment returns and changing longevity were shared between individuals and generations. The increasing dependence on private defined contribution pensions leaves those least able to bear risk – individual savers – bearing all the risk themselves. With the end of compulsory annuitisation this is also true in retirement. This cannot be optimal. Finding some way to share and socialise risk in pension saving must be a priority;
  • To ensure the sustainability of the remaining defined benefit schemes, and help with a more equitable distribution between generations, there is a strong case for moving all defined benefit pensions, both preserved and in payment, to indexation in line with the CPI rather than the now discredited RPI;
  • There is an urgent need to bring stability and rationality to the taxation of private pensions. Changes have been made far too frequently, making long-term planning impossible. The changes have themselves had little rationale. The Treasury’s current consultation on tax creates even more uncertainty, but at least gives an opportunity to rationalise the system and put it on a long-term sustainable basis. Its starting point ought to be that providing people with tax relief for pension saving when contributions are made, and charging tax (including National Insurance) on withdrawal, is the efficient, neutral basis for personal taxation.

IFS director Paul Johnson says [Note: quote may not appear in the unscripted lecture]: “We have achieved an astonishing turnaround in the incomes of pensioners over the last three decades, without increasing public spending to levels seen in many other continental European countries. But the longer term future looks very uncertain. Those now in their 20s, 30s and 40s may well end up with lower incomes in retirement than their parents. The focus for policy needs to be on getting private provision right, with more risk sharing, and a rational and stable tax policy.”

Notes to editors

1. The slides for the inaugural Pensions Management Institute annual lecture by the IFS director Paul Johnson are available from Jonathan Wood, IFS press & communications manager, on jonathan_w@ifs.org.uk or 020 7291 4818

2. The inaugural lecture will take place at 18.30 on Tuesday 20 October 2015 at JP Morgan Chase, 60 Victoria Embankment, Blackfriars, London. The event is fully booked. 

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http://www.ifs.org.uk/publications/8026 Tue, 20 Oct 2015 00:00:00 +0000
<![CDATA[No magic bullet in London schools' success. Just years of steady improvements in quality]]> Less than a quarter (22%) of children on free school meals in inner London obtained five or more A*–C grades at GCSE or their equivalent (including English and Maths) in 2002. In 2013, this had risen to almost half (48%). Gains were much smaller among disadvantaged children outside London (17%) to (26%).

New work published today, by researchers associated with the Centre for Social Exclusion (CASE) at the London School of Economics and the Institute for Fiscal Studies (IFS), concludes that the improved performance largely reflects gradual improvements in school quality over time. Improvements in primary schools played a major role in explaining later improvements in secondary schools.

The new work establishes that the “London effect” for poor children began in the mid-1990s – well before many of the high-profile policies in secondary schools previously credited with London’s success, such as the London Challenge, Teach First, and the growth of academies. 

It’s possible that recent changes reflect London’s status as an economic powerhouse. To check this the researchers follow a group of children born around the year 2000 from preschool to age 11. This shows that disadvantaged pupils in London are not ahead at age 5, but instead make faster progress once they get to school compared to their peers outside the capital.

Jo Blanden of the University of Surrey said: “London’s schools have become extremely good at helping poor children succeed.  This is despite the incredible diversity of their pupils.  This success is likely to lead to better jobs and more social mobility among those educated in the capital.”

Luke Sibieta of the IFS said: “London schools have become synonymous with educational success, particularly for poorer children. Our research shows that these improvements are not down to a single policy or factor. Instead, most of the improvements reflect gradual increases in the quality of schools stretching back to the mid-1990s. London’s primary schools have become particularly successful and London’s great secondary schools can then build on this success.”

The researchers from the IFS, University of Surrey, University of Bath and the UCL Institute for Education used information from the National Pupil Database, which records the school outcomes of all children in England. They found that:

  • London is much more ethnically diverse than the rest of England and ethnic minorities tend to obtain better GCSE results than children from white-British backgrounds. This explains a lot of the higher performance of poorer children in London compared with those outside London but it does not explain why disadvantaged Londoners have improved their performance so much. (It explains about one sixth of the improvement relative to the rest of the country). 

  • The main explanation for better GCSE results is that pupils from poorer backgrounds are entering secondary school with better test scores at age 11. In 1997, about 47% of poorer pupils in both inner London and the rest of England achieved the expected level in English tests at age 11. By 2008, poorer pupils in inner London became 7 percentage points more likely to achieve this standard (75% for inner London compared with 68% for the rest of England). This points to a very important role for improved performance by primary schools in London. This is then built on in London’s secondary schools so that children leave with strong GCSE results compared to other poor children outside of London.

  • In addition it seems that having lots of peers from deprived backgrounds is no longer holding children back as much.

The researchers supplemented their analysis of administrative data by using the Millennium Cohort Study to look at the performance of one large group of children born around 2000 and for whom there is detailed data on their progress before age 11.

  • In this cohort of around 19,000 children who all started school at age 5 in 2005, disadvantaged children in London were not ahead of those outside London at the point when they started school. Indeed, they were less school-ready on some measures, but this is mainly because of their more diverse ethnic background and because many do not speak English as a first language. They had more than overcome this starting disadvantage by age 11.

  • Differences in the family background and characteristics of poorer pupils in London explain just under half of the London advantage at age 11 (mostly due to higher levels of ethnic diversity). However, most of the advantage remains unexplained, again pointing to the important role played by London’s primary schools.

Notes for editors:

1. The working paper “Understanding the improved performance of disadvantaged pupils in London” will be published at 0.01 on Wednesday 30th September at http://sticerd.lse.ac.uk/case/ as Social Policy in a Cold Climate Working Paper No 21.  The authors are Jo Blanden (School of Economics, University of Surrey) Ellen Greaves (Institute for Fiscal Studies), Paul Gregg (Department of Social Policy, Bath University), Lindsey Macmillan (Institute of Education, University College London) and Luke Sibieta (Institute for Fiscal Studies).

2. In the National Pupil Database, the researchers use receipt of free school meals to indicate children from disadvantaged backgrounds.  35-40% of pupils at age 16 in Inner London receive free school meals while it’s 14% of pupils across the whole of England. Eligibility for free school meals depends on receipt of means tested benefits.

Children were considered poor in the Millennium Cohort Study if their household was in receipt of Job Seekers Allowance or Income Support when the age 3, 5, 7 or 11 survey was taken.

Disadvantaged children in London are different from their peers outside London, particularly in terms of ethnicity. However, all the children we consider are on means-tested benefits and this tends to lead to similar living standards across the country.

3. This project is part of the Social Policy in a Cold Climate programme of work which is funded by Joseph Rowntree Foundation, the Nuffield Foundation and Trust for London through the Centre for the Analysis of Social Exclusion (CASE), LSE. Co-funding from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies is gratefully acknowledged.

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http://www.ifs.org.uk/publications/8006 Wed, 30 Sep 2015 00:00:00 +0000
<![CDATA[Graduate ‘premium’ more significant for women]]> The significantly higher earnings that graduates in England can expect over those who didn’t study at university, the ‘graduate premium’, has been revealed in detail by a large new study – the first of its kind.

Researchers at the Institute for Fiscal Studies (IFS), Harvard University and the University of Cambridge found that median earnings of English women around 10 years after graduation were just over three times those of non-graduates. Median earnings of male graduates were around twice those of men without a degree. This advantage for graduates was maintained through the recent recession, although all groups saw significant falls in their earnings during this period.

The study shows that the recession had a large impact on the earnings of people in their twenties and early thirties. This is particularly true for women, who experienced much lower earnings than previous cohorts. However, the research also indicates that graduates fared better than non-graduates – they saw proportionally smaller drops in their earnings – with higher education providing some protection from the economic downturn.

The researchers used anonymised tax data and student loan records for over 260,000 graduates for up to 10 years after graduation. This large database provides a far more accurate picture of earnings than was previously possible, The data include cohorts of graduates who started university in the period 1998-2011 and whose earnings (or lack of earnings) are then observed in the tax year 2011/12, though the results hold for graduates in other tax years.

This is the first time a big data approach has been used to look at graduate earnings. The administrative data gives a much more accurate picture than existing surveys which tend to be based on much smaller samples self-reporting their earnings and are subject to biases.

The researchers, funded by the Nuffield Foundation, report their results in a new working paper. Other findings include that:

  • The administrative data suggests that the annual earnings of the highest earning graduates are greater than appears in other data. For example, 10 years after graduation, 10% of male graduates were earning more than £55,000 per annum, 5% were earning more than £73,000 and 1% were earning more than £148,000. Ten years after graduation, 10% of female graduates were earning more than £43,000 per annum, 5% were earning more than £54,000 and 1% were earning more than £89,000.

  • Using this “big data” also suggests there is less gender inequality among graduates than other data sources imply. The study puts the male–female annual earnings gap 10 years after graduation at around 23%, whereas the Labour Force Survey suggests it is around 33%.

  • Graduates suffered proportionately less during the recession than non-graduates in terms of their earnings, implying that having a degree provides some protection from bad labour market outcomes.

  • Over the recession period females fared proportionately worse than males in terms of annual earnings. For example, female graduates in their late 20s saw their real earnings decline just as, in normal times, they would have expected rapid earnings growth as they gained experience.

Jack Britton, a research economist at the IFS and an author of the working paper, said: “This study shows the value of a degree, in terms of providing protection from low income and shielding graduates from some of the negative impact of the recent recession on their wages. We find this to be particularly true for women.”

Neil Shephard of Harvard University, another author of the paper, said: “This type of big data analysis allows us to track how earnings evolve during a career. This is important in measuring human capital and understanding why this varies between subpopulations of graduates.” 

Anna Vignoles of the University of Cambridge and the IFS, and another author of the report, said: “This study illustrates the power of using big data to better understand the graduate labour market and shows that previously we have underestimated the earnings of top graduates.”

Notes for editors:

1. This research has been funded by the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at www.nuffieldfoundation.org.

2. The working paper ‘Comparing sample survey measures of English earnings of graduates with administrative data’ by Jack Britton, Neil Shephard and Anna Vignoles is to be published at 00.01 UK time on Thursday 24 September 2015.

3. The research team used administrative data from both the Student Loan Company (SLC) and Her Majesty’s Revenue and Customs (HMRC) to observe how the earnings of students who take out a loan from the SLC change through the years as they mature in the labour market. The team compared the administrative data set with the UK Labour Force Survey and other survey data on graduates.

4. The researchers note that they can only identify graduates who have borrowed money from the Student Loan Company. This is around 85% of English graduates in the period under consideration. There are therefore some graduates for whom there is no data but we have reason to believe that they are likely to be higher earning graduates, on average. As a result, if anything, the administrative data is likely to underestimate graduates’ earnings.

5. The researchers were granted access to records in a secure HMRC data enclave after all identifying material in the data had been anonymised. Team members who use this data have been subject to the same strict confidentiality and data protection requirements as HMRC staff and liable to legal penalties for breaches.

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http://www.ifs.org.uk/publications/7998 Thu, 24 Sep 2015 00:00:00 +0000
<![CDATA[More than nine in ten individuals pay more in taxes than they receive in social security over their lifetime]]> In a single year, 64% of individuals in the UK pay more in taxes than they receive in social security. But most individuals experience considerable change over their lifetimes: for example those not in paid work in one year are often in work in another year. New analysis, published by the Institute for Fiscal Studies (IFS) today, shows that extending the period of analysis from a single year to an entire lifetime increases the percentage who pay more in taxes than they receive in social security to 93%.

A second key finding is that in-work benefits are just as good as out-of-work benefits at targeting the lifetime poor (those with lowest incomes over the course of a lifetime). Since in-work benefits do this without worsening work incentives by nearly so much, policymakers might want to put greater weight on in-work than out-of-work support.

These are among the main findings of a new IFS report, Redistribution from a Lifetime Perspective, using data on the baby-boom generation (born 1945–54). The study was funded by the Nuffield Foundation and co-funded by the European Research Council. The research looks at how taking a lifetime – rather than a single-year snapshot – perspective changes our view of inequality, redistribution and reforms to the tax and benefit system.

Key findings on the redistribution achieved by the current tax and benefit system include:

  • Taking adult life as a whole, 93% of individuals pay more in taxes than they receive in social security. This compares with 64% of individuals when measured in a single year. These figures include most personal taxes and benefits, but do not take into account ‘business taxes’ or the benefits from public service spending.

  • More than half of the redistribution achieved by taxes and benefits is effectively across periods of life rather than between different people, in the sense that the tax and benefit system takes from an individual at one age and gives back to the same individual at another.

  • Income inequality is much lower from a lifetime perspective than a single-year perspective. The Gini coefficient – a common measure of inequality – for gross income is 0.49 in a single year compared with 0.28 across the whole of adult life. This indicates that a lot of the inequality between individuals is temporary in nature, reflecting either the stage of life they are at or some short-lived shock to income, such as a period of unemployment.

  • The tax and benefit system is less effective at reducing inequality over the lifetime than within each year. In the single-year snapshot, the tax and benefit system reduces the Gini coefficient by 31% but over the lifetime only by 15%. This is because much of what it takes at one age is returned to the same individual at another age. Its effectiveness at targeting lifetime outcomes is limited by the fact that most taxes and benefits are assessed over periods of a year or less, making the targeting of outcomes over short horizons much easier than over longer horizons.

The analysis of the distributional effects of historical tax and benefit reforms shows:

  • The Labour government’s expansion of in- and out-of-work benefits between 1999 and 2002 was less well targeted towards the lifetime poor than the snapshot poor. The reason is that many of the poorest individuals over the lifetime are not poor in all periods of life.

  • The losses from tax and benefit reforms implemented by the Conservative-Liberal Democrat coalition between 2010 and 2015 are more evenly spread across the income distribution from a lifetime perspective than in a snapshot. However, the reforms still take proportionally more from the poorest half of individuals. While in a single year upper-middle income groups were largely protected from the reforms, over their lifetime these individuals will sometimes be in receipt of benefits (and so will lose from the benefit cuts) and sometimes have high levels of earnings (and so will be affected by the income tax and National Insurance increases).

  • The four-year freeze to working-age benefits and tax credit cuts announced in the July 2015 budget remain regressive from a lifetime perspective, but losses extend into the top half of the distribution. This is because many individuals quite high up the lifetime income distribution will claim these benefits at some point in their lives (if only briefly), while the lifetime poor are not always in receipt of affected benefit payments.

The report also analyses the distributional effects of hypothetical tax and benefit reforms:

  • In-work (i.e. work contingent) benefits are just as good at targeting the lifetime poor as out-of-work benefits, but do so without worsening work incentives by nearly so much. The reason for this is that the lifetime poor spend the majority of their working lives in paid work. As a result, policymakers looking to target the lifetime poor might favour doing so through in-work benefits. However, in-work benefits may not be as good as out-of-work benefits at addressing temporary hardship.

  • Changes to the higher rate of income tax do target the lifetime rich reasonably well. This is because rich individuals tend to remain rich over prolonged periods of time.

  • From a lifetime perspective, increasing the main rate of VAT looks close to neutral in distributional terms. This stands in contrast to a snapshot perspective, from which increases in the main rate of VAT look regressive. This arises because snapshot-poor individuals typically spend a lot relative to their income, and therefore pay a lot of VAT, but the same is not true of the lifetime poor.

  • Increases in VAT on zero- and reduced-rated goods are mildly regressive from a lifetime perspective. This is because the lifetime poor spend a greater share of their income on zero- and reduced-rated goods, like food and heating. However, it is possible to design a reform package eliminating zero- and reduced-rating that pays for itself and is distributionally neutral. As a result, it is hard to justify zero- and reduced-rating on distributional grounds.

“Understanding the lifetime impact of policies matters because individuals experience considerable changes in their circumstances over their lives,” said Peter Levell, a Research Economist at the IFS, and an author of the report. “While over a third of individuals receive more in social security than they pay in taxes in a single year, this is true for very few when you look over an entire lifetime.”

Barra Roantree, a Research Economist at the IFS and another author of the report, said: “The sharp distinction often made in policy debates between ‘working’ and ‘non-working’ families is not especially useful: in reality very few individuals are permanently out of work, the poor are not always poor and, albeit to a lesser extent, the rich are not always rich.”

“The existing tax and benefit system, assessed largely against circumstances in the current year, doesn’t do especially well at redistributing resources towards the lifetime poor. Targeting lifetime redistribution more effectively may require new policies that take longer-run circumstances into account,” said Jonathan Shaw, a Senior Research Economist at the IFS, and the third author of the report.

ENDS

Notes to Editors:

1. A launch event for the IFS report is to be held at 10.00 on Tuesday 22 September at the Nuffield Foundation, 28 Bedford Square, London WC1B 3JS. http://www.ifs.org.uk/events/1192

2. The report Redistribution from a Lifetime Perspective by Peter Levell, Barra Roantree and Jonathan Shaw is to be published and is under embargo until 00.01 UK time on Tuesday 22 September 2015.

3. The authors are very grateful for financial support from the Nuffield Foundation for the project ‘Redistribution and insurance across the lifecycle – the effects of the UK tax and benefit system.’ Co-funding from the European Research Council and the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at the IFS is also very gratefully acknowledged.

4. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at www.nuffieldfoundation.org

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http://www.ifs.org.uk/publications/7987 Tue, 22 Sep 2015 00:00:00 +0000
<![CDATA[New analysis of the potential compensation provided by the new ‘National Living Wage’ for changes to the tax and benefit system]]> A number of changes to the tax and benefit system have been announced for implementation in the current parliament as part of the government’s deficit reduction programme. An analysis by researchers at the Institute for Fiscal Studies (IFS) finds that the package of changes to tax, tax credits and benefits will reduce household incomes significantly, particularly for those towards the bottom of the income distribution.

The July 2015 Budget also announced a substantial increase in the national minimum wage for those aged 25 and over, which the Chancellor described as a new “National Living Wage” (NLW).

New analysis by IFS economists, published in an IFS Briefing Note, analyses the extent to which the new NLW will compensate for the losses caused by the tax and benefit reforms for different types of households in 2019–20.

Among households with someone in paid work, those eligible for benefits and tax credits are estimated to lose an average of £750 per year from the changes to tax and benefits. On the other hand, the average gain from the new NLW for this group of 8.4 million working-age households is estimated to be £200 per year. This suggests that the new NLW will, on average, compensate for 26% of the losses this group of working households will see from changes to taxes, tax credits and benefits. They will remain £550 worse off per year, on average.

Households where no one is working – who are estimated to be hit especially hard by the tax and benefit changes – cannot gain from the new NLW.

Our scenario suggests that only around 13% (£150 per year) of the losses due to tax and benefit changes (£1,090 per year) of all working age households currently entitled to benefits and tax credits – including non-working households – will be offset by the NLW, on average.

These estimates assume that the new NLW will have no effect on GDP, employment or hours of work. In fact, as the Office for Budget Responsibility stresses, the new NLW is likely to depress GDP and employment, and the money for higher wages has to come from somewhere. In part because of this, these estimates are likely to represent a “better case” scenario for the impact of the NLW on household incomes.

The new NLW offers such little compensation because the boost to gross wages is smaller than the announced fiscal tightening, and almost one-third of the increase in gross wages goes to the Treasury in higher tax receipts and lower benefits and tax-credit entitlements.

The Briefing Note finds that the households gaining from the new NLW are often not the households losing the most from the tax and benefit reforms announced. It is households in the lower half of the income distribution who stand to lose the most from the reforms to taxes and benefits. The households gaining from the new NLW are more evenly distributed across the income distribution, with the largest gains in the middle.

The average losses from tax and benefit changes in deciles 2, 3 and 4 of the household income distribution are £1,340, £980 and £690 per year, respectively. These same groups are estimated to gain £90, £120 and £160 from the new NLW (again in a “better case” scenario). This suggests that a “better case” estimate of the compensation the new NLW offers these groups on average is 7%, 13% and 24%, respectively.

William Elming, a research economist at the IFS and co-author of the briefing note said: “The new ‘National Living Wage’ will only offer partial compensation to working age households who will see their incomes fall as a result of tax and benefit changes announced for the current parliament. There may be strong arguments for introducing the new NLW, such as increasing earnings and the incentives to work for the low paid. However, the new NLW cannot be considered a direct substitute for benefits and tax credits aimed at lower income households. The wage increases are not as large as the benefit cuts. And, it is not targeted at the same group who lose from the cuts.”

Notes to editors

1. The IFS Briefing Note entitled “An assessment of the potential compensation provided by the new ‘National Living Wage’ for the personal tax and benefit measures announced for implementation in the current parliament” by William Elming, Carl Emmerson, Paul Johnson and David Phillips is available on the IFS website: http://www.ifs.org.uk/publications/7975

2. The Briefing Note was prepared for the House of Commons Treasury Select Committee and has been published on the committee’s website.

3. The authors gratefully acknowledge funding from the Economic and Social Research Council via the Centre for the Microeconomic Analysis of Public Policy.

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http://www.ifs.org.uk/publications/7980 Thu, 10 Sep 2015 00:00:00 +0000
<![CDATA[Budget’s student finance proposals will reduce government spending on higher education, but will raise debt for poorer students and repayments for most graduates]]> Two major changes to student finance were proposed in the Budget. The replacement of maintenance grants by loans from 2016–17 will raise debt for the poorest students, but do little to improve government finances in the long run. The proposed freezing of the repayment threshold for loans, on the other hand, will – if implemented – significantly improve government finances because it will result in an increase in graduate repayments.

These are the main findings of a new briefing note published today by the Institute for Fiscal Studies (IFS), funded by the Economic and Social Research Council.

Replacing maintenance grants with loans

The poorest 40% of students going to university in England will now graduate with debts of up to £53,000 from a three-year course, rather than up to £40,500. This will result from the replacement of maintenance grants of up to nearly £3,500 per year by maintenance loans worth up to £550 a year more.

Students from households with pre-tax incomes of up to £25,000 (those currently eligible for a full maintenance grant) will have a little more “cash in pocket” whilst at university. But they will also graduate with around £12,500 more debt, on average, from a three-year course. This means that students from the poorest backgrounds are now likely to leave university owing substantially more to the government than their better-off peers.

We estimate that, as a result of this reform:

  • In the short term, government borrowing, as recorded in the national accounts, will fall by around £2 billion per year. This is because current spending on grants counts towards current borrowing, while current spending on loans does not.

  • In the long run, savings will be much less than this. The amount of money lent to students will rise by about £2.3 billion for each cohort, but only around a quarter of these additional loans will be repaid. The net effect is to reduce government borrowing by around £270 million per cohort in the long run in 2016 money – a 3% decline in the government’s estimated contribution to higher education.

  • About two-thirds of those eligible for the full maintenance grant will repay no more as a result of this reform because they will end up with the additional debt being written off. For the remaining third, repayments are forecast to continue for an extra four years on average, with contributions rising by around £9,000, on average, in 2016 money.

Freezing the repayment threshold

A number of other proposals on higher education funding were also put forward in the Budget. If enacted, the one that will have the greatest impact on graduate repayments – including for current students – is the announcement that the repayment threshold for student loans will be frozen at £21,000 for five years.

This means that repayments will start at a lower level of income than previously expected (close to the value of the pre-2012 threshold of £15,000 in real terms by the end of the freeze period). We calculate that (given the change from maintenance grants to loans described above):

  • Graduate loan repayments will increase by a further £3,800, on average, per student in 2016 money, reducing the long-run cost to government of issuing student loans by around £1.4 billion per cohort of students.

  • This change will hit middle-income graduates hardest, as they will end up paying more per year for the majority of the repayment period. We estimate that an individual on median graduate earnings will repay over £6,000 more in total in 2016 money.

Commenting on the research, Jack Britton, Research Economist at the Institute for Fiscal Studies (IFS), said:

“While the small increase in support for living costs available to students from lower-income families will undoubtedly be welcomed by many, the switch from maintenance grants to maintenance loans will result in substantially higher debt for the poorest students. For most, though, it is the freezing of the repayment threshold which will do more to raise loan repayments, and hence increase the cost of higher education.

“The 2012 reforms appear not to have had a negative effect on higher education participation amongst full-time students from poorer backgrounds. This likely reflected the fact that the system was designed to protect both that group and those with low expected lifetime earnings. Only time will tell whether these new changes will be similarly benign in their effect.

ENDS

Notes to Editors:

  1. In the Budget, the Chancellor also proposed allowing universities with high teaching quality to raise fees in line with inflation from 2017–18, and to review the discount rate applied to student loans. These changes are discussed in more detail in the briefing note.

  2. The briefing note entitled “Analysis of the higher education funding reforms announced in Summer Budget 2015” by Dr Jack Britton (Research Economist at the IFS), Dr Claire Crawford (Assistant Professor of Economics at the University of Warwick and Research Fellow at the IFS) and Professor Lorraine Dearden (Professor of Economics and Social Statistics at University College London and Research Fellow at the IFS) was published on Tuesday 21 July.

  3. The authors gratefully acknowledge funding from the Economic and Social Research Council via the Centre for the Microeconomic Analysis of Public Policy.

  4. Our estimates focus just on young English-domiciled full-time undergraduate students. We assume that earnings will grow in line with the Office for Budget Responsibility forecast for average economy-wide earnings growth from the June 2015 Fiscal Sustainability Report and the July 2015 Economic and Fiscal Outlook; specifically, average (but variable) real earnings growth of 1.1% per year from 2016–17 to 2020–21 and 1.5% per year real earnings growth subsequently. We assume that all students take out the full amount of the loans to which they are entitled and pay them back according to the repayment schedule (with no early repayments and no avoidance). We use the government’s approved discount rate for assessments of the student loan system of RPI+2.2%.

  5. All figures are in 2016 prices and have been discounted back to 2016 using the government’s approved discount rate for the student loan system of RPI+2.2%.

  6. To estimate the total cost of these reforms to government, we use internal Treasury estimates of the number of English-domiciled undergraduate students expected to start university in 2016–17 of 362,000. We fix growth in parental income to match the shares of students taking the full and partial maintenance grants in 2014–15 from the latest Student Loans Company estimates: that is, 55% receiving some maintenance grant and 41% receiving the full grant.

  7. To estimate the implications of the maintenance grant reform, we assume that maintenance grants and loans would have increased by 3% between 2015–16 and 2016–17 in the absence of this reform. To estimate the implications of the threshold freeze, we assume that the threshold above which repayments are made and the threshold above which students face the maximum interest rate are both frozen in nominal terms for five years and uprated in line with average earnings thereafter. Our assumed counterfactual is that both thresholds would otherwise have been increased in line with average earnings in all years.
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http://www.ifs.org.uk/publications/7905 Tue, 21 Jul 2015 00:00:00 +0000
<![CDATA[Nearly two-thirds of children in poverty live in working families]]> Rising employment between 2009–10 and 2013–14 led to increases in the proportion of children living with working parents. At the same time, falls in real earnings reduced the incomes of working families. These two contrasting trends led to absolute child poverty remaining unchanged overall in this period. However, the proportion of children in poverty living in a working family rose from 54% in 2009–10 to 63% by 2013–14.  

These are among the findings of a new report by IFS researchers published today: Living Standards, Poverty and Inequality in the UK: 2015, funded by the Joseph Rowntree Foundation. The research uses data on household incomes from the government’s Households Below Average Income series, recently made available up to and including the financial year 2013–14.

Key findings on trends in child poverty include:

  • Between 2009–10 and 2013–14, the proportion of children in workless families fell from 18% to 16%. This reduced absolute child poverty by more than 1 percentage point (see notes to editors for cash-terms poverty lines for different family types).

  • Over the same period, increased rates of poverty within working families acted to increase absolute child poverty by more than 2ppt. This was caused primarily by falling real earnings. The rate of absolute child poverty in working families rose from 19% to 21%.

  • Benefit cuts over this parliament will put upward pressure on absolute poverty for working-age households – including those in work. The planned rises in the minimum wage will help many of those on the lowest hourly pay, but are smaller in overall magnitude than the benefit cuts and less tightly targeted on low-income households.

Looking at other measures of low living standards and financial difficulties:

  • Among those in income poverty, ‘material deprivation’ (according to what families say they cannot afford) is much higher for social renters, lone parents and disabled people than for owner-occupiers, the self-employed and those with some savings. In fact, among families with children, social renters with incomes (after housing costs) around the median are at least as likely to be materially deprived as the lowest-income owner-occupiers. This illustrates the importance of looking at more than just current income to understand low living standards.

  • Cuts to council tax support and the introduction of the so-called ‘bedroom tax’ in 2013–14 both seem to have caused clear increases in arrears, on council tax and rent respectively. Council tax arrears among working-age recipients of council tax support rose by 10ppt in areas that introduced the highest minimum council tax payments (above 20%), but fell in areas with no minimum payment. Rent arrears increased by 8ppt for those likely to be affected by the so-called ‘bedroom tax’, but were essentially unchanged for other working-age social tenants on housing benefit.

The report also examines changes in average living standards:

  • By 2013–14, real median household income was almost back to its pre-recession (2007–08) level though still 2.4% below its 2009–10 peak. Pensioners have done much better than average: median pensioner income in 2013–14 was 7.0% above its 2007–08 level, while median non-pensioner income was still 2.7% below.

  • Recent income growth has been much weaker than in the equivalent periods around previous recessions. Median income in 2013–14, four years after the peak, was about the same as seven years earlier in 2006–07. Over the corresponding seven-year period around previous recessions in the 1970s, 1980s and 1990s, median income grew by between 13% and 17%. This mostly reflects slow growth before and after the recession, rather than particularly large peak-to-trough falls in income.

The report also analyses changes in inequality, over the short and longer run:

  • Inequality amongst the majority of the population has fallen since 1990. In 2013–14, incomes at the 90th percentile were 3.8 times those at the 10th percentile, compared with 4.4 times in 1990. Much of this fall has happened since the recession.

  • But the top 1% have been taking an increasing share of household income, up from 5.7% in 1990, to 8.4% in 2007–08 prior to the crisis (and 8.3% in 2013–14).

  • The fall in inequality partly reflects the ‘catch-up’ of pensioners. The median pensioner now has a higher income than the median non-pensioner (after accounting for housing costs), having been more than 30% poorer in 1990.

  • Workless households have also been catching up with those in work. Excluding pensioners, median income (after housing costs) for workless households is 46% of the median among working households, up from 39% in 1990.

  • Inequality among working households was rising before the recession, but has fallen since 2007–08. This fall reflects the fact that lower-earning working households get more support from in-work benefits, which have been more stable than earnings.

The recent stability in absolute income poverty among children has masked important and offsetting trends,” said Chris Belfield, a Research Economist at the IFS, and an author of the report. “Since 2009–10, a fall in the number of workless families has acted to reduce poverty, but this has been offset by a substantial rise in in-work poverty. This largely reflects the wider nature of the labour market since the recession: robust employment and weak earnings.”

Robert Joyce, a Senior Research Economist at the IFS and another author of the report, said: “The government has recently emphasised worklessness as a cause of poverty. This makes sense, but tackling low living standards will be difficult without improvements for working families too.”

Julia Unwin, Chief Executive of the Joseph Rowntree Foundation, said: “A strong economy and rising employment have masked the growing problem of in-work poverty, as years of below-inflation wage rises have taken their toll on people’s incomes. The upcoming minimum wage rise will help, but many low-income working families will still find themselves worse off due to tax credit changes. Boosting productivity and creating more jobs which offer progression at work is vital to make work a reliable route out of poverty.”

ENDS

Notes to Editors:

1. The full Households Below Average Income publication can be found at https://www.gov.uk/government/statistics/households-below-average-income-19941995-to-20132014.

2. Embargoed copies of the full report, Living Standards, Poverty and Inequality in the UK: 2015, are available on request. The report will also be available on the IFS website from 00:01 AM on Thursday 16 July 2015.

3. The authors are very grateful for financial support from the Joseph Rowntree Foundation for the project ‘Living Standards, Poverty and Inequality in the UK: 2015’. Co-funding from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS is also very gratefully acknowledged.

Absolute poverty lines (£ per week) in 2013–14 for example families (assuming any children are under 14), measuring household income net of direct taxes, including benefits and after housing costs have been deducted:

Single individual

Childless couple

Lone parent, one child

Couple, one child

Couple, two children

Couple, three children

£136

£235

£183

£282

£329

£376

 

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http://www.ifs.org.uk/publications/7880 Thu, 16 Jul 2015 00:00:00 +0000
<![CDATA[Further increases in worker mobility needed as public workforce cuts accelerate]]> The pace of public workforce cuts is likely to accelerate over the new parliament. Conservative party plans outlined in their manifesto imply a further reduction in the public workforce of 580,000 between 2014–15 and 2018–19, unless the government imposes further public pay restraint. The last parliament saw many public sector workers move into private sector employment. This movement into the private sector will need to grow to prevent former public workers spending a significant amount time out of work.

These are among the conclusions of a new Briefing Note from the Institute for Fiscal Studies (IFS). The researchers, funded by the Joseph Rowntree Foundation and the Economic and Social Research Council (ESRC), looked at the movement between jobs, or ‘mobility’, of workers in the public and private sectors.

There were large cuts to the public workforce over the last parliament during a period of fiscal consolidation. The public workforce fell by 375,000 between the start of 2010 and the end of 2014. Initially, these falls were quite sharp with a fall of 2.9% between 2010Q2 and 2011Q2, and many former public sector workers were unable to find new jobs in the private sector. After 2011, the pace of public workforce cuts slowed somewhat and former public sector workers were almost fully absorbed by the private sector.

In particular, the researchers found that:

  • The initial sharp cuts in 2011 were partly delivered by a reduction in the number of private sector workers joining the public sector (inflows from the private sector comprised just over 3% of the public workforce after 2010 compared with around 5% of the public workforce each year during 2000s);

  • Although there was a small increase in workers leaving the public sector to find new jobs in the private sector in 2011, movements between sectors cannot fully account for the reduction in the public workforce in 2011. Instead, the combination of reduced public sector recruitment and public sector workers moving out of employment amounted to a net reduction of 3% in the public workforce in 2011;

  • After 2011, public sector workforce cuts were delivered with relatively few people moving out of employment. This is because the pace of cuts slowed and because the proportion of public sector workers finding new jobs in the private sector increased. About 5% of public sector workers in 2013 moved to the private sector, the highest level since the early 1990s;

  • Cuts to the public workforce have been smallest in the protected areas of the NHS and education and largest in public administration, which includes administrative workers in various areas of the public sector (e.g. civil service, local government, Job Centre Plus).

Other findings on public and private sector mobility include:

There was an increase in mobility from public to private sector after 2010, but a decline in mobility within the public and private sectors to historically low levels. This decline in mobility across firms in the private sector is widespread and is potentially concerning if it reflects barriers to workers shifting from less productive to more productive jobs. Understanding the root causes of this decline in private sector job mobility is an important area for future research.

The geographical mobility of public sector workers is low compared with the private sector. Around 5–6% of men and women in the private sector moved to a job in another part of the country in 2013. That is about double the proportion of public sector workers changing region (about 2–3% in 2013). Public sector job losses may require workers finding jobs in the private sector within their current region in order to prevent workers moving into non-employment.

Luke Sibieta, a programme director at the IFS and an author of the report, said:

“Given the historically large cuts to the public sector workforce over the last parliament, it is encouraging to see increases in the numbers of public workers managing to find new jobs in the private sector. With the pace of workforce cuts set to accelerate in the coming years, the capacity of the private sector to absorb former public sector workers will need to increase further to prevent them spending a significant amount of time out of work.”

 

Notes:

1. In 2014, the NHS made up 27% of the public sector workforce, education made up 29% and public administration made up 18%. Public administration includes administrative workers across various areas, including the civil service, Job Centre Plus, local government and other areas. The rest of the public sector (26% of the public workforce in 2014) comprises the Police, HM Forces, social care and other smaller areas of the public sector.

2. Our estimates of the mobility of public and private sector workers is based on the Annual Survey of Hours and Earnings Panel dataset made available by the Office for National Statistics. This allows us to follow a 1% random sample of employees over time and track their occupational histories. More details can be found in the data and methodology section of the briefing note.

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http://www.ifs.org.uk/publications/7774 Tue, 16 Jun 2015 00:00:00 +0000
<![CDATA[Honour for IFS’ Rachel Griffith]]> Professor Rachel Griffith of the Institute for Fiscal Studies (IFS) has been recognised in the Queen’s Birthday Honours and made a CBE for her services to economic policy.

Rachel is Professor of Economics at the University of Manchester and Deputy Research Director of the Institute for Fiscal Studies.

Her research considers the ways that public policy affect firms and people. Her work has considered what drives the process of innovation and what determines differences in productivity levels between firms.

She is interested in understanding dietary choices, looking at the ways that public policy affects the choices that individuals make over the foods they purchase and their activity levels, and the choices that the food industry makes over what foods they offer.

Her work combines economic theory, econometric methods and applies them to detailed micro data to address these questions. She believes passionately in the importance of open and informed public debate.

Rachel did not come to academia though the traditional route. She grew up in the US and quit school at the age of 16. She spent a number of years working as a waitress and came to Europe to travel. She returned to education and completed her Bachelor's degree at 22. She spent a number of years working in a small charity before coming to work at the IFS in 1993 and studied part-time for a PhD.

Rachel is currently serving as President of the European Economic Association and as Managing Editor of the Economic Journal – she is the first woman to hold either of these positions. Last year, she was honoured with the Birgit Grodal award for the leading European-based female economist. She is a Fellow of the British Academy.

Earlier this week, Rachel was in Germany at the University of Wuppertal to receive the Schumpeter School Price 2015 for her pioneering contributions to the economic and political determinants of innovation and productivity.

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http://www.ifs.org.uk/publications/7772 Sat, 13 Jun 2015 00:00:00 +0000
<![CDATA[New IFS research to focus on health and social care spending on older people]]> The Institute for Fiscal Studies (IFS) is to carry out new research on the need for, and use of, health and social care services among older people in England, and how these services interact – thanks to funding from the Health Foundation, an independent health care charity.

The IFS researchers will investigate how public money is allocated across health and social care services for older people with different types of needs, and the effect on their health outcomes and wellbeing.

The research project will be led by IFS Programme Director Gemma Tetlow. She says, “With an ageing population and limited public funding, it is important to understand how health and social care spending can be directed most efficiently and how these services can complement one another to produce the best outcomes. In this new research, we will use newly available data on older people’s need for and use of health and social care services to better understand how public spending is currently allocated across services and individuals and the effect of this allocation on individuals’ outcomes and wellbeing. An important aspect of this project will be to understand more about how the provision of social care affects demand for health care and vice versa.”

IFS Director Paul Johnson adds: “One of the most pressing challenges facing policymakers over the coming years will be how to provide adequate health and social care to the UK’s ageing population without imposing an unsustainable burden on taxpayers. This new funding from the Health Foundation will allow us shed new light on this important question by applying the rigorous, impartial quantitative analysis and in-depth policy knowledge for which IFS is renowned.”

The IFS research is one of four projects selected for support by the Health Foundation under its £1.5 million Efficiency Research Programme. The five-year programme will see new research carried out on efficiency and value for money in the health and social care systems, at a time when maximising efficiency is one of the key challenges facing the NHS over the coming years.

Anita Charlesworth, Chief Economist from the Health Foundation, said, “The Five Year Forward View set our plans to reform the way care is delivered and identified that the NHS will need to deliver £22 billion of efficiency savings by the end of the decade alongside additional taxpayer funding of £8 billion. Research evidence on how to improve the efficiency and productivity of health systems is comparatively limited. Our programme of investment seeks to make a contribution to work in this area.”

Health Foundation Director of Research Nick Barber said, “The Health Foundation’s biennial Efficiency Research Programme has been designed to generate new knowledge that provides an increased understanding of the likely impact of health care policy and process on efficiency, and to better understand how to implement, spread and scale-up value-generating programmes.

“The projects we are supporting will provide powerful lessons and blueprints for change, which we hope will have a profound impact on the thinking, planning and implementation of transformative change that can lead to the long-term sustainability of health and social care services in the UK.”

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http://www.ifs.org.uk/publications/7757 Thu, 21 May 2015 00:00:00 +0000
<![CDATA[Little sense of direction in tax and benefit proposals]]> With significant deficit reduction still to come, households can expect the tax and benefit changes implemented over the next parliament to reduce their incomes, on average. There are large differences between the Conservatives, Labour and the Liberal Democrats in how they propose to do this. But they share a lack of willingness to be clear about the details, and an inability to resist the urge for piecemeal changes which would make the overall system less efficient and coherent.

  • The Conservatives propose small net cuts to taxes and large cuts to benefits; Labour propose a rise in taxes and little change to benefits spending; the Liberal Democrats are in both respects somewhere in between.
  • All these parties seem to have a desire to raise tax revenue in vaguely-defined, opaque and apparently painless ways. In many cases the proposals would lead to unnecessary increases in complexity and inefficiency in the tax system.
  • Where benefit cuts are proposed, they are largely unspecified (Conservatives), vague (Liberal Democrats) or trivially small relative to the rhetoric being used (Labour).

New research, published today by the IFS and funded by the Nuffield Foundation, analyses the tax and benefit policies of the Conservatives, Labour and the Liberal Democrats. It finds little evidence of any coherent strategy, and numerous proposals that would complicate the tax system.

On income tax proposals we find:

  • Conservative and Liberal Democrat proposals to increase the personal allowance to £12,500 by the end of the parliament would cost about £4 billion per year in today’s prices. Unlike with the substantial increases over this parliament, most income tax-paying pensioners would benefit. Given that 44% of adults now have incomes too low to pay income tax, and that two earner couples gain twice, further increases are of most value to those in the middle and upper-middle of the income distribution;
  • Since 2010 the number of higher- and additional-rate income taxpayers has risen from 3.2 million to 4.9 million, in large part because the higher-rate threshold has been cut by the coalition government. Fiscal drag means that failure to increase the threshold by more than inflation could see the number paying higher rates rise to nearly 6.5 million by 2020. Even if the threshold were to rise to £50,000, as the Conservatives promise, numbers of higher- and additional-rate taxpayers would probably grow by about another 300,000 to well over 5 million;
  • Labour’s proposal to abolish the transferable personal allowance for married couples and use the proceeds to reintroduce a 10% starting rate of income tax would replace one small complication in the system with another. It is hard to think of any economic justification for a 10% starting rate over a small range of income; virtually identical effects could be achieved by simply raising the personal allowance. If, as Labour says, the new band is to be funded only by the abolition of the transferable allowance, it would be worth only 50p a week to most taxpayers;
  • There is much uncertainty about how much Labour’s proposal to increase the additional rate of income tax to 50% would raise. The most recent evidence we have is from HMRC, signed off as reasonable by the OBR, which suggests it would raise very little – £100 million is the central estimate;
  • None of the parties is suggesting sorting out real problems in the income tax system. They would extend the reach of the effective 60% income tax rate which currently applies on incomes between £100,000 and £121,200. They do not propose to do anything about the proliferation of thresholds that are by default frozen in nominal terms, and hence eroded by inflation over time.

The Conservatives and the Labour Party both want to raise more money from increasing income tax on pension contributions:

  • Both want dramatically to reduce the value of pension tax relief for additional rate taxpayers, on top of significant reductions in the value of pension tax relief introduced by the coalition. These may be less visible ways of raising income tax than more straightforward alternatives, but they harm the coherence of our system of pensions’ taxation. Tax relief on contributions makes sense, and it exists because we tax pension income when it is withdrawn;
  • Both sets of proposals would also significantly complicate the system. They discourage people with incomes around £150,000 from increasing their earnings, with Labour’s proposals introducing a “cliff-edge” into the system – people could become worse off as their income rises above £130,000;
  • We need stability in the system for taxing pension savings. None of the proposals on the table would improve those parts of the pension tax system which need changing. They look like short-term, ad hoc changes which we will come to regret as what was historically a relatively rational income tax treatment of pension saving crumbles.

A number of proposals would change the taxation of housing:

  • We do not know for sure how many properties would be affected by Labour and Liberal Democrat proposals for a 'mansion tax' on properties worth more than £2 million. Labour appears to be targeting revenue of £1.2 billion. Given the £3,000 tax bill they propose for houses in the £2-3 million bracket this might imply an average tax of over £16,000 a year on properties worth more than £3 million;
  • Given the structure of council tax – it is regressive in that you pay a lower percentage of property value the more valuable the property, and it is capped – there is a case for reform which would increase the tax on more expensive properties. We also urgently need a revaluation to end the absurd situation in which taxes in England and Scotland are based on relative values in 1991. No party seems to have the courage to propose these rational and long overdue changes. Fixing council tax would be preferable to layering a separate tax on top of it;
  • The Conservatives want to increase the inheritance tax threshold in respect of primary residences at an estimated cost of £1 billion a year. It is hard to see a good economic or social rationale for such a policy. Owner-occupied housing is already tax-privileged and this policy would help lock older people into bigger and more expensive homes when both they, and those looking to buy, might be better off if they were to 'downsize';
  • Labour proposals to offer a stamp duty holiday for first-time buyers is likely, at least in part, to increase house prices, thereby shifting some of the benefit to current property owners.

None of these proposals even begins to tackle the huge problems in the current design of council tax and stamp duty land tax. They are irrelevant to the fundamental problem of lack of housing supply.

With respect to changes to the social security system:

  • There is remarkable cross-party agreement about the desirability of protecting most pensioner benefits. The 'triple lock' on the state pension is set to continue even though it is unsustainable in the long run as it implies state pension spending increasing indefinitely as a share of national income. It means that future pension levels will depend not just on how fast prices grow or how fast earnings grow but on whether the years with high price growth are also the years with high earnings growth;
  • Despite being used as examples of ‘tough choices’, Labour proposals to remove winter fuel payments from higher-rate taxpaying pensioners and to limit cash increases in child benefit to 1% this year and next would save next to nothing;
  • More than two years after first announcing a desire to cut £12 billion from the social security budget in 2017–18, the Conservatives have provided details of just a tenth of this. Given that state pensions and universal pensioner benefits are to be protected this will require cuts of 10% on average to other benefits. It is hard to see how such savings could be achieved without sharp reductions in the generosity of, or eligibility to, one or more of child benefit, disability benefits, housing benefit and tax credits.

James Browne, a senior research economist at the IFS and one of the report’s authors, said: “We have seen little coherent reform to the tax system for many years and the parties’ manifestos promise little going forward. Damage has been done, and more is being proposed, to pension taxation, while proposals on the taxation of housing lack coherence. There is a limit to the extent that we can continue to pretend that tax revenues can rise while protecting the vast majority of people. Just because a tax rise hits 'the rich' or is labelled 'anti-avoidance' does not necessarily mean it is harmless.”

Robert Joyce, a senior research economist at the IFS and another author of the report said: “The Conservatives have continued to fail to explain how they would achieve the substantial cuts to social security they say they would deliver in the first half of the coming parliament. These will be neither easy nor painless to deliver. Meanwhile, Labour claims to be taking tough decisions by removing winter fuel payments from a small fraction of pensioners and limiting child benefit increases to 1%. The former will save almost nothing – about one pound in a thousand spent on pensioner benefits. The latter is likely to save literally nothing. The manifestos have not helped us towards a sensible debate on the future generosity or structure of the benefits system.”

ENDS

Notes to Editors

1. "Taxes and Benefits: The Parties’ Plans" is published by the Institute for Fiscal Studies today. For copies of thereport or other queries, please contact: Jonathan Wood 020 7291 4818/07730 667013, jonathan_w@ifs.org.uk.

2. The Nuffield Foundation is an endowed charitabletrust that aims toimprovesocialwell-being inthewidest sense. It funds researchandinnovationin educationand socialpolicyand alsoworks to build capacityineducation, scienceand socialscienceresearch. The Nuffield Foundationhasfunded this project, but theviews expressed arethose of the authors andnot necessarilythose of the Foundation. Moreinformationisavailableat http://www.nuffieldfoundation.org.

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http://www.ifs.org.uk/publications/7735 Tue, 28 Apr 2015 00:00:00 +0000
<![CDATA[Public finance plans of Conservatives, Labour, Liberal Democrats and SNP leave much unanswered]]> Public finance plans of Conservatives, Labour, Liberal Democrats and SNP leave much unanswered

With the deficit in 2014–15 still at 5% of national income all these parties have pledged to reduce it over the coming parliament. New research, published today by the IFS and funded by the Nuffield Foundation, analyses the public finance implications of these political parties’ election manifesto commitments, and sets out the size and composition of the future fiscal tightening that each appears to be planning.

None of these parties has provided anything like full details of their fiscal plans for each year of the coming parliament, leaving the electorate somewhat in the dark as to both the scale and composition of likely spending cuts and tax increases. In our analysis we have used the information provided in each manifesto, plus in some cases some necessary assumptions, to shed light on the four parties’ plans.

Our analysis suggests that, on borrowing and debt:

  • The Conservatives are planning the largest reduction in borrowing over the next parliament, of 5.2% of national income, to eliminate the deficit by 2018–19. They would require some large spending cuts or tax increases to achieve this.
  • Labour has been considerably more vague about how much they would want to borrow. They have pledged to ‘get a surplus on the current budget’ without specifying either exactly when or how much of a surplus. This pledge could be consistent with any reduction in borrowing totalling 3.6% of national income or more (given the coalition government’s investment plans). A reduction in borrowing of 3.6% of national income would require little in the way of spending cuts or tax increases after this year.
  • The Liberal Democrats have been more transparent about their overall fiscal plans through to 2017–18 and are aiming for a tightening that is larger than Labour’s but smaller than the Conservatives’, at 3.9% of national income.
  • The SNP’s fiscal numbers imply the same reduction in borrowing over the next parliament as Labour, although the reduction in borrowing under their plans would be slower. While their plans imply a slower pace of austerity than those of the other three parties, they imply a longer period of austerity.

The Conservatives’ plans could see national debt falling from about 80% of national income to 72% by the end of the parliament while debt might fall only as far as 77% under Labour plans. That’s a difference equivalent to about £90 billion in today’s terms. The Conservative plans, if implemented would have the advantage of resulting in lower debt interest payments and could potentially leave the country better placed to deal with future adverse economic shocks. But they would require much deeper spending cuts or tax increases than would the other parties’ plans.

In terms of the measures required to bring about these plans:

  • Despite planning for more austerity, the Conservatives’ detailed tax policies amount to a net giveaway, their detailed social security measures would only provide a tenth of the cuts that they have said they would deliver, and their commitments on aid, the NHS and schools would increase spending in these areas.
  • The Conservatives’ borrowing reduction is, therefore, predicated on £5 billion of largely unspecified anti-avoidance measures, £10 billion of unspecified social security cuts, and £30 billion of cuts to unprotected departmental spending. Departments outside the NHS, education and aid look to be facing cuts of 17.9% between 2014–15 and 2018–19. This would imply average cuts to these spending areas of one third in real terms from the start of austerity (in 2010-11) up to 2018-19. These ‘unprotected’ areas include defence, transport, law and order and social care.
  • Labour’s plans include some small net tax increases, and their commitments to increase certain areas of public spending are no bigger than the Conservatives. The big difference though is their much looser fiscal rule. If they can find £7½ billion of revenues from anti-avoidance measures, as they say they can, then they might need to find a mere £1 billion from further real cuts to unprotected departmental spending.  
  • As the Liberal Democrats have acknowledged in their manifesto, their plans would require £12 billion of cuts to unprotected departments. Their plans are predicated on two other optimistic claims. First, the vast majority of their planned cut to social security spending is to come from their ambition to reduce fraud and error in the system and to get better at helping benefit recipients back into work. Second, they wish to raise £10 billion by the end of the parliament from largely unspecified and highly uncertain measures to reduce tax avoidance and evasion. This is twice as much as the Conservatives, and a third more than Labour, expect to raise from such measures.
  • The SNP are the one major party not to have used largely made up assumptions about how much they could raise from clamping down on tax avoidance to try to make their sums add up. Their proposed tax giveaways appear to be offset by their tax takeaways, while they would increase the generosity of the social security system. As a result, even though they propose increasing total spending in real terms each year, departmental spending would need to be broadly frozen between 2014–15 and 2019–20, and departmental spending outside of the NHS and aid could be facing a cut of 4.3%. The SNP’s manifesto states that “We reject the current trajectory of spending, proposed by the UK government and the limited alternative proposed by the Labour Party”. There is a considerable disconnect between this rhetoric and their stated plans for total spending, which imply a lower level of spending by 2019–20 than Labour’s plans.

Soumaya Keynes, research economist at the IFS and an author of the report, said: “The Conservatives have said they want to eliminate the deficit but provided next to no detail on how they would do it. They should be forthcoming on the £5 billion of largely unspecified clamp down on tax avoidance, the £10 billion of unspecified cuts to social security spending and, according to our calculations, further real cuts to ‘unprotected’ departments of around £30 billion.”

Rowena Crawford, senior research economist at the IFS and an author of the report, said: “Labour’s proposed measures might be broadly enough to meet their target for only borrowing to invest. But this would leave borrowing at £26 billion a year in today’s terms. If Labour wanted to reduce borrowing to a lower level than this, they would have to spell out more detail of how they would get there.”

Carl Emmerson, IFS deputy director, added: “There are genuinely big differences between the main parties’ fiscal plans. The electorate has a real choice, although it can at best see only the broad outlines of that choice. Conservative plans involve a significantly larger reduction in borrowing and debt than Labour plans. But they are predicated on substantial and almost entirely unspecified spending cuts and tax increases. While Labour has been considerably less clear about its overall fiscal ambitions its stated position appears to be consistent with little in the way of further spending cuts after this year”.

 

ENDS

 

Notes to Editors:

1. ‘Post-election Austerity: Parties’ Plans Compared’ by Rowena Crawford, Carl Emmerson, Soumaya Keynes and Gemma Tetlow is published today. For copies of the report or other queries, please contact: Jonathan Wood 02072914818 / 07730667013, jonathan_w@ifs.org.uk.

2. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policyand also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but theviews expressed arethose of the authors and not necessarily those of the Foundation. More information is available at http://www.nuffieldfoundation.org.

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http://www.ifs.org.uk/publications/7726 Thu, 23 Apr 2015 00:00:00 +0000
<![CDATA[Benefit receipt more widespread and inequality lower in the long-run]]> Almost three times as many people interact with the benefit system over an 18 year period than in a single year on average. As most analyses of benefit reforms are based on measures of individuals’ circumstances at a particular point in time, often a week or a month, they will understate the number of people affected by such reforms in the longer run. Policymakers should also consider that adopting a longer time horizon can lead to a very different impression of inequality and the role of the tax and benefit system, the researchers suggest.

These are among the main findings of a paper by researchers at the Institute for Fiscal Studies – funded by the Nuffield Foundation – to be presented at the 2015 Royal Economic Society conference in Manchester this week.

Using data from the British Household Panel Survey, which follows the same individuals each year between 1991 and 2008, the research shows that while around 17 per cent of individuals report being in a family that receive one of the UK’s main means-tested benefits at a particular point in time on average, receipt of benefits rises to almost half of individuals (48%) over the full 18 year horizon the data cover.

These estimates are likely to understate the true proportion of people affected for two reasons. First, as with any survey-based data, there is under-reporting of benefit receipt compared to official statistics. Second, the long-run measure used is based on 18 annual snapshots and will miss some benefit claims occurring between the dates the survey is carried out. All this suggests that over the long run, a far greater proportion of individuals interact with the benefit system than a snapshot measure would suggest.

The research also finds that income inequality is considerably lower over longer horizons. This is because some of the variation in income across individuals is only temporary and will tend to average out when considering multiple years together. A common measure of inequality – the Gini coefficient1 –falls steadily as longer horizons are considered. Income inequality, both before and after taxes and benefits, is about a fifth lower when measured across 18 years than if measured at a single point in time.

Finally, as longer time periods are considered, the research shows that the impression of the amount of redistribution done by the tax and benefit system falls significantly. A commonly used measure of the extent to which the tax and benefit system redistributes income in a way that reduces income inequality – known as the Reyolds-Smolensky index – also falls by about a fifth as the horizon under consideration increases from 1 to 18 years. This shows that the tax and benefit system is achieving less redistribution across individuals over longer periods. The reason is that, as the horizon is extended, part of what the tax and benefit system does is effectively to redistribute across periods of life rather than across individuals. For example individuals might pay more in tax than they receive in benefits early in their working lives, but this situation might reverse once they have children.

Barra Roantree, a Research Economist at the IFS and a co-author of the report, said: “These findings demonstrate that a longer-run perspective can substantially change our impression of the tax and benefit system in terms of its reach, its effect on inequality, and the amount of redistribution done. While in a single year about around 17% of individuals report being in a family receiving one of the UK’s main means-tested benefits, this rises to 48% of people when the time horizon is extended to 18 years. This highlights the importance for policymakers of considering not only the immediate effect of tax and benefit reforms, but their impact right across individuals’ lifetimes.”  

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http://www.ifs.org.uk/publications/7685 Wed, 01 Apr 2015 00:00:00 +0000
<![CDATA[Renewal of research centre recognises academic excellence of IFS research]]> The Economic and Social Research Council (ESRC) today announced the renewal of funding for the Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (IFS). Running for five years from this Autumn, the centre will again be led by IFS research director Professor Sir Richard Blundell.

The ESRC awards centres only to support research of the highest academic quality. Underpinning all of the work of the IFS, the centre will provide about 20% of the institute’s funding and its only source of funding secure for anything like five years.

The new centre will carry out empirical economic and econometric research on a wide range of public policy areas including:

  • Consumers and markets Using both traditional and behavioural economic techniques this will deepen our understanding of household responses to policy interventions. The work will include cutting edge research on how consumers’ decisions over nutrition, energy use and alcohol consumption can be affected by information, taxation and regulation.

  • Inequality, risk and insurance Looking across people’s lifecycles this research will use phenomenal new data resources to understand for example what aspects of education, inheritance and government tax and benefit policy affect inequality both within and between generations.

  • Public finances and taxation With a particular focus on the taxation of high earners and multinational companies we will look at risks to the public finances in the coming years. This strand of work will also investigate key determinants of wages and productivity which are themselves fundamental to the health of the economy and the public finances.

Welcoming the announcement Richard Blundell, director of the centre said:

"The ESRC Centre is at the core of IFS, providing the underpinning for the rigorous research on which all good policy analysis must be based. The Centre will tackle some of the key questions facing society in the coming years and will provide the empirical evidence required for improving policy analysis. Misunderstanding the evidence and poor policy design can be hugely costly. Getting the best answers requires careful use of economic analysis applied to the richest available data. Without the ESRC Centre, the IFS could not maintain its preeminent position in the economic policy debate."

Paul Johnson, director of the IFS added:

"The IFS is truly unique in combining world class academic research with an active role in the public policy debate. It is only with support from the ESRC that we are able to do this and that support has been crucial to our success in recent years. The ESRC came to its decision following a hugely, and appropriately, rigorous and competitive application process which resulted in exceptional referees’ reports and recognition of the very high calibre of our proposal. I am delighted that the ESRC has agreed to fund the centre for a further five years, though the reduced real level of their support will make this a challenging period for all of us at the IFS."

Reflecting the esteem in which the IFS is held by some of the world’s leading economists, Professor Jean Tirole, the 2014 Nobel Laureate in Economics, commented: "I have always been a big admirer of IFS. Its non-partisan, microeconomic-research-based analysis of public policies has set the standard for Europe and beyond. I am delighted by the ESRC renewed funding."

Professor James Poterba, Mitsui Professor of Economics at MIT and President of the National Bureau of Economic Research in the USA, adds: "The IFS is one of the leading global research institutes on taxation and expenditure policy.  Its high-impact research simultaneously informs policy analysis and pushes back the scientific frontier, a goal to which other institutions aspire but which very few achieve."

The Centre is co-directed by Professor Orazio Attanasio (UCL), Professor James Banks (Manchester), Professor Ian Crawford (Oxford), Professor Rachel Griffith (Manchester) and Professor Imran Rasul (UCL). 

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http://www.ifs.org.uk/publications/7672 Thu, 26 Mar 2015 00:00:00 +0000
<![CDATA[School spending per pupil in England protected to date; cuts of 7% or more possible in next parliament]]> Overall current, or day-to-day, school spending in England has been remarkably well protected under the coalition government. Between 2010–11 and 2014–15, there has been a 0.6% real-terms increase in current spending per pupil, though capital spending has been cut by over one third in real-terms. Over the next parliament, current spending on schools could be squeezed harder. Although the commitments made by the three main UK parties are subtly different, they could all imply real spending per pupil falling by 7% or more between 2014–15 and 2019–20.

These are among the main findings of a new IFS Election Briefing Note on schools and education spending in England published today, funded by the Nuffield Foundation.

Other key findings on changes in education spending in England under the coalition government include:

  • Current school spending has been protected compared with other areas of domestic spending. The current schools budget has increased by 3% in real-terms between 2010–11 and 2014–15 (equating to a 0.6% rise in spending per pupil after accounting for growth in pupil numbers). In contrast, current public service spending has been cut by 8% in real-terms over the same period.

  • School spending has become more targeted on poorer pupils as a result of the pupil premium. Even in 2010–11, funding per pupil was higher amongst the most deprived primary (by 35%) and secondary schools (by 41%) compared with the least deprived ones. As a result of the pupil premium, these differences have increased to 42% and 49% in 2014–15. 

  • Other areas of education have received larger cuts. There has been a 16% real-terms reduction in education spending for 16- to 19-year-olds and a one third real-terms cut to capital spending.

  • Squeezes on public sector pay have probably eased cost pressures on schools. This is likely to be an important explanation for why the school workforce has not fallen since 2010. The number of teachers has held steady at 450,000 and the number of teaching assistants has increased from 210,000 in 2010 to 240,000 by 2013.

Looking forwards, there are likely to be significant cost pressures on schools’ spending over the next parliament:

  • The growth in pupil numbers is set accelerate. Between 2016 and 2020, we expect to see a 7% rise in the school population, with the highest growth expected in London.

  • Costs faced by schools will be pushed up further by additional employer pension contributions for teachers and higher National Insurance contributions (due to the end of contracting out of the State Second Pensions).

  • Public sector earnings are expected to grow faster. The Office for Budget Responsibility (OBR) currently expects public sector pay per head to rise by about 14% between 2014–15 and 2019–20. This compares with growth of about 8% between 2009–10 and 2014–15.

Looking at the commitments made by the three main UK parties:

  • Labour and the Liberal Democrats have committed to protecting the age 3–19 education budget in real terms – early years, schools and 16–19 education, whilst the Conservatives have committed to protecting cash school spending per pupil. 

  • In practice, these commitments might imply similar overall settlements for schools if spending increases are allocated equally across all areas by Labour and the Liberal Democrats (and assuming protections are only just met). This is because the projected growth in pupil numbers is currently around the same as the forecast rate of inflation.

  • They could all imply real-terms cuts to school spending per head of 7% between 2015–16 and 2019–20. 

  • This increases to 9% if we account for increases in national insurance and pension contributions and to 12% if we also account for the OBR’s assumption for likely growth in public sector earnings.

  • There are potentially bigger differences between the parties outside of schools spending. These protections might imply that Labour and the Liberal Democrats are not planning to make any further cuts to spending on 16-19 education. The Conservative have not made any commitments for education spending in England outside of the schools budget.

Luke Sibieta, Programme Director at the IFS and author of the report, commented:

“School spending in England has been one of the most protected areas of public spending under the coalition government. However, it is likely to be squeezed harder in the next parliament. Schools face significant cost pressures from rising pupil numbers, increased employer pension and National Insurance contributions and potential upward pressure on wages.”

He added, “Plans announced by the Conservatives, Labour and the Liberal Democrats could all imply school spending per pupil in England falling by around 7% in real-terms over the next parliament, or by up to 12% if we account for some of the specific cost increases schools are likely to face in the next few years.”

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http://www.ifs.org.uk/publications/7670 Thu, 26 Mar 2015 00:00:00 +0000
<![CDATA[Sharpest cuts to local government spending in poorer areas; same areas likely to lose most in next few years]]> The spending power of local authorities in England has been cut substantially during this parliament. We find that local authorities’ spending per person has been cut by 23.4% in real terms between 2009–10 and 2014–15, using a comparable definition of net spending on services over time by single-tier and county councils.

However, the size of cuts varied markedly across the country – Westminster saw a cut of 46.3%, while North East Lincolnshire experienced a cut of 6.2%. On the whole, more deprived areas and those that saw faster population growth have seen larger cuts.

Further cuts planned for 2015–16 will generally be focused on the same local authorities that have lost over the last five years. For example, London boroughs face cuts of 6.3% on average next year compared with 1.9% cuts faced by shire counties. Without a change in policy, any further cuts over the next parliament are also likely to affect the same places again.

These are some of the main findings of an Election Briefing Note published today by researchers from the Institute for Fiscal Studies with funding from the Nuffield Foundation.

The report looks at how local authorities’ spending and different sources of revenue have changed across England and how these cuts to funding have translated into changes in spending on different service areas, such as social care, transport, housing, and environmental services.

Cuts to local authority spending have been large. They were driven by large cuts to local authority revenues, particularly grants from central government. In particular, we find that:

  • Spending by local authorities in England has been cut between 2009–10 and 2014–15 by 20.4% after accounting for economy-wide inflation. Taking into account population growth, spending per person has been cut by 23.4%.

  • These cuts are similar in magnitude to those seen on average across central government departments outside protected areas such as the NHS, schools and overseas aid.

  • Grants from central government (excluding those specifically for education, public health, police and fire services) have been cut by 36.3% overall (and by 38.7% per person) in real terms. Total council tax revenues have grown slightly in real terms over this period (3.2%) but this still represents a decline of 0.7% per person.

  • Taking grants and council tax revenues together, local authorities’ total revenues have fallen by 19.9% overall (or 22.9% per person) in real terms. But the overall cut to spending was actually slightly larger than this because, on average, local authorities have added to their reserves over this period.

The cuts to local authority spending have also varied in size across different areas of England, with the cuts largest in areas more reliant on grants and with higher initial levels of spending.

  • Cuts to net service spending have tended to be larger in those areas that were initially more reliant on central government grants to fund spending (as opposed to locally-raised revenues). These are areas that have, historically, been deemed to have a high level of spending need relative to their local revenue-raising capacity. The cuts to spending per person were also higher on average in areas that saw faster population growth.

  • London boroughs, the North East and the North West have seen the largest average cuts to spending per person. London boroughs cut spending per person on average by 31.4%, while spending per person was cut by 26.5% in the North East and 25.7% in the North West.

  • Since these regions initially had the highest level of spending per person, there has been some convergence in the average level of local authority spending per person across regions over the last five years. In 2009–10, spending per person in London was on average 80.1% higher than that in the South East; by 2014–15 – with London having seen spending cuts that were nearly twice as deep as those seen in the South East – this differential had fallen to 48.0%.

Local authorities have not cut all service areas equally. Despite it being the largest component, social care (including adult social care and children’s and families’ services) has seen one of the smallest cuts to date.

  • Despite this relative protection, net spending per capita on social care was cut by 16.7% in real terms between 2009–10 and 2014–15.

  • Some of the service areas that saw the largest cuts to net spending were planning and development (which was cut to less than half its original level), regulation and safety, housing, and transport (all of which were cut by at least 30%). There was variation across the country, however, in which services different local authorities chose to focus the cuts on.

There are likely to be further cuts to local government spending power beyond the election and there are a number of reasons to believe that these may be concentrated on many of the same authorities that have already seen the largest cuts. In particular, those areas with the lowest local revenue-raising power will continue to be the most exposed to cuts in central government funding, while those with higher population growth will find it harder to maintain levels of spending per person.

David Innes, a Research Economist at IFS and one of the authors of the report, commented:

“English councils – like many government departments in Whitehall – have experienced sharp cuts to their spending power over the last five years. But the size of the cuts has varied a lot across England. On the whole, it is more deprived areas, those with lower local revenue-raising capacity, and those that have seen the fastest population growth that have seen the largest cuts to spending per person. Further cuts are likely to come in the next parliament and they could well be focused on many of the same local authorities if the current mechanism for allocating funds is retained.” 

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http://www.ifs.org.uk/publications/7621 Fri, 06 Mar 2015 00:00:00 +0000
<![CDATA[Average income back to around pre-recession level after historically slow recovery in living standards]]> New IFS projections suggest median (middle) household income in 2014–15 is at around the same level as it was in 2007–08 before the recession, though still more than 2% below its 2009–10 peak. But the recovery in living standards that began in 2011–12 has been much slower than after the three previous recessions, with median income growing by less than 2% between 2011–12 and 2014–15. 

These are among the main findings of a new IFS Election Briefing Note on living standards published today, funded by the Nuffield Foundation.

Real household incomes continued to grow slowly during the recession of 2008 and 2009, in part due to temporary fiscal stimulus measures. Median income then fell by 4.0% from peak in 2009–10 to trough in 2011–12. It is almost certain that incomes would have fallen significantly under any government. It would therefore be misleading to attribute all trends in living standards before May 2010 to Labour, and all trends since then to the coalition.

Key findings on changes in average living standards include:

  • There are signs that the recovery in household income is finally strengthening. Thanks to an improving labour market and falling inflation, we project real median household income grew by 1.1% in 2014–15, returning it to around its pre-recession (2007–08) level.

  • But the recovery in living standards has been slow. Between 2011–12 and 2014–15, median income grew by just 1.8%, much more slowly than during the first three years of recovery in the early 1980s (9.2%) and 1990s (5.1%). This is mainly the result of weak growth in earnings for those in work. Tax increases and benefit cuts, implemented as part of the government’s deficit reduction plan, have also reduced incomes.

  • Household consumption is still below pre-crisis levels. Consumption per person of non-durables (things such as food and fuel that are bought and consumed straightaway) was 3.8% lower in 2014Q3 than in 2008Q1. At the same point after the 1980s and 1990s recessions, it was 14.4% and 6.4% above pre-recession levels respectively. This may suggest that households think the recession has had a permanent impact on their income prospects.

Changes in living standards have been different for different groups:

  • Falls in income have been larger for higher-income households. This is largely because real earnings fell significantly after the recession, while social security benefits were initially largely protected. Since 2012–13, middle-income households have done better than low- and high-income households, in line with the distributional impact of recent tax and benefit changes.

  • But low-income households have faced higher inflation. This is mostly due to changes in the period up to and including 2009–10. Low-income households were hit harder by rising food and energy prices, and benefited less from falling mortgage interest rates. When this is taken into account, changes in real incomes between 2007–08 and 2014–15 look similar across most of the distribution.

  • Incomes for those of working age remain below pre-crisis levels. After adjusting for group-specific inflation, median income for young adults (aged 22 to 30) is projected to be 7.6% lower in 2014–15 than in 2007–08, and it is estimated to be 2.5% lower for those aged 31 to 59. Meanwhile, median income among those aged 60 and over is projected to have risen by 1.8% over the same period. On the other hand, the incomes of young adults have been recovering relatively quickly of late – growing by an estimated 2.5% from 2012–13 to 2014–15.

“After large falls, and a historically slow recovery, average household income is now back to around its pre-crisis level,” said Andrew Hood, a Research Economist at IFS and an author of the report. “However, the young have done much worse than the old, those on higher incomes somewhat worse than those on lower incomes, and those with children better than those without.”

Robert Joyce, a Senior Research Economist at IFS and another author of the report, added “The key reason living standards have recovered so slowly has been weak earnings growth. In the long run, policies that boost productivity, and so increase real earnings, are likely to have a bigger impact on living standards than changes in tax and benefit rates.” 

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http://www.ifs.org.uk/publications/7616 Wed, 04 Mar 2015 00:00:00 +0000
<![CDATA[Uncertainty over size and shape of painful measures to follow election]]> Uncertainty over size and shape of painful measures to follow election

The IFS Green Budget 2015, in association with ICAEW and funded by the Nuffield Foundation with analysis from Oxford Economics, is published today.

Debt is set to peak at over 80% of national income. The deficit is still more than 5% of national income. The fact that they remain so high largely reflects poor economic performance at the start of this parliament. But real spending cuts have been substantially less than originally planned, no net additional tax rises have been implemented, and tax revenues have proved less responsive to the economic growth we have had than was expected. Difficult choices lie ahead.

  • Some countries have implemented much bigger austerity packages than the UK since 2008. But analysis of IMF forecasts suggests that the UK is currently planning the largest fiscal consolidation out of 32 advanced economies over the period from 2015 to 2019.
  • Real terms cuts in spending on public services over this parliament have been smaller than planned, as inflation has come in below expectations but cash spending plans have not been adjusted down to offset this fully. Original plans implied real cuts of 10.6% to departmental spending by the end of this financial year. Current plans suggest cuts of “only” 9.5% by the end of next year. Capital spending by departments has been cut in real terms only about half as much as originally planned by the current government.
  • The last five years have demonstrated how hard it is to reduce the level of social security spending. Despite cuts in the generosity of working-age benefits there has been no real reduction in spending on social security as the number of pensioners and the generosity of the state pension has risen, while rising rents and falling pay have increased pressure on the working-age budget.
  • Almost all (98%) of the remaining consolidation is currently planned to come from spending cuts. If the plans set out in the Autumn Statement were to be implemented, then we would see real cuts of 14.1% (£51.4 billion) to departmental spending between 2015–16 and 2019–20, on top of 9.5% (£38.2 billion) cuts up to 2015–16. Cuts of this scale could lead to public spending falling to its lowest share of national income since at least 1948 and fewer people working in the public sector than at any time since at least 1971.
  • The three main UK parties could each cut spending by less than is implied by Autumn Statement plans and still meet their fiscal targets. If they implement the tax cuts and £12bn cut to social security that they have suggested, to meet their target of budget balance the Conservatives would need to reduce departmental spending after 2015–16 by 6.7% (£24.9 billion). Labour and the Liberal Democrats would need to impose departmental spending cuts of 1.4% (£5.2 billion) and 2.1% (£7.9 billion) respectively to be consistent with their fiscal targets and stated intentions on tax and benefit policy.
  • For any overall cut in departmental spending, protecting real spending on health, schools and overseas aid doubles the average cut for all other departments. Protecting these departments from 2015–16 onwards would mean that the Autumn Statement plans for 22% cuts overall between 2010–11 and 2019–20 would become 42% cuts for unprotected departments.
  • Labour'’s fiscal target, of balance on the current budget, could be achieved with substantially smaller spending cuts than could the Conservative target of overall budget balance. But continuing with Labour’s target over the 2020s would result in debt falling by 9 percentage points of GDP, compared to a 19 percentage point fall in debt under the Conservatives’ proposed overall budget balance.
  • None of the parties is talking about significant tax rises, but history suggests that general elections tend to be followed by tax rises. The first year after each of the last five elections has seen the announcement of net tax rises of more than £5 billion per year in today’s terms. On current plans tax receipts will be 1% of GDP lower in 2019-20 than they were in 2007-08.

Oxford Economics, with whom we are again collaborating, forecast that the slump in oil prices will propel UK growth to 3% in 2015. They expect this growth to be driven by consumer spending and business investment, with only a modest contribution from net trade. Further out, they expect the economy to continue to grow at a solid pace, though faster growth would be possible were it not for the drag from fiscal consolidation. While their growth forecasts are similar to those of the OBR, they are significantly more optimistic about the scope for the UK economy to grow before inflationary pressures return. If they are right, less fiscal consolidation would ultimately be needed than is currently planned.

In terms of risks to the UK economy, Oxford Economics see the most significant upside risk being stronger-than-expected recoveries in the US and Eurozone leading to a boost in UK export growth. Conversely a broad-based retreat from risk by investors, resulting in a global sell-off of equities and other assets, could drag the UK back towards recession.

ICAEW provide a detailed analysis of Whole of Government Accounts which illustrates the importance of taking a wider view of government finances than the traditional National Accounts. When you take account of increasing charges for future public service pension payments, a proper accounting for assets, and provisions for the likely future costs of things like nuclear decommissioning and clinical negligence, then in 2012–13 (the latest year available), the accounting deficit of £179 billion was £94 billion more than the current deficit reported in the National Accounts.

Paul Johnson, Director of the Institute for Fiscal Studies and an editor of the Green Budget, said: “Mr Osborne has perhaps not been quite such an austere Chancellor as either his own rhetoric or that of his critics might suggest. He deliberately allowed the forecast deficit to rise as growth undershot in the early years of the parliament. He has not cut spending in real terms as much as planned, as inflation has undershot. And he has cut departmental investment spending by only half as much as he originally planned. One result is that he or his successor will still have a lot of fiscal work to do over the course of the next parliament. The public finances have a long way to go before they finally recover from the effects of the financial crisis.”

Andrew Goodwin, Senior Economist at Oxford Economics and co-author of a chapter in the Green Budget said: “For UK households the collapse in the price of oil is the equivalent of a large VAT cut, a pre-election giveaway financed largely by the oil producers. This will provide a significant boost to households’ spending power and should mean that 2015 sees zero inflation and 3% GDP growth, a powerful combination. With very low inflation, even such strong growth is unlikely to force the Bank of England to raise interest rates before 2016 at the earliest.

"What’s more if, as we believe, there is plenty of spare capacity in the economy, the UK will be able to continue to enjoy strong growth through the medium-term. Indeed, were it not for the drag from fiscal austerity, we believe that the UK could achieve faster growth rates than those shown in our forecast. If it does turn out that there is still a sizeable amount of spare capacity that may allow the next government to reduce the pace of fiscal consolidation further down the line.”

Michael Izza, Chief Executive of ICAEW said “Financial analysis based on Whole of Government Accounts has the potential to transform the debate on public finance from the current narrow focus on balancing the deficit in the National Accounts to a more comprehensive debate about how future governments’ deal with long-term financial challenges”.

In more detail the Green Budget shows that:

Balancing the books will depend on taxes coming in as planned

There are risks to this. Perhaps the biggest is that growth will underperform against what has been forecast. In addition:

  • Growth may not occur in a way that is good for tax revenue. Over recent years, growth has comprised more employment than anticipated but lower earnings for those employed. As a result of this, the exchequer is receiving £6.5 billion per year less in tax than it would have done if the balance of growth had been as previously expected. Policy changes also mean that tax revenues have become slightly more sensitive to the composition of growth.
  • Indexing fuel duties to the Retail Prices Index could prove politically difficult, as recent experience suggests. Freezing them for five years would cost £4.1 billion.
  • There may be pressure to raise tax thresholds faster than planned. For example we estimate that, under current policy, fiscal drag would cause the number of families losing some or all of their child benefit to more than double over the next decade (from 1.2 million to 2.5 million).

Nobody is talking about tax rises – but while painful, they could happen

A new government looking for more revenue could raise around £5 billion by increasing the main rates of income tax by 1 percentage point, or by increasing all employee and self-employed National Insurance contribution (NIC) rates by 1 percentage point, or by raising the main rate of VAT by 1 percentage point.

All the parties have suggested they would like “the rich” to bear their “fair share” of any additional fiscal adjustment. In fact tax revenues are already highly concentrated – for example just 3% of the adult population already pay half of all income tax. A government looking to raise more tax revenue overall from the very well off might look at extending the reach of inheritance tax or capital gains tax, perhaps abolishing some existing reliefs. Rather than introducing a separate ‘mansion tax’, council tax could be brought up to date and refocused on higher-value properties. Further cuts to income tax relief on pension contributions are probably best avoided, although there are subsidies for pension saving that ought to be reduced.

A further £12 billion of cuts to social security would not be easy

Though they are targeting further cuts of £12 billion to annual social security spending, the Conservatives’ most significant announced cut – a two year freeze for all non-disability benefits for those of working age – would reduce spending by less than £2.5 billion (less than the £3.2 billion estimated by the Treasury last autumn). To give a sense of scale, all benefits and tax credits other than state pensions would have to be frozen for the entire five years of the next parliament to achieve a £13 billion cut in spending. This would mean taking an average of £800 a year from 16 million families.

Other options to reduce spending on social security include:

  • making all housing benefit recipients pay at least 10% of their rent (£2.5 billion);
  • abolishing child benefit and increasing universal credit to compensate low-income families (£4.8 billion);
  • reducing the generosity of means-tested support for children to its 2003–04 level (£5.1 billion); and
  • restricting benefits for families with children to the first two children (which would save around £4 billion a year in the long run).

There are pressures on NHS spending, but protecting the NHS budget would tighten the squeeze elsewhere

In England the National Health Service (NHS) has so far been protected from the large ongoing cuts to departmental spending. But the NHS faces a number of significant pressures from a growing and ageing population, rising demand and rising costs.

The Autumn Statement plans imply average annual departmental spending cuts of 3.7% between 2015–16 and 2019–20. Were spending on the NHS to rise by £8 billion over the course of the next parliament – the minimum NHS England believe is plausible – then, under Autumn Statement plans, the average annual cut for other departments would reach 6.1%.


ENDS

We are delighted to have produced this year’s Green Budget in association with ICAEW and with funding from ICAEW and the Nuffield Foundation.

Additional analysis is provided by ICAEW and Oxford Economics.

We are also grateful to the Economic and Social Research Council for funding much of the day-to-day research at IFS that underpins the analysis in this report.

Notes to Editors:

1. The Green Budget 2015, edited by Carl Emmerson, Paul Johnson and Robert Joyce, will be launched at 10:00 on Wednesday 4 February 2015 in Church House conference centre, Westminster (http://www.ifs.org.uk/events/1110). Please email events@ifs.org.uk if you wish to attend.

2. For the first time the launch will also be live webcast from Church House. Which you can view at: http://mclav-source.mediasite.com/mediasite/Play/69af2ee73af24a9d9e3ab0240ca160c61d

3. The full report will go live on the IFS website shortly after 10am. For embargoed copies or other queries, please contact Jonathan Wood on 07730 667013, jonathan_w@ifs.org.uk.

4. Previous editions of the Green Budget can be found at: http://www.ifs.org.uk/budgets.

5. ICAEW is a world leading professional membership organisation that promotes, develops and supports over 144,000 chartered accountants worldwide. They provide qualifications and professional development, share their knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession.

As leaders in accountancy, finance and business ICAEW members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together they contribute to the success of individuals, organisations, communities and economies around the world. Because of this, people can do business with confidence.

ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance.

6. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at www.nuffieldfoundation.org.


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http://www.ifs.org.uk/publications/7565 Wed, 04 Feb 2015 00:00:00 +0000
<![CDATA[Men and younger workers see biggest falls in pay; low-paid see smaller falls than those on higher earnings]]> The employment rate has returned to its pre-crisis level, but wages remain well below their 2008 peak. Median hourly wages, adjusted for (RPIJ) inflation, were still 4.7% lower in 2014 than in 2008 (according to the Annual Survey of Hours and Earnings).

New analysis by IFS researchers shows that these changes have affected different groups in quite different ways. Women, older workers and the low-paid have seen smaller real wage falls than men, younger workers and those on higher pay.

Key findings from this work, which forms part of the forthcoming IFS Green Budget 2015, which is produced in association with ICAEW and funded by the Nuffield Foundation, include:

  • Earnings inequality has narrowed. The 10th percentile of the hourly wage distribution (10% of employees earn less than this wage level) was 3.3% lower in real terms in 2014 than in 2008, while the 90th percentile was 6.4% lower. This is entirely driven by the pattern since 2011, when pay has fallen by more at higher points in the distribution.
  • Men have seen larger falls in pay than women. Real median hourly wages fell by 2.5% for women and by 7.3% for men between 2008 and 2014. Part of the explanation for this is that female employees are significantly more likely than men to work in the public sector and, so far, mean earnings falls have been smaller in the public sector.
  • Older workers have done much better than younger workers. For employees aged 60 and older, median real hourly pay in 2014 was back to its 2008 level, but for those aged 22-29 it was still 9% lower than in 2008.
  • Real median weekly earnings have fallen even more than hourly wages. By 2014, they were 5.9% below 2008 levels. This reflects sharp rises in the relative prevalence of part-time work, rises which are now just beginning to be unwound.
  • The proportion of part-time workers who say they work part-time because they cannot get more hours is almost double its pre-crisis level. In addition, the proportion of 16- to 64-year-olds in work and working at least as many hours as they want was 65.7% in the first three quarters of 2014: up significantly from 63.8% in 2012, but still 2.0 percentage points below its pre-crisis level.
  • Wages have fallen despite a continued trend towards a more highly educated and older workforce working in more skilled occupations. Trends in average earnings since the crisis, including over the past two years, would have looked even worse if the characteristics of the workforce had stayed the same.
  • It is true that individuals continuously in the same full-time job have seen their average real pay rise from year to year since 2011. There are at least two likely reasons: pay tends to increase with experience, and those in continuous employment are a select group (e.g. more highly educated) who may be likely to see steeper rises in pay as they age. Hence this measure of earnings growth is always likely to look relatively favourable, and there is little evidence that the degree to which it looks more favourable has changed since the crisis.
  • Real earnings growth appears to be returning. The most recent data (for September-November 2014) from the Average Weekly Earnings series show mean weekly earnings rising by 1.7% in nominal terms compared with the same months a year earlier (2.1% in the private sector). Together with rapid falls in inflation (RPIJ inflation fell to 1.0% in December 2014), this suggests the return of real earnings growth, and official forecasts suggest continued real earnings growth in 2015–16.

Jonathan Cribb, an author of the report and a Research Economist at IFS, said, "Almost all groups have seen real wages fall since the recession. The pay of young adults remains well below its pre-crisis level after particularly large falls between 2008 and 2011, while the average pay of those aged 60 and over has already recovered. Women have seen much smaller falls than men. Falls for the low-paid have been somewhat smaller than for those on higher pay, driven by trends since 2011."

ENDS


We are delighted to have produced this year’s Green Budget in association with ICAEW and with funding from ICAEW and the Nuffield Foundation. We are also grateful to the Economic and Social Research Council for funding much of the day-to-day research at IFS that underpins the analysis in this report.

Notes to Editors:

1. 'Earnings since the recession' by Jonathan Cribb and Robert Joyce is a pre-released chapter from the IFS Green Budget 2015, edited by Carl Emmerson, Paul Johnson and Robert Joyce. For an embargoed copy of this chapter, please contact Bonnie Brimstone or Jonathan Wood at bonnie_b@ifs.org.uk / 07730 667 013 / 020 7291 4800.

2. The full Green Budget 2015 publication, with analysis from IFS and additional analysis from ICAEW and Oxford Economics, will be launched at 10:00 on Wednesday 4 February 2015 at Church House conference centre, Westminster (http://www.ifs.org.uk/events/1110). Please email events@ifs.org.uk if you wish to attend.

3. ICAEW is a world leading professional membership organisation that promotes, develops and supports over 144,000 chartered accountants worldwide. They provide qualifications and professional development and share their knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession. As leaders in accountancy, finance and business ICAEW members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together they contribute to the success of individuals, organisations, communities and economies around the world. Because of this, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance.

4. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at www.nuffieldfoundation.org.

 

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http://www.ifs.org.uk/publications/7544 Thu, 29 Jan 2015 00:00:00 +0000
<![CDATA[Low-income households with children and the very rich have lost the most from coalition’s tax and benefit changes]]> The coalition government has implemented a set of tax changes which, broadly speaking, have left middle income households better off and have hit high income households. Accompanying benefit changes have reduced the incomes of poorer working age households and reduced the incomes of most families with children.

Taking these tax and benefit changes as a whole, they have reduced the incomes of low-income households with children and the very richest households by the most as a percentage of income. By contrast, middle to higher income working age households have escaped remarkably unscathed on average; those without children have actually gained from the changes.

These are two of the main results from a new IFS Election Briefing Note on the impact of tax and benefit changes on household incomes being published today with funding from the Nuffield Foundation.

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http://www.ifs.org.uk/publications/7536 Fri, 23 Jan 2015 00:00:00 +0000
<![CDATA[IFS launches election 2015 website]]> As the general election approaches the governing and opposition parties are making claim and counter claim not just about each other’s policies, but about what has actually happened over the past five years. Now more than ever careful, objective, accurate analysis is required to assess the claims and put the facts in the public domain.

In a major new programme of work, funded by the Nuffield Foundation, researchers at the IFS are analysing what happened over this parliament and the implications of the different parties’ fiscal policies. Today our new election analysis website (http://election2015.ifs.org.uk/) goes live. It provides initial analysis of what has happened to the public finances, public spending, living standards, earnings, inequality, tax, welfare, pensions, education and productivity over the last five years. Much more will follow.

The following are highlights currently on our website:

  • The deficit has been halved as a proportion of national income since 2009–10, but at £90 billion it is more than twice as large as was originally planned by this government;
  • The government has implemented a substantial programme of pension reform which will rationalise – and over the long run cut – state pension provision. Cuts to public service pensions have been significant, but they remain much more generous than private sector pensions;

Paul Johnson, IFS Director, said: “The last five years have been extraordinary. Earnings have fallen and productivity is well below expectations but, given economic performance, employment is amazingly high. Average living standards have been stagnant. While the deficit has been halved it remains much bigger than planned.

The shape of the state has changed as some spending has been cut dramatically while spending on pensions and health has risen. Taxes overall have risen but the corporate tax rate has been reduced to among the lowest in the G20. Benefit cuts have hit lower income households, but many on average incomes and above have been spared the effects of austerity. The richest have seen the biggest tax increases. Education funding and pension systems have been reformed.

Understanding these facts, what they mean for policy, and exactly what the different parties’ policies are, should be crucial to the choices people make on 7th May. We hope that the research we have done at the IFS, and new analysis we will publish over the coming months, will help inform those choices”.

ENDS


Notes to Editors

1. The above highlights have been taken from a selection of previously published briefing notes and reports, all of which appear on our election 2015 website and are intended to act as a useful resource. In coming months we will publish in excess of 10 new election briefing notes, all of which will be accompanied by IFS press releases or observations.

2. For further information please contact: Bonnie Brimstone at IFS: 020 7291 4818 / 07730 667013, bonnie_b@ifs.org.uk

 3. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at http://www.nuffieldfoundation.org

4. Support from the ESRC through the Centre for Microeconomic Analysis of Public Policy (CPP) is gratefully acknowledged.

 

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http://www.ifs.org.uk/publications/7516 Mon, 12 Jan 2015 00:00:00 +0000
<![CDATA[“Flaw” in Barnett formula protects Scotland and Northern Ireland from hundreds of millions of cuts]]> At present, the devolved governments in Scotland, Wales and Northern Ireland get most of their money in the form of a block grant from the UK Treasury. How this grant changes from year-to-year is largely determined by the Barnett formula – which aims at providing the same pounds-per-person change in funding for the devolved governments as is the case in England.

The devolved governments – particularly Scotland’s – may soon find themselves raising and keeping more of their own tax revenues. But the Barnett formula looks set to stay in place. A new report published today by the IFS, funded by the Economic and Social Research Council (ESRC), looks at how the Barnett formula interacts with business rates (a tax that is already fully devolved to Scotland and Northern Ireland), and the lessons that can be learned for further tax devolution.

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http://www.ifs.org.uk/publications/7444 Wed, 12 Nov 2014 00:00:00 +0000
<![CDATA[First study comparing overall costs and benefits of new teacher training routes]]> In new research led by the Institute for Fiscal Studies, produced in collaboration with the Institute for Education and the National Foundation for Educational Research with funding from the Nuffield Foundation, we provide the first estimates of the likely costs and benefits involved in providing training across different routes.

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http://www.ifs.org.uk/publications/7437 Mon, 10 Nov 2014 00:00:00 +0000
<![CDATA[Faster cost of living increases for poorer households means more people in absolute poverty than thought]]> Big increases in food and energy prices mean that poorer households have experienced larger increases in their living costs than have richer households. If one were to take account of differential inflation since 2010-11 the numbers of people recorded in "absolute poverty" would have been about 300,000 higher in 2013-14 than official numbers imply and the increase in “relative poverty” at the start of the recession would have been greater. These are some of the main findings of a new report funded and published by the Joseph Rowntree Foundation (JRF) and written by researchers at the Institute for Fiscal Studies (IFS).

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http://www.ifs.org.uk/publications/7428 Wed, 05 Nov 2014 00:00:00 +0000
<![CDATA[Students from poorer backgrounds do less well at university]]> Amongst those who go to university, students from less affluent backgrounds are more likely to drop out and less likely to graduate with a first or upper second class degree than their peers from more affluent backgrounds. This is true even amongst those on the same course who arrived at university with similar grades. These are the main findings of new research published today by the Institute for Fiscal Studies, funded by the Nuffield Foundation.

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http://www.ifs.org.uk/publications/7423 Tue, 04 Nov 2014 00:00:00 +0000
<![CDATA[Graduates who went to private schools earn more than graduates who did not]]> Graduates who went to private schools earn substantially more than those who went to state schools. Part of that difference is explained by the fact that, on average, they attend more prestigious universities and study subjects which tend to be more highly rewarded. But new research shows that even amongst graduates who went to the same university to study the same subject and who left with the same degree class, those who went to private schools still earn 7% more, on average, three and a half years after graduation than their state-educated contemporaries.

This difference does not arise because graduates who attended private schools are more likely to enter higher paid professions: even once we compare graduates in the same occupations, those who went to a private school still earn 6% more, on average, than those who went to a state school. These are the main findings of new research published today by the Institute for Fiscal Studies, funded by the Nuffield Foundation.

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http://www.ifs.org.uk/publications/7421 Thu, 30 Oct 2014 00:00:00 +0000
<![CDATA[Inheritances have not increased wealth inequality among older households]]> Inheritances and large gifts received by English individuals born between the 1920s and 1950s do not appear to have increased the degree of inequality in their wealth holdings. The already wealthy do receive much bigger inheritances than the less wealthy, but what they receive is smaller relative to their other wealth holdings. So the effect is not to increase the overall level of wealth inequality. This is the main finding of new IFS research, published today as part of English Longitudinal Study of Ageing (ELSA) Wave 6 Report, and funded by the IFS Retirement Saving Consortium with support from the Economic and Social Research Council. ELSA is funded by the National Institute of Aging in the US and a consortium of UK government departments.

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http://www.ifs.org.uk/publications/7412 Thu, 23 Oct 2014 00:00:00 +0000
<![CDATA[Free pre-school places for 3 year olds helped only a small number of women into work]]> Offering free part-time pre-school education for all 3 year olds in England helped only a small number of women into work. But this is mostly because most families were accessing some form of pre-school childcare before the entitlement was introduced.

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http://www.ifs.org.uk/publications/7406 Wed, 22 Oct 2014 00:00:00 +0000
<![CDATA[Public private pay differential broadly back to pre-crisis levels; pensions remain a big difference between sectors]]> Two new IFS reports published today find that public pay differential broadly back to pre-crisis levels and that a big difference remains between public and private pensions.

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http://www.ifs.org.uk/publications/7397 Thu, 09 Oct 2014 00:00:00 +0000
<![CDATA[Most couples retiring over the last decade appear financially well prepared]]> The vast majority of couples born in the 1940s have levels of wealth that are more than sufficient to maintain their standards of living into and through retirement. This is the main finding of Retirement Sorted? The adequacy and optimality of wealth among the near-retired, new research published today by the IFS and funded by the Joseph Rowntree Foundation and the Economic and Social Research Council.

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http://www.ifs.org.uk/publications/7359 Tue, 09 Sep 2014 00:00:00 +0000
<![CDATA[Housing Benefit reductions for private tenants had little impact on rents; some recipients moved to cheaper homes]]> A package of cuts to Housing Benefit for about 900,000 tenants in the private rented sector has so far had little impact on average rents, but has affected the housing choices of some claimants. These are among the findings of new IFS research, published today by the Department for Work and Pensions as part of the independent evaluation of the reforms, which were phased in during 2011 and 2012.

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http://www.ifs.org.uk/publications/7278 Tue, 15 Jul 2014 00:00:00 +0000
<![CDATA[Pay, employment and incomes all fall furthest for young adults]]> The recession and its aftermath have been much harder on the young than the old. The employment rate of those in their 20s has fallen, while employment among older individuals has not; and real pay among young workers has fallen much faster than among older workers. As a result, young adults’ real incomes have fallen much more than any other age-group.

These are among the findings of a new report by IFS researchers, funded by the Joseph Rowntree Foundation and published today. The research uses data on household incomes from the government’s Households Below Average Income series, recently made available up to and including 2012–13, in conjunction with the Labour Force Survey.

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http://www.ifs.org.uk/publications/7275 Tue, 15 Jul 2014 00:00:00 +0000
<![CDATA[Women in their late 60s will be as likely as men to be in paid work in 2020]]> Life at older ages will look very different for women in the early 2020s than it does today. They are likely to be healthier, their husbands will live longer, and they will be much more likely to be in paid work.


These are among the main findings of The Changing Face of Retirement, a new report published today by the Institute for Fiscal Studies (IFS) and funded by the Joseph Rowntree Foundation and the IFS Retirement Saving Consortium, with support from the Economic and Social Research Council. The study projects the demographic and financial circumstances of those aged 65 and over in England up to 2022–23.

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http://www.ifs.org.uk/publications/7252 Thu, 26 Jun 2014 00:00:00 +0000
<![CDATA[Disadvantaged pupils perform better in London due to earlier improvements in primary schools]]> The research for this report was carried out jointly with the Institute of Education.

Disadvantaged pupils have higher academic attainment in London than in other regions in England and have pulled even further ahead over the past decade, particularly in inner London. This has often been referred to as the ‘London effect’. In new IFS research published today, we show that this higher level and improvement in performance is unlikely to have been driven by improvements in secondary schools. Instead, we argue that the roots of the London effect lie much earlier, with rapid improvements in pupil performance in London’s primary schools in the late 1990s and early 2000s.

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http://www.ifs.org.uk/publications/7246 Mon, 23 Jun 2014 00:00:00 +0000
<![CDATA[Spending cuts or tax increases would be needed to pay for Independence White Paper giveaways]]> New calculations – based on forecasts from the Office for Budget Responsibility (OBR) – suggest that an independent Scotland would face a budget deficit of 5.5% of GDP (£8.6 billion in today’s terms) in its first year of independence were it to inherit a population share of the UK’s national debt. This would not be sustainable for any prolonged period. Any upside surprise on oil revenues would help, for a while, but as recent experience demonstrates, these revenues can also disappoint. And in the longer term, the eventual decline of oil revenues would likely prove a much more acute problem for an independent Scotland than it would for the UK. Thus, while independence would bring more choice about how to deliver further fiscal consolidation beyond April 2016, it is unlikely to mean that further austerity could be avoided.

The Scottish government’s White Paper suggests a £400 million cut to defence spending, and the abolition of the new transferable tax allowance for married couples and the ‘shares for rights’ scheme. But, the spending increases and tax cuts planned or hinted at are more numerous and more costly. Implementing such a net giveaway would require bigger cuts to other public services or benefits, or increases to other taxes.

These are among the main conclusions of two new IFS reports, funded by the Economic and Social Research Council (ESRC), which update our medium-term forecasts for an independent Scotland’s public finances and consider the Independence White Paper in the context of these forecasts. Other findings of the report include:

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http://www.ifs.org.uk/publications/7231 Wed, 04 Jun 2014 00:00:00 +0000
<![CDATA[Government reforms to HE finance currently estimated to save little but long-run impact on public finances is hugely uncertain]]> The government’s 2012 reforms to higher education (HE) funding in England now look like they will do little to reduce the total taxpayer contribution per student. However, this depends fundamentally on what happens to graduate earnings over the coming decades.

In fact, the main impact of the reforms on the public finances has been an increase in uncertainty. Teaching grants (a certain cost to the government in the short run) were replaced by substantially larger tuition fees and an accompanying increase in student loans (the public cost of which is highly uncertain) (see note 2). Since the long-run public cost of student loans depends on the earnings and repayment behaviour of graduates for many years in the future, the government will not know for decades whether the 2012 reforms have saved taxpayers any money. This is the main finding of new IFS research published today and funded by Universities UK, with additional support from the Nuffield Foundation and the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS.

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http://www.ifs.org.uk/publications/7178 Thu, 24 Apr 2014 00:00:00 +0000
<![CDATA[Public sector workforce shrinking fast: further reductions could be up to 30-40% outside of education and NHS]]> The Office for Budget Responsibility (OBR) forecasts that general government employment will fall by 1.1 million (19%) by 2018–19 compared with 2010–11. If delivered, these cuts would be the largest recorded over the past fifty years: almost three times larger than the reductions in the early 1990s. A buoyant private sector labour market, though, means that up to now private sector employment has risen by more in every region than public employment has fallen.

With schools and NHS budgets currently protected from cuts the long run shift in the composition of the public workforce will continue. Already 57% of public sector workers are employed in these two sectors, up from 42% in 1991. This proportion could reach over 70% by 2018 if education and health were protected from future workforce cuts.

These are amongst the main findings of a new research, published today by the Institute for Fiscal Studies (IFS) and funded by the Joseph Rowntree Foundation, with support from the ESRC through the Centre for the Microeconomic Analysis of Public Policy at IFS. This study provides, for the first time, a consistent picture of how the size and composition of the public sector workforce has changed over the past fifty years.

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http://www.ifs.org.uk/publications/7114 Fri, 14 Feb 2014 00:00:00 +0000
<![CDATA[Still not half way there yet on planned spending cuts]]> The IFS Green Budget, funded by the Nuffield Foundation and produced in collaboration with Oxford Economics, is published today.

The Chancellor’s decision to extend the fiscal consolidation through to 2018–19 means even more dramatic spending cuts are now planned, despite the better headline economic news. By the end of this financial year only 40% of planned spending cuts will be in place.

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http://www.ifs.org.uk/publications/7086 Wed, 05 Feb 2014 00:00:00 +0000
<![CDATA[Richest have seen biggest cash income squeeze but poorest have faced higher inflation]]> Recent debates about the squeeze on household incomes have suffered from a lack of up-to-date information. The latest data covering all incomes at a household level only goes up to 2011–12, but new modelling work published today by the IFS provides a good guide to where we are now. It shows that:

  • Real median household income in 2013–14 is more than 6% lower than before the economic crisis hit in 2007–08;
  • The fall in median income has probably come to a halt in 2013–14;
  • Better-off households have seen bigger proportionate real falls in income than poorer households if – as is usually the case – one assumes that all households face the average inflation rate;
  • But this equalising effect is largely undone by the fact that poorer households have in fact experienced significantly higher rates of inflation.

These are the headlines from work carried out by IFS researchers, which forms part of the forthcoming IFS Green Budget 2014 and is funded by the Nuffield Foundation with support from the ESRC through the Centre for the Microeconomic Analysis of Public Policy at IFS.

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http://www.ifs.org.uk/publications/7068 Thu, 30 Jan 2014 00:00:00 +0000
<![CDATA[Cuts to council tax support increase numbers seeking debt advice]]> Four in five English local authorities (LAs) reduced entitlements to council tax support (CTS) this financial year. This followed the replacement of council tax benefit, a UK-wide benefit that provided help for low-income families with their council tax, by CTS schemes designed by individual LAs. At the same time funding from central government was cut by 10%.

With LAs obliged to protect pensioners, entitlements were reduced for 2.5 million working age households, by an average of £160 in 2013–14.

These are among the findings of new research, published today by the Institute for Fiscal Studies (IFS) and funded by the Economic and Social Research Council (ESRC). The research also shows that where LAs removed full exemption from council tax for the poorest families and replaced it with a substantial minimum council tax payment, the numbers seeking advice on council tax debt increased significantly.

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http://www.ifs.org.uk/publications/7058 Tue, 21 Jan 2014 00:00:00 +0000
<![CDATA[Those born in the '60s and '70s likely to be no better off in retirement than their predecessors-unless they inherit]]> Inherited wealth looks like the only major factor that could act to make individuals born in the 1960s and 1970s better off in retirement than their predecessors, on average. When compared with those born a decade earlier at the same age, these cohorts: have no higher take-home income; have saved no more of their previous take-home income; are less likely to own a home; probably have lower private pension wealth; and will tend to find that their state pensions replace a smaller proportion of previous earnings.

These are among the main findings of a new report by IFS researchers published today, funded by the Joseph Rowntree Foundation, the IFS Retirement Saving Consortium and the Economic and Social Research Council.

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http://www.ifs.org.uk/publications/7017 Tue, 17 Dec 2013 00:00:00 +0000
<![CDATA[Independent Scotland would face tougher long-run fiscal challenge than the UK as a whole]]> An independent Scotland would require a significant cut in spending or increase in taxes, over and above that already announced by the UK government, in order to put their long-term public finances onto a sustainable footing. The scale of this fiscal tightening is likely to be greater than that required for the UK as a whole.

These are the main findings of new IFS research, funded by the Economic and Social Research Council (ESRC). The research uses a model of the UK’s and Scotland’s long-run public finances to project levels of public revenues and spending over the next 50 years, taking into account projected changes in the size and demographic structure of the population, in order to examine the long-term public finance challenge that would face the UK and Scotland. Even under the most optimistic scenario we consider, the long-run ‘fiscal gap’ in Scotland would be 1.9% of national income compared to 0.8% of national income for the UK as a whole.

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http://www.ifs.org.uk/publications/6950 Mon, 18 Nov 2013 00:00:00 +0000
<![CDATA[Since 2008 food spending fails to keep pace with rising food prices and nutritional quality of calories falls / Long term decline in calorie purchases despite increase in calories from eating out, snacks and soft drinks ]]> These are the key headlines from two new pieces of research published by the Institute for Fiscal Studies and due to be presented today as part of the ESRC Festival of Social Science.

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http://www.ifs.org.uk/publications/6922 Mon, 04 Nov 2013 00:00:00 +0000
<![CDATA[Inconsistent taxes on energy use raise costs of meeting carbon targets and need to be overhauled ]]> Recent headlines have focussed on energy prices faced by households. Government policy has increased those prices. It has increased prices faced by business by rather more. This has mainly happened because this government and the last have committed to legally binding carbon reduction targets to tackle climate change.

The best way to achieve these targets would include a single, consistent carbon price. But that is not what we have. Existing policies impose very different costs on different energy users. Businesses are taxed more than households. Electricity is taxed more than gas. A more rational and straightforward policy would impose a uniform carbon price. Instead the current system is complex and incoherent and less effective than it could be at reducing carbon emissions at the lowest overall cost.

These are among the findings of a new report published today by the IFS, in collaboration with the ESRC Centre for Climate Change Economics and Policy, and funded by the Esmée Fairbairn Foundation and the Economic and Social Research Council (ESRC). It suggests how taxes and charges could be rationalised, reducing emissions at no additional cost and without, on average, lower income households being made worse off.

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http://www.ifs.org.uk/publications/6917 Fri, 01 Nov 2013 00:00:00 +0000
<![CDATA[Independent Scotland could face conflict between pressure to lower tax rates and need to fix its public finances]]> http://www.ifs.org.uk/publications/6913 Tue, 29 Oct 2013 00:00:00 +0000 <![CDATA[Welsh Government faces tough choices balancing spending over the next 12 years as cuts continue]]> The UK Government’s deficit reduction plan means the Welsh Government faces at least four more years of budget cuts on top of those already delivered over the three years since 2010-11. While overall spending may be able to rise from 2017-18 significant challenges will remain. In particular, pressures for increased spending in areas such as health, social services and schools over the period to 2025-26 could see continuing spending cuts in other areas, such as transport, culture and housing.

These are among the main conclusions of new IFS research, funded by Wales Public Services 2025 and being launched at a conference in Cardiff today. The research looks at recent changes in Welsh Government spending, and the prospects for the Welsh Government budget under various scenarios as far as 2025-26.

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http://www.ifs.org.uk/publications/6868 Thu, 26 Sep 2013 00:00:00 +0000
<![CDATA[Spending on public services higher in Scotland, but may face greater cuts under independence]]> http://www.ifs.org.uk/publications/6859 Thu, 19 Sep 2013 00:00:00 +0000 <![CDATA[Government's welfare reforms mean overall work incentives modestly strengthened despite wage falls]]> New IFS research, launched at a conference in London today, shows that the coalition government's tax and benefit reforms will strengthen peoples' incentives to work on average. This strengthening more than offsets the weakening in work incentives that would have occurred in the absence of policy change as a result of falling real earnings.

The report considers reforms that have been implemented, or are due to be implemented, from when the coalition government took office in May 2010 until the scheduled end of its term of office in May 2015. The reforms examined involve significant changes to existing personal taxes (raising £11 billion a year) and benefits (saving £22 billion a year) and the integration of six existing benefits into universal credit (broadly revenue-neutral).

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http://www.ifs.org.uk/publications/6852 Wed, 11 Sep 2013 00:00:00 +0000
<![CDATA[More spending on disability benefits and less on housing benefit per person in Scotland than in the rest of GB]]> Overall spending per person on benefits (including tax credits and the state pension) is only slightly higher in Scotland than in Great Britain as a whole. Within this, higher spending on old-age benefits and significantly higher spending on disability benefits is almost entirely offset by lower spending on housing benefit and the fact that there are fewer children per adult in Scotland, which leads to lower spending on child benefit and tax credits.

Recent years have seen benefit spending in Scotland grow less quickly than in Great Britain as a whole, narrowing what used to be a much larger gap in benefit spending per person. However, looking ahead, the projected more rapid ageing of the Scottish population suggests that, all else equal, benefit spending will grow somewhat more quickly than in Great Britain as a whole in the coming decades.

Independence – or the devolution of benefits policy and spending to the Scottish Government – would provide Scotland with an opportunity to make reforms to its benefits system, and in the process, reassess some aspects of current UK policy. That would allow an independent Scotland to improve a benefit system, parts of which make little economic sense – or, of course, to make its own mistakes. Radical reform will be difficult however: any major redesign of the system would either require Scotland to spend rather more on benefits than is spent now or else create large numbers of losers.

These are among the main conclusions of a new IFS report, funded by the Economic and Social Research Council (ESRC), that looks at the benefit system in the context of 2014 Scottish independence referendum.

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http://www.ifs.org.uk/publications/6821 Wed, 31 Jul 2013 00:00:00 +0000
<![CDATA[Women approaching retirement and the self-employed to gain from single-tier pension reforms, employees in their thirties to lose]]> http://www.ifs.org.uk/publications/6797 Thu, 11 Jul 2013 00:00:00 +0000 <![CDATA[Elderly see incomes rise, whilst young adults see large falls]]> The incomes of those in their 60s and 70s have continued to rise since the recession. In contrast, median (middle) income among peoploe in their 20s fell by 12% between 2007-8 and 2011-12, after adjusting for inflation- the largest fall of any age group.

These among the findings of a new report by IFS researchers published on 14 June 2013: Living Standards, Poverty and Inequality in the UK: 2013, funded by the Joseph Rowntree Foundation. The research is based on the government's Households Below Average Income data, an analysis of which was published om 13 June 2013 by the Department for Work and Pensions.

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http://www.ifs.org.uk/publications/6760 Fri, 14 Jun 2013 00:00:00 +0000
<![CDATA[Workers kept their jobs but one third faced nominal wage freezes or cuts]]> http://www.ifs.org.uk/publications/6750 Wed, 12 Jun 2013 00:00:00 +0000 <![CDATA[Better-off hit hardest by recession initially; poor feeling the squeeze now]]> Falls in real earnings hit well-off households particularly hard after the recession, while many poorer households were initially relatively protected by the benefits system. But poorer households are the hardest hit by the benefit cuts being implemented in the years to 2015–16. The likely net result is that income losses resulting from the recession will be spread quite evenly across income groups.

These are among the key findings of new IFS research published today, in a pre-released article from a special issue of Fiscal Studies to be launched on Wednesday 12th June. This research provides the first comprehensive estimate of what the distributional impact of the recession will be in the medium term.

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http://www.ifs.org.uk/publications/6728 Tue, 04 Jun 2013 00:00:00 +0000
<![CDATA[Independent sector providers took on more NHS-funded work as use of privately funded health care faltered]]> Over the first decade of the 2000s, rapid growth in public health spending was matched by a slowdown in the growth of private health spending. At the same time, an increasing volume of publicly funded care was delivered by the private sector – meaning that the NHS became a major client for many private healthcare providers. Over the 2000s the number of NHS-funded hip and knee replacements rose by a half whilst there was fall in the numbers of privately funded procedures.

These are among the main findings of a new report published today by researchers at the Institute for Fiscal Studies and the Nuffield Trust. The report forms part of a joint programme of work between the two organisations entitled “Understanding competition and choice in the NHS”.

]]> http://www.ifs.org.uk/publications/6711 Wed, 22 May 2013 00:00:00 +0000 <![CDATA[New study recommends test scores should be age adjusted to ensure fair comparisons]]> http://www.ifs.org.uk/publications/6687 Fri, 10 May 2013 00:00:00 +0000 <![CDATA[More women - and their husbands - in work due to rising female pension age]]> Since April 2010 the age at which women can first receive a state pension has been rising from 60. It is currently at 61 years and 5 months and is due to rise to 66 by 2020.

So far this change, first legislated in 1995, has had a strong effect in increasing employment among those women directly affected by the reform. It has also changed the behaviour of some of the husbands of the affected women – possibly because they are delaying their own retirement so they both retire together or perhaps to cover their wives’ lost pension income with additional earnings.

These are among the main findings of new research launched today by researchers at the Institute for Fiscal Studies. This report has been supported by the Nuffield Foundation and the IFS Retirement Saving Consortium.

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http://www.ifs.org.uk/publications/6623 Fri, 08 Mar 2013 00:00:00 +0000
<![CDATA[Children with strong maths skills at age 10 earn significantly more in their 30s]]> Children with strong maths skills at age 10 earn significantly more in their 30s. This is the main finding of new research published today by the Institute for Fiscal Studies (IFS) and funded by the Department for Education via the Centre for the Analysis of Youth Transitions (CAYT).

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http://www.ifs.org.uk/publications/6625 Fri, 08 Mar 2013 00:00:00 +0000
<![CDATA[Borrowing to take the strain until the election. More pain on spending, jobs and, recent history suggests, tax after the election]]> • On current plans public service spending in “unprotected” Whitehall departments could fall by a third between 2010–11 and 2017–18

• If departments continue with trajectories implied by current plans public sector employment will have fallen by 1.2 million by 2017–18

• But within the current parliament the Chancellor has chosen not to cut spending or raise taxes further to offset much higher borrowing resulting from a weaker economy. As a result borrowing is forecast to be £64 billion higher in 2014–15 than he originally hoped.

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http://www.ifs.org.uk/publications/6584 Wed, 06 Feb 2013 00:00:00 +0000
<![CDATA[Piecing together the productivity puzzle]]> In a new paper published today, IFS researchers address Productivity Puzzles. There are many factors affecting productivity. We find little evidence that the overall fall has been caused by labour hoarding, the demise of financial services or changes in workforce composition. Instead, we conclude that the key contributing factors are likely to be low real wages, low business investment and a misallocation of capital.

This paper is a pre-released chapter from the February 2013 IFS Green Budget, funded by the Nuffield Foundation and to be launched on Wednesday 6th February.

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http://www.ifs.org.uk/publications/6561 Fri, 01 Feb 2013 00:00:00 +0000
<![CDATA[Few know what pension income they will receive and levels of engagement with annuity markets are low]]> A third of those approaching retirement report finding it impossible even to hazard a guess as to how much income they will receive from their private pensions. This is true of nearly 40% of those with defined contribution (DC) pensions.

Despite the fact that annuity rates vary widely, over the last decade over 70% of people with non-employer DC pension funds simply purchased an annuity from the provider with whom they held their pension. Purchasing externally has, however, been more common among those who might have had most to gain - including those who held more of their wealth in DC pensions.

These are among the main findings of a new report published today by researchers at the Institute for Fiscal Studies. This report has been supported by the National Association of Pension Funds, with co-funding from the Economic and Social Research Council.

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http://www.ifs.org.uk/publications/6471 Fri, 30 Nov 2012 00:00:00 +0000
<![CDATA[Autumn Statement 2012: more fiscal pain to come?]]> http://www.ifs.org.uk/publications/6454 Mon, 26 Nov 2012 00:00:00 +0000 <![CDATA[Changing patient choices driven by bigger role for private providers]]> http://www.ifs.org.uk/publications/6447 Mon, 19 Nov 2012 00:00:00 +0000 <![CDATA[Independent Scotland would face long term fiscal challenges]]> http://www.ifs.org.uk/publications/6446 Mon, 19 Nov 2012 00:00:00 +0000 <![CDATA[IFS research provides new evidence on the consequences of recent changes to university funding in England]]> The gap in HE participation between those from the richest and poorest families has been narrowing over the last decade. The gap in participation at age 18 or 19 between state school students from the most and least deprived fifths of the population fell from 40 percentage points in 2004-05 to 37 percentage points in 2009-10 with much of that narrowing occurring after the tuition fee cap was raised to £3,000 in 2006-07. This may reflect the fact that, contrary to popular beliefs, the new regime introduced in 2006-07 was actually more generous to students from poorer backgrounds and hit richer students relatively harder.

The current government is looking to offset possible effects of increasing the fee cap to £9,000 by introducing a National Scholarship Programme (NSP) aimed at providing bursaries and fee waivers to poorer students. In its first year the NSP will cost the government £50 million, and universities must match the funds. But the programme is being administered separately, and differently, by each university and for students entering a majority of universities they cannot be sure in advance what level of support they will receive. The effectiveness of this financial support in encouraging participation of students from poorer backgrounds is likely to be undermined by these levels of complexity and uncertainty.

These are the key findings of two new pieces of research published today by the Institute for Fiscal Studies and funded by the Nuffield Foundation, which will be presented as part of the ESRC’s Festival of Social Science on Friday 9 November.

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http://www.ifs.org.uk/publications/6427 Thu, 08 Nov 2012 00:00:00 +0000
<![CDATA[Up to one-in-five facing large income falls on retirement; Financial crisis knocks 10% off wealth holdings among older individuals]]> http://www.ifs.org.uk/publications/6404 Tue, 23 Oct 2012 00:00:00 +0000 <![CDATA[Welsh local government spending: some deep cuts done, but much more to come]]> Spending by Welsh unitary authorities (UAs) is set to be 8.0% lower per person this year than in 2009-10 in real terms. Despite this significant cut the majority of the cuts implied by Government spending plans are still to come. Even if the UK Government’s fiscal repair job is completed by 2016-17 as planned, and public spending then grows in line with the official forecasts for long-term economic growth, the spending power of Wales' UAs per person in 2020-21 looks likely to be below its current level in real terms, let alone the level enjoyed in 2009-10 prior to the current austerity drive commencing.

These are amongst the findings of a new report by IFS researchers, Local Government Expenditure in Wales: Recent Trends and Future Pressures, funded by the Welsh Local Government Association, and launched today at their 2012 Finance Conference in Cardiff.

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http://www.ifs.org.uk/publications/6360 Fri, 05 Oct 2012 00:00:00 +0000
<![CDATA[Offering free school meals to all primary school pupils increased attainment in disadvantaged areas]]> http://www.ifs.org.uk/publications/6278 Thu, 26 Jul 2012 00:00:00 +0000 <![CDATA[English NHS budget squeeze could run for at least a decade]]> http://www.ifs.org.uk/publications/6229 Wed, 04 Jul 2012 00:00:00 +0000 <![CDATA[New studies underline key role for education and skills in driving social mobility]]>

Key findings include:

  • The HE funding regime to be introduced in England in September 2012 will be substantially more progressive than the current system. Roughly the poorest 30 per cent of graduates, in terms of lifetime earnings, will be better off (i.e. will pay back less) than under the current system. Graduates who do best in the labour market will lose most and the richest 15 per cent will pay back more than they borrow. Universities will also be better off, on average, and the taxpayer will save around £2,500 per graduate.
  • The highest-performing 15-year-olds from poor backgrounds are, on average, around two years behind the highest-performing pupils from privileged backgrounds. This gap in attainment amongst the most able children in England is twice the equivalent gap observed in some other developed countries.
  • Young people from the richest fifth of families are nearly three times more likely to go to university than those from the poorest fifth, but most of this difference is driven by application decisions, which are in turn largely explained by exam results. The differences do not arise because universities discriminate against poor students, given their qualifications.
  • Children whose fathers lost their jobs in the 1980s recession did less well at school and were less likely to be in work themselves in their early 20s than children in comparable families where the father did not lose his job. This suggests that the increased unemployment associated with this recession may have long-term effects on educational attainment.
  • Educational attainment has increased more rapidly amongst the well-off in the UK: comparing those born in 1958 and 1970, the proportion with a degree increased from just 9 per cent to 10 per cent amongst the poorest fifth of families, but from 28 per cent to 37 per cent amongst the richest fifth. At the same time, the pay-off to having particular qualifications has risen. Together, this suggests that the expansion of educational opportunities may have hindered rather than helped social mobility.
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http://www.ifs.org.uk/publications/6219 Fri, 29 Jun 2012 00:00:00 +0000
<![CDATA[Funding social care proposals may offer opportunity to rationalise tax system for older people]]>

The Dilnot Commission proposed changes which would involve a degree of co-payment between individuals and the state, and a much less harsh means-test on assets than in the current system. The proposals would cost money - £1.7 billion a year in the short term. The main beneficiaries of these changes would be pensioners with higher levels of income or significant assets. Dilnot therefore suggested that any tax rises or benefit cuts designed to pay for the proposals should be focussed on this group of better off pensioners.

In a new report funded by the Nuffield Foundation and published today, IFS researchers look at how pensioner incomes have evolved in recent years, how the tax and benefit system provides additional support for pensioners and how it could be reformed to raise additional revenue from this group. Any such changes would of course be painful, and may not be the best way to fund the Dilnot proposals; but money could be found whilst also making the tax and benefit system more coherent in the way it affects pensioners.]]> http://www.ifs.org.uk/publications/6208 Tue, 26 Jun 2012 00:00:00 +0000 <![CDATA[Council Tax Benefit recipients in Wales to lose £74 a year on average]]> http://www.ifs.org.uk/publications/6205 Thu, 21 Jun 2012 00:00:00 +0000 <![CDATA[Average private incomes fall over 7% in the three years to 2010-11 ]]>

These are amongst the findings of a new report by IFS researchers published today, Living Standards, Poverty and Inequality in the UK: 2012, funded by the Joseph Rowntree Foundation. The IFS research is based on the government’s Households Below Average Income data, an analysis of which was published yesterday by the Department for Work and Pensions.

Today’s report provides a more detailed analysis of trends in living standards, poverty and inequality. ]]> http://www.ifs.org.uk/publications/6197 Fri, 15 Jun 2012 00:00:00 +0000 <![CDATA[Biggest one-year fall in middle incomes since 1981]]>

This is one of the key findings from today’s annual Household Below Average Income (HBAI) report published by the Department for Work and Pensions. The data cover years up to and including 2010-11, the first full financial year following the late 2000s recession. Other key findings include:

  • 2010-11 saw the largest one-year fall in median income since 1981, reversing five years of (slow) growth in middle incomes in a single year. This means that after accounting for inflation, median income in 2010-11 was no higher than in 2004-05.
  • Incomes fell right across the income distribution. But incomes fell proportionally more for richer households than poorer ones, leading to a large fall in income inequality.
  • Measures of relative poverty continued to fall in 2010-11. But unlike in previous years, this did not reflect rising absolute living standards among poorer households. Instead, it reflected the fact that their incomes fell by less than median income. Absolute measures of poverty increased for the population as a whole.
  • The last government’s target to halve relative child poverty between 1998-99 and 2010-11 was missed by 0.6 million children. However, the number of children in relative income poverty did fall by around a third over that period with 2.3 million children in relative poverty in 2010-11 compared with 3.4 million in 1998-99.
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http://www.ifs.org.uk/publications/6195 Thu, 14 Jun 2012 00:00:00 +0000
<![CDATA[Councils face a difficult task to replace Council Tax Benefit]]>

With 5.9 million recipients, Council Tax Benefit (CTB) is more widely claimed than any other means-tested benefit or tax credit. The UK government is proposing to abolish CTB across Britain from 2013–14 and give local authorities in England, and the Scottish and Welsh governments, grants to create their own systems for rebating council tax to low-income families - though pensioners in England will have to be fully protected. These grants will be based on 90% of what would have been spent on CTB in each area. A new report, funded by the Joseph Rowntree Foundation and published today by the IFS, examines the likely effects of this policy and the options available to councils.]]> http://www.ifs.org.uk/publications/6184 Thu, 31 May 2012 00:00:00 +0000 <![CDATA[Households with children to lose most from tax and benefit changes in coming year]]> As background to the Chancellor's Budget on 21st March, IFS today publishes a summary of recent analysis looking at the likely evolution of household incomes over the next few years and, in particular, how they are likely to be affected by tax and benefit changes that are currently planned for 2012-13.

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http://www.ifs.org.uk/publications/6042 Thu, 08 Mar 2012 00:00:00 +0000
<![CDATA[Borrowing set to undershoot official forecasts, but downside risks limit room for manoeuvre]]> The IFS Green Budget suggests that, even relative to major planned cuts, Whitehall departments will underspend by more than £3 billion this year.

The result of the underspend is that the Government will borrow slightly less in 2011-12 (£2.9 billion) than the latest official forecast. We are also more optimistic about future tax receipts than the OBR, meaning that if the economy broadly evolves as the OBR expects then borrowing could be £9 billion lower in 2016-17 than the official forecast. But significant downside risks to the public finances, combined with long-term pressures from an ageing population, suggest that the Chancellor has little scope for a significant permanent fiscal loosening relative to current plans.

The risks to our central forecast are very much on the downside. Should the Eurozone break up, or the economy do much worse than forecast for other reasons, then future borrowing would be increased and one - or both - of the Chancellor's fiscal targets would be broken.

The case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago. There seems little prospect that it would prompt an offsetting monetary tightening in the present climate. But a small loosening would be likely to deliver only a small boost to the economy, while a big one might risk undermining investor confidence.

We are delighted to have produced this year's Green Budget in collaboration with Oxford Economics. We are also very grateful to the Economic and Social Research Council for supporting this work and for funding much of the day-to-day research at IFS that underpins the analysis in this report.

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http://www.ifs.org.uk/publications/6004 Wed, 01 Feb 2012 00:00:00 +0000
<![CDATA[Latest public pension reforms unlikely to save money over longer term; four-year pay squeeze returns public-private differential to pre-recession level]]>

These are two headline findings from an in-depth analysis of this government's public pensions and pay policies done by IFS researchers in preparation for the launch of the annual IFS Green Budget on Wednesday 1 February.

The pension reforms just negotiated will make little or no difference to the long-term costs of public service pensions. The savings from higher pension ages are, on average, offset by other elements of the pensions becoming more generous. The current pay freeze and additional two years of one per cent increases will leave public pay at roughly the same level relative to private pay as it was in 2008.

A common element to both is the relative protection of lower earners - a group which tends to do better in terms of both pay and pensions in the public sector than in the private sector.

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http://www.ifs.org.uk/publications/5999 Tue, 31 Jan 2012 00:00:00 +0000
<![CDATA[IFS releases first analysis of proposed school funding reforms in England]]>

IFS researchers have provided the first detailed assessment of the Government's ambitious plans to reform school funding in England - the Government itself having failed to quantify the likely effects of the proposals on which it has consulted.

The research shows that, after years of failure to develop and implement rational reform, the current system continues to allocate money in ways which mean that similar schools can receive very different amounts. Inevitably reforms, including those proposed by the Government, would involve significant disruption for schools, creating large numbers of financial winners and losers. Even under a reform that sought to minimise the amount of disruption, roughly one in six schools would see cuts in funding of 10% or more compared with existing policy, while one in ten schools would see their funding increase by 10% or more.

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http://www.ifs.org.uk/publications/5753 Fri, 18 Nov 2011 00:00:00 +0000
<![CDATA[Month of birth matters for children's well-being as well as for test scores]]> Previous research published by the Institute for Fiscal Studies (IFS) has shown that children born at the start of the academic year achieve better exam results, on average, than children born at the end of the academic year. In England, this means that children born in the autumn tend to outperform those born in the summer. New research published today by IFS, and funded by the Nuffield Foundation, shows that month of birth also matters for other characteristics and outcomes of young people growing up in England today.

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http://www.ifs.org.uk/publications/5737 Tue, 01 Nov 2011 00:00:00 +0000
<![CDATA[Public spending on education in the UK to fall at fastest rate since at least 1950s]]> As with most areas of government spending, education spending is set to shrink in real terms over the Spending Review period. In new figures released today, IFS researchers estimate that total public spending on education in the UK will fall by over 13% in real terms between 2010-11 and 2014-15. This represents the largest cut in education spending over any four-year period since at least the 1950s. The cuts will be deepest for capital spending and higher education, followed by 16-19 education and early years provision. Schools spending is relatively protected, and schools with the most deprived intakes are likely to see real-terms increases in funding. However, the majority of schools will see real-terms cuts.

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http://www.ifs.org.uk/publications/5733 Tue, 25 Oct 2011 00:00:00 +0000
<![CDATA[Young cut back their spending most in recent recession]]> New research published today by the IFS throws more light on the nature of the recent recession and its impact on households. It shows that the 2008-09 recession was different from the recessions of the 1980s and 1990s in the scale of the falls in household expenditure, in how long those falls have persisted and in the ways in which households have adjusted their spending.

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http://www.ifs.org.uk/publications/5716 Wed, 19 Oct 2011 00:00:00 +0000
<![CDATA[High September inflation increases welfare spending, but benefit recipients lose from new indexation rules]]> Today the Office for National Statistics published the annual rates of inflation to September. These numbers are particularly important: September inflation figures are used to determine increases in personal tax and benefit parameters and public sector pensions at the beginning of the next financial year.

The fact that inflation rates are above those previously expected by the Office for Budget Responsibility will add roughly £1.8 billion to welfare spending next year.

But the fact that benefits will be increased by inflation measured by the Consumer Prices Index rather than that measured by the Retail Prices Index or the Rossi index, as happened until last year, means that many benefit recipients will be worse off than they would otherwise have been. Over time this change will prove to be the biggest change to welfare system so far implemented by the government.

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http://www.ifs.org.uk/publications/5714 Tue, 18 Oct 2011 00:00:00 +0000
<![CDATA[Universal Credit not enough to prevent a decade of rising poverty]]> A new forecast of income poverty among children and working-age adults in the UK has been published today by the Institute for Fiscal Studies, funded by the Joseph Rowntree Foundation.

The research forecasts poverty for each year between 2010-11 and 2015-16, and for 2020-21. It accounts for all announced tax and benefit policies, including Universal Credit, and incorporates the latest official economic and demographic forecasts. The report uses two of the four measures of poverty defined in the Child Poverty Act (2010).

Key findings from the report are as follows:

  • The period between 2009-10 (the latest household income data available) and 2012-13 is likely to be dominated by a large decline in real incomes across the income distribution. Absolute poverty is forecast to rise by about 600,000 children and 800,000 working-age adults. Median income is expected to fall by around 7% in real terms, which would be the largest three-year fall for 35 years.

  • In the longer term, the planned introduction of Universal Credit will act to reduce both absolute and relative poverty. The long term effect of Universal Credit is to reduce relative poverty by about 450,000 children and 600,000 working-age adults in 2020-21.

  • However, the net direct effect of the coalition government's tax and benefit changes is to increase both absolute and relative poverty. This is because other changes, such as the switch from RPI- to CPI- indexation of means-tested benefits, more than offset the impact on poverty of Universal Credit.

  • Absolute and relative child poverty are forecast to be 23% and 24% in 2020-21 respectively. These compare to the targets of 5% and 10%, set out in the Child Poverty Act (2010) and passed with cross-party support. This would be the highest rate of absolute child poverty since 2001-02 and the highest rate of relative child poverty since 1999-2000. Modelling of scenarios in which employment rises by more than expected or take-up of benefits increases (perhaps as a consequence of Universal Credit strengthening work incentives or being easier to understand for benefit claimants) suggests that such factors cannot be relied upon to make a large difference to poverty rates.

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http://www.ifs.org.uk/publications/5710 Tue, 11 Oct 2011 00:00:00 +0000
<![CDATA[Mirrlees Review of tax system published]]> In the deepest and most far reaching analysis of the UK tax system in more than 30 years, the Mirrlees Review puts the case for radical tax reform. It shows how the current system is inefficient, overly complex and frequently unfair. And it sets out a range of proposals designed to increase output and welfare.

Government, through the tax system, takes around £4 in every £10 earned in the economy. It is not surprising that getting tax design wrong can be hugely costly. Yet the level and quality of debate on tax policy is inadequate; there has rarely been any clear sense of direction from governments; and expensive and damaging mistakes have been all too common.

In the UK poor tax design contributes to an inefficient housing market, distortionary taxation of financial services, excessive reliance on debt finance, employment levels lower than they need be and distorted and inefficient savings and investment decisions. The review sets out a long term strategy for reform, and in doing so speaks to immediate policy priorities.

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http://www.ifs.org.uk/publications/5674 Wed, 14 Sep 2011 00:00:00 +0000
<![CDATA[New study reveals effects of 'Great Recession' across OECD countries]]> The UK recently experienced its worst recession for over sixty years, and large falls in GDP were seen across many other developed countries. As part of a new cross-country study commissioned and supported by the Fondazione Rodolfo Debenedetti, IFS researchers have examined the effects of this recession on UK households. This is one of the first studies to look at the effects of the 'Great Recession' on the distribution of living standards, and to do so in comparative perspective across countries.

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http://www.ifs.org.uk/publications/5671 Mon, 12 Sep 2011 00:00:00 +0000
<![CDATA[School league tables: do they make the grade?]]> School League Tables have been a feature of the English education system since 1992. Whilst many bemoan their existence, the government has made it clear that they are here to stay, in England at least. Statistics on school performance can and should be used to inform school choice and improve accountability and school performance. But they need to be the right statistics presented in a useful, robust and informative way.

A series of papers, published today in a special issue of Fiscal Studies on measuring school effectiveness, highlight some of the key issues that policymakers must consider.

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http://www.ifs.org.uk/publications/5652 Mon, 15 Aug 2011 00:00:00 +0000
<![CDATA[Tough choices to make as welfare, health and care bills rise]]> We often worry about increased spending on health, long term care and social security in the future. We are right to. But we perhaps underestimate the extent to which the shape of the state has already changed to accommodate much greater spending on these areas. Between them they accounted for a third of all spending in 1978-79. They now account for half of spending. Add in education and the "core" welfare state - education along with health, social security and social care accounts for nearly two thirds of spending, up from a half at the end of the 1970s.

This dramatic increase in the share of health and social welfare spending has been made possible by substantial reductions in the proportion of spending going to defence, housing, and support for business and industry.

Going forward, spending on health, pensions and long term care is set to rise fast. Just these elements of spending, excluding all the welfare benefits paid to non-pensioners, will reach half of all public spending over the next 50 years unless there is significant reform or unless total spending is significantly increased.

These are among the findings of new analysis of recent government figures by researchers at the IFS.

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http://www.ifs.org.uk/publications/5651 Wed, 10 Aug 2011 00:00:00 +0000
<![CDATA[Marriage does not improve children's development]]> New research published today by researchers at the Institute for Fiscal Studies, and funded by the Nuffield Foundation, finds little or no evidence that marriage itself has any effect on children's social or cognitive development.

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http://www.ifs.org.uk/publications/5633 Tue, 19 Jul 2011 00:00:00 +0000
<![CDATA[Poor experience higher inflation than rich]]>

New research undertaken by researchers at the Institute for Fiscal Studies and funded by Consumer Focus reveals that:

  • Poorer households have experienced higher inflation on average than richer households over the past decade. This difference has been especially marked since 2008 (during the recession).
  • The poorest fifth of households faced an average annual inflation rate of 4.3% between 2008 and 2010, whilst the richest fifth experienced a rate of just 2.7% a year over the same period.
  • Pensioners, and in particular those dependant on state benefits, experienced higher rates of inflation than non-pensioners.
  • During the period of the recession, dramatic cuts to interest rates reduced mortgage payments, which tend to be more important for richer households. At the same time, the prices of gas, electricity and food increased and this hit poorer households harder on average.

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http://www.ifs.org.uk/publications/5605 Tue, 14 Jun 2011 00:00:00 +0000
<![CDATA[Labelling matters: households spend 40% of Winter Fuel Payment on fuel. But poor pensioners still cut back on food in cold weather]]> Two papers published today by the IFS and funded by the Nuffield Foundation show that: Households receiving the winter fuel payment are almost 14 times as likely to spend the money on fuel than would have been the case had their incomes been increased in other ways; But in very cold weather it remains the case that the poorest pensioners cut back on spending on food to finance the additional cost of heating their homes.

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http://www.ifs.org.uk/publications/5601 Wed, 08 Jun 2011 00:00:00 +0000
<![CDATA[Programme to boost early literacy shows promising results]]> A package of early literacy interventions has been found to improve significantly the reading and writing skills of young children who struggle to learn to read. As currently implemented, the policy is arguably expensive, costing over £3,000 per child in the first year and £2,600 per child thereafter. Even so, it could still offer good value for money, but that judgement will depend on the extent to these improvements are maintained throughout children's school careers.

These are the main findings of new research funded by the Department for Education, and carried out by IFS researchers in collaboration with the National Centre for Social Research. This work assessed the impact of the Every Child a Reader (ECaR) programme of initiatives, which targets low-attaining children aged 6 or 7 and attempts to raise their attainment to the expected level. The core initiative within ECaR is Reading Recovery, which provides children in the greatest difficulty with daily one-to-one tuition for up to 20 weeks.

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http://www.ifs.org.uk/publications/5590 Thu, 26 May 2011 00:00:00 +0000
<![CDATA[Long-term effects of recession on living standards yet to be felt]]> http://www.ifs.org.uk/publications/5583 Fri, 13 May 2011 00:00:00 +0000 <![CDATA[Childhood psychological problems associated with substantial economic losses during adulthood]]> The estimated impacts of childhood psychological health problems on adult economic life are severe and substantially larger than the impacts of a wide range of childhood physical health problems, according to work co-authored by IFS researchers and published this week in the Proceedings of the National Academy of Sciences.

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http://www.ifs.org.uk/publications/5527 Mon, 28 Mar 2011 00:00:00 +0000
<![CDATA[Budget 2011: an initial response]]> The IFS' initial response to Chancellor George Osborne's 2011 Budget statement.

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http://www.ifs.org.uk/publications/5520 Wed, 23 Mar 2011 00:00:00 +0000
<![CDATA[Biggest three year fall in household incomes since early 1990s ]]> Over the long run, the income of the median (middle) UK household has increased by about 1.6% per year on average after taking account of inflation. So over a typical three year period real incomes would rise by about 5%. However, new IFS research published today estimates that in the three years from 2008 to 2011 real household incomes will in fact have fallen by 1.6%, or £360 a year. So households are likely to be about 6% worse off than they might have expected had incomes risen in the normal way.

This research was funded by the BBC and the ESRC Centre for the Microeconomic analysis of Public Policy at the IFS.

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http://www.ifs.org.uk/publications/5516 Mon, 21 Mar 2011 00:00:00 +0000
<![CDATA[Least well-off in society better identified by low spending than low income]]> Those with the lowest reported income are not those with the lowest spending or those living in the most severe forms of deprivation. Thisis one of the main results from research by IFS researchers Mike Brewer and Cormac O'Dea. These findings have important implications for the measurement of poverty because official government poverty measures in the UK are all based on income. Other measures of poverty can complement the standard income measure and give a better impression of which groups in society have the lowest living standards as well as whether poverty is rising or falling.

The relatively high expenditure at the bottom of the income distribution is being caused by two factors. The first is that incomes at the bottom of the distribution are sometimes mismeasured, with some individuals underreporting their income. Second, some individuals reporting low income have incomes that are only temporarily low and are able to use their assets or borrowing to maintain their expenditure at a high level for a short period of time. Ongoing work at the IFS aims to shed some light on the extent to which each of these two factors can explain the finding of relatively high expenditure at the bottom of the income distribution.

This research extends and builds on previous work undertaken at the IFS which has found that, across a wide variety of measures of living standards (including expenditure, housing conditions, assets and material deprivation), the lowest living standards are not found at the bottom of the income distribution. It was presented at a workshop at the Centre for Microdata Methods and Practice (cemmap) on the 11th March 2011 that explored the measurement of well-being and living standards. The workshop was sponsored by the ESRC National Centre for Research Methods (NCRM) and was attended by researchers from both inside and outside government in the UK and internationally.

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http://www.ifs.org.uk/publications/5506 Mon, 14 Mar 2011 00:00:00 +0000
<![CDATA[Inflation high but impact evenly felt]]> Today the Office for National Statistics published its inflation figures for the year to January 2011. We find that although today's figures show that the headline rate of inflation is high, there is relatively little variation in average inflation rates across household types.

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http://www.ifs.org.uk/publications/5487 Tue, 15 Feb 2011 00:00:00 +0000
<![CDATA[Tax rises and spending cuts will hurt, but little room for Budget easing]]> The IFS Green Budget forecast is that the Government will need to borrow slightly less in 2010-11 (£2.9 billion) than the Office for Budget Responsibility (OBR) forecasts. But this is in the context of a deficit which we expect to be at £145.6 billion this year. Having set out his fiscal consolidation plan, it is important that Chancellor George Osborne resist the temptation to engage in any significant net giveaway in the Budget.

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http://www.ifs.org.uk/publications/5461 Wed, 02 Feb 2011 00:00:00 +0000
<![CDATA[Rich to lose most from new measures in April, as 750,000 brought into higher rate tax]]> As the governor of the Bank of England predicts stagnant real earnings for some time to come, households will be hit by a further average £200 a year loss from tax increases and benefit cuts due in April. In addition there will be big changes in marginal tax rates for some. Around 750,000 more people will become higher rate taxpayers as a result of a reduction in the level of income at which the higher rate starts to bite. This reduction accompanies the increase of £1,000 in the tax allowance which itself will take 500,000 other people out of tax altogether.

These are among the findings of new analysis done at the IFS in preparation for the launch of our annual IFS Green Budget on Wednesday February 2.

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http://www.ifs.org.uk/publications/5452 Mon, 31 Jan 2011 00:00:00 +0000
<![CDATA[Universal Credit: much to welcome, but impact on incentives mixed]]> The Universal Credit will dramatically change the welfare system for working-age adults. If successful, it will make the welfare system more effective and coherent. But it will create winners and losers in the process: couples with children will gain from it and, when transitional protection expires, lone parents will lose. This is one of the key findings of a preliminary analysis funded by the ESRC and published today by the IFS.

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http://www.ifs.org.uk/publications/5414 Wed, 12 Jan 2011 00:00:00 +0000
<![CDATA[Child and working-age poverty set to rise in next three years]]> Between 2010-11 and 2013-14 average incomes are forecast to stagnate and both absolute and relative poverty among children and working-age adults are expected to rise, according to projections funded by the Joseph Rowntree Foundation and published today by the IFS.

The IFS researchers forecast absolute and relative income poverty amongst children and working-age adults for each year to 2013-14, using a static tax and benefit micro-simulation model combined with official macroeconomic and demographic forecasts, taking into account current government policy. They also forecast poverty under a scenario where the coalition Government simply implemented the plans for the tax and benefit system it inherited from the previous administration. Poverty beyond 2013-14 is likely to be affected by the Universal Credit, and future work will forecast poverty to the end of this Parliament when the Government publishes its Welfare Reform Bill.

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http://www.ifs.org.uk/publications/5372 Thu, 16 Dec 2010 00:00:00 +0000
<![CDATA[Northern Ireland to be hit more than average by tax and benefit changes]]> A series of changes to the tax and benefit system, announced both by the last government and the current one, is being implemented across the UK between January 2011 and April 2014. Some of these changes involve increases in tax payments, particularly affecting those on higher incomes. Some will reduce benefit entitlements. Their impact on the regions of the UK will depend on the incomes of the regions' residents and the degree of their dependence on benefits.

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http://www.ifs.org.uk/publications/5368 Fri, 10 Dec 2010 00:00:00 +0000
<![CDATA[IFS Appoints New Director]]> The Institute for Fiscal Studies has announced that Paul Johnson is to be its new Director. He will take over at the beginning of January following the departure of Robert Chote to chair the Office for Budget Responsibility.

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http://www.ifs.org.uk/publications/5365 Fri, 03 Dec 2010 00:00:00 +0000
<![CDATA[An initial reaction to the OBR's first economic and fiscal outlook]]> An initial reaction to the OBR's first economic and fiscal outlook.

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http://www.ifs.org.uk/publications/5359 Mon, 29 Nov 2010 00:00:00 +0000
<![CDATA[Mirrlees Review of tax system recommends radical changes ]]> Britain's tax system is ripe for reform in ways that could significantly increase people's welfare and improve the performance of the economy, according to a landmark review chaired by the Nobel laureate Sir James Mirrlees for the Institute for Fiscal Studies.

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http://www.ifs.org.uk/publications/5346 Wed, 10 Nov 2010 00:00:00 +0000
<![CDATA[Proposed pupil premium could increase school funding inequalities]]> This morning, Deputy Prime Minister Nick Clegg confirmed that the Government will introduce a 'pupil premium' in England. This will provide extra money to state schools for each pupil from a disadvantaged background.

The Department for Education is currently consulting on the design of this pupil premium, and today IFS researchers publish their response to the consultation. Its two key conclusions are that:

  • Overall, it would be broadly 'progressive' in the sense that the average percentage increase in funding would be greater for schools that are more deprived;
  • But schools in more deprived areas would, under the proposed model, receive a smaller pupil premium than similarly-deprived schools in more affluent areas.

Luke Sibieta, a co-author of the report and a senior research economist at IFS, said:

"The pupil premium proposed by the Government would be broadly progressive since more deprived schools have many more pupils who would attract additional funding. That the pupil premium should be higher in less deprived areas is hard to justify: it would widen inequalities in funding for deprived pupils, rather than reduce them. Attaching the same pupil premium to all disadvantaged pupils regardless of where they live would not only be simpler, it would also be more consistent with the Government's stated objectives."

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http://www.ifs.org.uk/publications/5305 Fri, 15 Oct 2010 00:00:00 +0000
<![CDATA[Graduates and universities share burden of Browne recommendations]]> Under proposals released today by the Browne Review of higher education funding and student finance, graduates would expect to pay on average at least £5,300 more for their degree, according to analysis by IFS researchers. However, the lowest-earning graduates would be protected from the burden of increased debt and would actually pay less than under the current system.

Despite the proposed increase in tuition fees to £6,000 or above, universities would not be likely to see any benefit: they would need to charge fees of £7,000 or more in order to recoup their losses from proposed cuts in public funding. The real winner of the proposed reforms is the Exchequer, which would save up to £6,000 on the cost of a degree for each student.

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http://www.ifs.org.uk/publications/5302 Tue, 12 Oct 2010 00:00:00 +0000
<![CDATA[Minimum alcohol price of 45p per unit could transfer £700 million from drinkers to firms]]> A grouping of opposition Members of the Scottish Parliament recently removed plans for a minimum price of 45p per unit of alcohol from the Alcohol Bill currently in front of the Scottish Parliament, though the SNP minority Government is still in favour of the measure. IFS researchers estimate that if a policy like this were rolled out across Britain it could transfer £700 million from alcohol consumers to retailers and manufacturers. This contrasts to increases in alcohol taxes, which largely result in transfers to government in the form of much needed tax revenue. In the long-term, it would be desirable to restructure alcohol taxes so that they were based on alcohol strength, thus allowing the tax system to mimic the impact of a minimum price but ensuring the additional revenues went to the Government rather than firms.

These are among the findings of new research published today by the Institute for Fiscal Studies, funded by the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS. Using data on off-license alcohol purchases of a large number of households in 2007, the authors estimate the impact of a 45p per unit minimum alcohol price introduced across Great Britain.

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http://www.ifs.org.uk/publications/5286 Tue, 28 Sep 2010 00:00:00 +0000
<![CDATA[New IFS research challenges Chancellor's 'progressive Budget' claim]]> The Chancellor claimed in his Budget speech that the June 2010 Budget was a 'progressive Budget', backed up by distributional analysis in the Budget documentation that showed that tax and benefit changes due to come into effect between now and 2012-13 will hit the richest more than the poorest. IFS researchers have previously cast doubt on this claim, noting that the main measures which will lead to losses amongst better-off households were announced by the previous government, and that the reforms to be in place by 2014-15 are generally regressive. The distributional analysis in the Budget documents also excluded the effects of some cuts to housing benefit, Disability Living Allowance and tax credits that will tend to hit the bottom half of the income distribution more than the top half.

IFS research published today makes use of analysis published by the Department for Work and Pensions since the Budget, and attempts to reflect the impact of all the benefit cuts announced in the Budget. It shows that, once all of the benefit cuts are considered, the tax and benefit changes announced in the emergency Budget are clearly regressive as, on average, they hit the poorest households more than those in the upper-middle of the income distribution in cash, let alone percentage, terms.

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http://www.ifs.org.uk/publications/5245 Wed, 25 Aug 2010 00:00:00 +0000
<![CDATA[Little saving done by families in the run up to the financial crisis ]]> Most families accumulated very little liquid wealth between 2000 and 2005. Median liquid financial wealth among families increased from approximately £750 to approximately £1,100 in real terms between those two years. Younger families and those on the lowest incomes had particularly low median rates of saving over this period.

These are amongst the findings of new research published today by the Institute for Fiscal Studies and funded by the IFS Retirement Saving Consortium. Using data from the British Household Panel Survey, the report's authors estimate two measures of wealth: liquid financial wealth (which excludes pension and housing wealth) and housing wealth in both 2000 and 2005. Looking at changes in these wealth holdings between the two years gives an indication of the saving carried out by families.

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http://www.ifs.org.uk/publications/5199 Thu, 15 Jul 2010 00:00:00 +0000
<![CDATA[The effect of asset price falls on household wealth]]>

New analysis by IFS researchers, commissioned by the Department for Work and Pensions, uses data from the Wealth and Assets Survey (2006/08) to examine wealth holdings among households in Britain just before the financial crisis hit in 2008, and considers what this might mean for the future retirement resources of current workers and how it might have been affected by the large asset price changes during 2008 and 2009.

Considerable variation in the amount of wealth that households hold and how they hold it means that some will have been more exposed to falling asset prices during 2008 and 2009 than others. We estimate that the best off will have lost most - households headed by someone aged 55-74 with a degree level qualification will, we estimate, have lost on average about £25,000 as a result of asset price falls between 2007 and autumn 2009. Less well off households will have lost less in absolute terms, both because they held less wealth initially and because they held it in safer assets. Households headed by someone aged under 35 with no qualifications will, we estimate, have lost less than £2,000 on average. Across all households headed by someone with below degree level qualifications, the asset price falls will, we estimate, have knocked on average 5% to 6% off gross wealth.

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http://www.ifs.org.uk/publications/5201 Thu, 15 Jul 2010 00:00:00 +0000
<![CDATA[Marriage does not make relationships between parents more stable]]> Marriage per se does not contribute much to making relationships more stable when children are young, according to new research from the Institute for Fiscal Studies (IFS) and funded by the Nuffield Foundation. This casts doubt on the government's aim of promoting marriage in order to decrease the rate of parental separation.

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http://www.ifs.org.uk/publications/5183 Wed, 07 Jul 2010 00:00:00 +0000
<![CDATA[Tax policy making in the UK]]> The TLRC today publishes a discussion paper considering tax policy making in the UK.

Five years have passed since the reorganisation of UK tax policy making. Since the O'Donnell reforms of 2004 lead responsibility and accountability have rested with HM Treasury and HMRC have been responsible for policy maintenance. The TLRC paper considers that this organisation of tax policy making has not worked as well as it should to produce clear and effective tax policies. The TLRC paper argues that if the new Government is to take steps aimed at improving the system of making UK tax law and simplifying the UK tax system, it should also address the organisation and functioning of tax policy making.

The paper considers how this might be done, either improving the operation of tax policy making within HM Treasury and HMRC, or by using a separate body for this purpose. If an Office of Tax Simplification ("OTS") is to be set up it may be appropriate to look at how the OTS could contribute to policy making. If the OTS were to have a role in dealing with perceived problems in the current tax policy making process, however, it would need to be more than an advisory body.

The discussion paper is published in order to encourage debate on these issues and to inform the TLRC's further work in this area.

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http://www.ifs.org.uk/publications/5170 Mon, 21 Jun 2010 00:00:00 +0000
<![CDATA[OBR sets the scene for a painful Budget]]> The newly created independent Office for Budget Responsibility (OBR) has published its first set of official forecasts for the economy and the public finances. It argues that the economy's growth prospects are weaker than the last government claimed, and that bigger spending cuts and tax increases will be required over the coming years than Labour's final Budget suggested.Here are some initial thoughts from Robert Chote, Rowena Crawford, Carl Emmerson and Gemma Tetlow on some of the issues raised by the report.

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http://www.ifs.org.uk/publications/5034 Mon, 14 Jun 2010 00:00:00 +0000
<![CDATA[Poverty falls most under Labour in Scotland and the North East, but rises in the Midlands]]> Changes in poverty under the previous Labour government were uneven, with relative poverty falling most in the North East and Scotland, but rising in the East and West Midlands. Once one takes account of price differences across the regions and nations of the UK, Scotland currently has the lowest poverty rate, and London the highest.

These are amongst the findings of a report by IFS researchers published today, Poverty and Inequality in the UK 2010, funded by the Joseph Rowntree Foundation. The IFS research is based on the government's Households Below Average Income data, an analysis of which was published yesterday by the Department for Work and Pensions.

Today's report by IFS researchers provides a more detailed analysis of trends in living standards, poverty and inequality, including the differences between regions and nations of the UK, and an assessment of the impact of the start of the recession on living standards, poverty and inequality. Analysis of regional living standards and poverty levels are all based on three years of data combined, the latest period covering 2006-07 to 2008-09, and these poverty rates are calculated using incomes measured before housing costs (BHC). Poverty lines for some typical family types can be found at the end of this press release.

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http://www.ifs.org.uk/publications/4878 Fri, 21 May 2010 00:00:00 +0000
<![CDATA[Average incomes up and poverty down slightly during first year of recession]]> Average take-home incomes grew even after taking account of inflation and in spite of rising unemployment during 2008-09, the first full financial year of the recent recession. This is the surprising finding of official statistics released today.

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http://www.ifs.org.uk/publications/4876 Thu, 20 May 2010 00:00:00 +0000
<![CDATA[Some initial reaction to the Tory / Lib Dem coalition agreement]]> In this press release we provide an initial analysis of the information in the new coalition government's agreement on their plans to tackle the public finances and on their planned tax and benefit reforms.

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http://www.ifs.org.uk/publications/4864 Wed, 12 May 2010 00:00:00 +0000
<![CDATA[Couple 'penalties' in tax and benefit system are widespread, but almost impossible to eliminate]]> The majority of people in the UK would receive more financial support from the state if they were single (or told the authorities they were single) than if they were married or part of a cohabiting couple, according to new research, Couple Penalties and Premiums in the UK Tax and Benefit System, published today from the Institute for Fiscal Studies and funded by the Nuffield Foundation.

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http://www.ifs.org.uk/publications/4857 Thu, 29 Apr 2010 00:00:00 +0000
<![CDATA[Future arrangements for funding higher education]]> The system of higher education finance in England is currently under formal independent review. The review, chaired by Lord Browne, will be taking evidence up to May 2010.

In "Future arrangements for funding higher education", IFS researchers, funded by the Nuffield Foundation, highlight some of the trade-offs that would be involved in reforming the current system of fees and loans applying to full-time undergraduate study.

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http://www.ifs.org.uk/publications/4836 Thu, 22 Apr 2010 00:00:00 +0000
<![CDATA[Encouraging parents to marry unlikely to lead to significant improvements in young children's outcomes]]> Young children's cognitive or social and emotional development does not appear to be significantly affected by the formal marital status of their parents, according to a new report from IFS researchers.

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http://www.ifs.org.uk/publications/4824 Mon, 19 Apr 2010 00:00:00 +0000
<![CDATA[Conservatives to recognise one third of marriages in the tax system]]> The Conservative Party has announced how it intends to recognise marriage and civil partnerships in the tax system if it forms the next government. It plans to make up to £750 of the income tax personal allowance transferable between adults who are married or in a civil partnership, so long as the higher-income member of the couple is a basic-rate taxpayer.

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http://www.ifs.org.uk/publications/4811 Fri, 09 Apr 2010 00:00:00 +0000
<![CDATA[Labour's tax and benefit increases prevent rapid rise in income inequality ]]> The tax and benefit measures implemented by Labour since 1997 have increased the incomes of poorer households and reduced those of richer ones, largely halting the rapid rise in income inequality we saw under the Conservatives. Despite this, inequality was still slightly higher in 2007-08 than when Labour came to office, according to the first set of Election Briefing Notes to be released by the IFS to help inform public debate during the general election campaign.

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http://www.ifs.org.uk/publications/4806 Wed, 07 Apr 2010 00:00:00 +0000
<![CDATA[Pensions boost public sector pay growth unlike private sector experience]]>

Public sector pay grew more rapidly than private sector pay between 2001 and 2005, but the gap was even larger if we take into account the rising value pension accrual among public sector workers and the falling value among private sector workers, according to new research published today by the Institute for Fiscal Studies (IFS) and funded by the IFS Retirement Savings Consortium.

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http://www.ifs.org.uk/publications/4805 Thu, 01 Apr 2010 00:00:00 +0000
<![CDATA[Conservatives plan to cut public spending to cut National Insurance]]> The Conservative Party plans to cut central government spending on public services outside the NHS, defence and overseas aid by £6 billion in the coming financial year in order to finance a cut in National Insurance that would offset most of the impending increase that the Government has already announced.

Please note: The new (employees') Primary Threshold has been corrected (it had incorrectly stated around £8,200 in the previous version rather than £8,400). The underlying analysis of the proposed NI reforms used the correct level of the Primary Threshold, and is therefore unaffected.

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http://www.ifs.org.uk/publications/4802 Mon, 29 Mar 2010 00:00:00 +0000
<![CDATA[The pupil premium: more cash for poor pupils, but is it worth the cost?]]> Both the Conservatives and the Liberal Democrats have proposed introducing a 'pupil premium' in England, with the aim of narrowing the educational achievement gap between rich and poor pupils by attaching greater school funding to those from disadvantaged backgrounds.

In "The pupil premium: assessing the options", IFS researchers assess the rationale for a pupil premium and offer an empirical analysis of how such a scheme might operate in practice and affect school finances.

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http://www.ifs.org.uk/publications/4775 Tue, 02 Mar 2010 00:00:00 +0000
<![CDATA[A response to the Treasury consultation on restricting pensions tax relief]]> In response to the Treasury's consultation on the forthcoming restriction of income tax relief on pension contributions Carl Emmerson, IFS deputy director, said: "Implementing this reform will create complexity, unfairness and inefficiencies. The Government's goal is to raise money by reducing the subsidy that the wealthy enjoy on their pension contributions. But many people on high incomes will still be able to receive unrestricted income tax relief on their pension contributions - for example by making greater use of salary sacrifice arrangements. A better approach would be to reduce the amount that individuals can take tax-free from a private pension from its current level of £437,500."

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http://www.ifs.org.uk/publications/4773 Mon, 01 Mar 2010 00:00:00 +0000
<![CDATA[More ambition needed to repair public finances, but don't squeeze too soon]]> Whoever forms the Government after the forthcoming general election should put in place a fiscal tightening more ambitious over the next Parliament than that set out in the Pre-Budget Report (PBR), but without putting the recovery at undue risk with significant extra tax increases or public spending cuts in the coming year, researchers from the Institute for Fiscal Studies argue in this year's IFS Green Budget.

We are delighted to have produced this year's Green Budget in collaboration with Barclays Capital and Barclays Wealth. We are very grateful to them for their support and for the chapters they have contributed. We are also grateful to the Economic and Social Research Council for supporting much of the day-to-day research at IFS that underpins the analysis in this volume.

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http://www.ifs.org.uk/publications/4733 Wed, 03 Feb 2010 00:00:00 +0000
<![CDATA[Reforms to tuition fees and student support had no overall impact on the number of 18 or 19 year olds attending university in England]]> IFS research, due to be presented today at the first public hearing of the Independent Review of Higher Education Funding and Student Finance, shows that reforms reduced the total costs over a lifetime of attending university for young people from low and middle income backgrounds, and increased them for young people from higher income backgrounds.

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http://www.ifs.org.uk/publications/4726 Thu, 28 Jan 2010 00:00:00 +0000
<![CDATA[Parents' work entry, progression and retention, and child poverty]]> Recent policy has focused on facilitating employment for parents as a means of lifting families with children out of poverty.

New research published today by the Department for Work and Pensions and written by IFS researchers James Browne and Gillian Paull shows that a parent moving into work allows a large proportion of poor families (65 percent) initially to escape poverty. But a substantial fraction of families with children remain in poverty or fall into poverty during the three years following work entry, suggesting considerable scope for improvements in work progression and training to help lift and keep these families with working parents out of poverty.

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http://www.ifs.org.uk/publications/4721 Thu, 21 Jan 2010 00:00:00 +0000
<![CDATA[Some initial reactions to the 2009 Pre-Budget Report]]> No Chancellor would wish to publish a forecast showing that the government will need to borrow £178 billion this year. But when you consider that the economy has shrunk more in recent months than he hoped at Budget time, an increase in the forecast deficit of just £3 billion since then actually looks like good news.

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http://www.ifs.org.uk/publications/4690 Wed, 09 Dec 2009 00:00:00 +0000
<![CDATA[The pension advantage of public sector workers]]> Defined benefit pensions in the public sector are worth more as a share of the total remuneration package than they are in the private sector.

Research by Professor Richard Disney, Carl Emmerson and Gemma Tetlow, published in the latest Economic Journal, reveals the key drivers of this public sector pension advantage: longer job tenures; the option of claiming pensions earlier; and lifetime earnings profiles that peak in workers' late 50s rather than their late 40s.

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http://www.ifs.org.uk/publications/4669 Wed, 02 Dec 2009 00:00:00 +0000
<![CDATA[Keeping official fiscal forecasts honest]]> Creating a new independent body to forecast the public finances could help keep the interest rates at which the government is able to borrow low, Robert Chote, the Director of the Institute for Fiscal Studies, will argue in the Scottish Economic Society / Royal Bank of Scotland Annual Lecture in Edinburgh this evening. But such a body would need to be willing and able to resist political pressure at a time when fiscal policy is likely to be unusually controversial and fiscal forecasting unusually difficult.

There are a number of ways in which the fiscal forecasting process could be made more independent. The Conservatives have proposed an Office of Budget Responsibility (OBR) and the Government is likely to move at least some way in this direction in its promised Fiscal Responsibility Act. The most likely model for the OBR may be the creation of a new independent body to forecast the public finances in parallel with the Treasury. A cheaper, but perhaps less convincing, option would to make civil servants rather than the Chancellor responsible for Treasury forecasts, as in New Zealand.

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http://www.ifs.org.uk/publications/4658 Thu, 12 Nov 2009 00:00:00 +0000
<![CDATA[Green Budget 2010]]> The Institute for Fiscal Studies is pleased to announce that its 2010 Green Budget will be produced for the first time in collaboration with Barclays Capital and Barclays Wealth. It will be launched at the British Museum on 3rd February 2010.

The Green Budget will focus on the policy challenges confronting the Chancellor of the Exchequer in what is likely to be the last Budget before the General Election. IFS researchers will examine the outlook for the public finances and possible decisions on tax and spending. Barclays analysts will look at the outlook for the macro-economy, and the implications for markets.

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http://www.ifs.org.uk/publications/4657 Tue, 10 Nov 2009 00:00:00 +0000
<![CDATA[Loosening public services squeeze requires tax rises or welfare cuts]]> Internal Treasury projections leaked to the Conservatives imply that the rise in Whitehall spending on public services as a share of national income that we have seen under Labour to date may need to be completely reversed to fill the hole in the public finances - unless we see further tax increases or cuts in welfare payments - according to a new analysis by IFS researchers.

What would you do? Our DIY Spending Review tool allows you to set your own plans for total spending and decide how you would slice the cake.

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http://www.ifs.org.uk/publications/4619 Thu, 17 Sep 2009 00:00:00 +0000
<![CDATA[The expenditure experience of older households]]> Higher energy prices between 2004 and 2007 coincided with substantially higher fuel spending and lower fuel consumption for older households, according to research published today by the Institute for Fiscal Studies (IFS) and funded by Age Concern and Help the Aged.

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http://www.ifs.org.uk/publications/4601 Fri, 28 Aug 2009 00:00:00 +0000
<![CDATA[Protecting NHS spending from 2011 likely to require large cuts to other department budgets or tax rises ]]> Spending commitments made by the Labour and Conservative Parties to not cut NHS spending in real terms from 2011 onwards would inevitably result in hard decisions such as cuts to other departments' budgets or further tax raising measures over the period to 2017, according to a major new analysis published today by The King's Fund and Institute for Fiscal Studies (IFS).

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http://www.ifs.org.uk/publications/4568 Mon, 20 Jul 2009 00:00:00 +0000
<![CDATA[Reforms to boost pension coverage, but many accounts may have small amounts]]> The government recently legislated radical private pension reforms that will lead to the majority of employees being enrolled automatically by their employer into a private pension and in some cases into a new 'Personal Account'. The shift to automatic enrolment and increased requirements on employers to make contributions, should both boost pension coverage. A report published today by IFS researchers presents new evidence on individuals at which the Government's reforms are targeted.

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http://www.ifs.org.uk/publications/4539 Mon, 15 Jun 2009 00:00:00 +0000
<![CDATA[Recession hitting low-skilled younger workers hardest]]>  Predictions that this would be a predominantly 'middle class' or 'white collar' recession, because of the plight of the financial sector, have not yet been borne out in reality, according to a new study by IFS researchers. Low-skilled, low-educated and young workers are seeing a bigger deterioration in their job prospects than skilled and educated ones, just as in previous recessions.

Using a variety of data sources, the IFS report examines how previous recessions have hit different groups in society, and traces the path of living standards, poverty and inequality during previous economic downturns. The authors then use the latest available data regarding the current recession to highlight particular areas for concern over the coming months.

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http://www.ifs.org.uk/publications/4526 Fri, 08 May 2009 00:00:00 +0000
<![CDATA[Income inequality hit record high before the recession started]]> Poverty and inequality both increased for a third successive year in 2007-08, with the incomes of poorer households falling in real terms since the last election while those of richer households increased, according to official statistics released today.

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http://www.ifs.org.uk/publications/4522 Thu, 07 May 2009 00:00:00 +0000
<![CDATA[Some initial reactions to Budget 2009]]> Some initial reactions to the Chancellor's 2009 Budget.

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http://www.ifs.org.uk/publications/4507 Wed, 22 Apr 2009 00:00:00 +0000
<![CDATA[Will income tax changes for the very rich raise any money?]]>

The Government's plans to raise income tax rates for people on incomes above £150,000 are very unlikely to raise the revenue that it has predicted, and indeed more likely to reduce revenue overall than increase it, without additional steps to tackle tax avoidance or to discourage people from reducing their taxable income by other means, according to a study by IFS researchers published today.

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http://www.ifs.org.uk/publications/4485 Mon, 20 Apr 2009 00:00:00 +0000
<![CDATA[Fiscal Studies symposium on the economics of VAT cuts]]> As the imminent 2009 Budget presents an opportunity to revisit fiscal policy options during the recession, the new issue of Fiscal Studies contains a timely symposium on the economics of the likely effects of the temporary VAT cut that is in place until the end of 2009.

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http://www.ifs.org.uk/publications/4483 Fri, 17 Apr 2009 00:00:00 +0000
<![CDATA[Countering tax avoidance in the UK: which way forward]]> Government efforts to tackle tax avoidance too often address the symptoms of that avoidance rather than its root causes, a discussion paper written for the Tax Law Review Committee of the Institute for Fiscal Studies argues today.

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http://www.ifs.org.uk/publications/4460 Wed, 11 Mar 2009 00:00:00 +0000
<![CDATA[Average inflation falls, but remains high for some]]> Older and poorer households are facing much higher average inflation rates than younger and richer ones, as the former have tended to suffer most from continued high annual inflation in food and domestic energy costs, while the latter have tended to benefit most from cuts in mortgage rates and falling motor fuel bills, according to a new analysis of official data that is being launched as part of the ESRC Festival of Social Science today.

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http://www.ifs.org.uk/publications/4454 Mon, 09 Mar 2009 00:00:00 +0000
<![CDATA[Darling, Osborne and Cable welcome ESRC decision to renew IFS funding]]> The Institute for Fiscal Studies (IFS) has secured fresh core funding from the Economic and Social Research Council (ESRC) that will be worth almost £6.8 million over the five years from October 2010. This follows a lengthy open competition in which our research proposals and plans to engage with the users of our work were scrutinised by leading academics and other experts.

The ESRC's decision has been welcomed by the leading economic decision-makers from all the main UK political parties. Alistair Darling, the Chancellor of the Exchequer, said that the IFS had developed "a tremendous reputation for independent and impartial advice". George Osborne, the Conservative Shadow Chancellor, said that the IFS "treats all political parties fairly and says what it thinks". And Vince Cable, the Liberal Democrat Shadow Chancellor, said the IFS had set "the quality standard for serious work on public finance".

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http://www.ifs.org.uk/publications/4444 Thu, 26 Feb 2009 00:00:00 +0000
<![CDATA[Cost of cutting child poverty rises as families fall further below poverty line ]]> The Government would need to spend £4.2 billion extra on tax credits for low-income families to be on track to hit its short-term child poverty target for 2010-11, according to research funded by the Joseph Rowntree Foundation and carried out at the Institute for Fiscal Studies and the Institute for Social and Economic Research at Essex University. Without this spending, child poverty in 2010-11 is forecast to be 600,000 above the target.

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http://www.ifs.org.uk/publications/4433 Wed, 18 Feb 2009 00:00:00 +0000
<![CDATA[More tax increases or spending cuts needed to pay for cost of credit crunch]]> The Government - or its successor - will need fresh tax increases or spending cuts worth an extra £20 billion a year by the end of the next Parliament, if it is to expect to repair the public finances as planned in November's Pre-Budget Report, according to the 2009 IFS Green Budget. Even if it acts, public sector debt may well not return to pre-crisis levels for more than 20 years.

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http://www.ifs.org.uk/publications/4419 Wed, 28 Jan 2009 00:00:00 +0000
<![CDATA[Proportion of families receiving the majority of their income from the state declines under Labour]]> The proportion of families reliant on the state for the majority of their disposable income has fallen under Labour, having risen under the previous Conservative government.

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http://www.ifs.org.uk/publications/4403 Fri, 19 Dec 2008 00:00:00 +0000
<![CDATA[Poorest households face highest average inflation rates]]> Recent increases in the prices of food and fuel have led to higher inflation rates among older and poorer households than among younger and richer ones. Households in the poorest 10% of the population had an average inflation rate of 7.9% in September compared to rate of 5.1% for those in the richest 10%. The average across all households was 6.7%.

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http://www.ifs.org.uk/publications/4330 Tue, 14 Oct 2008 00:00:00 +0000
<![CDATA[Oldest, poorest pensioners hit hardest by recent increases in inflation]]> Recent high inflation has affected pensioner households more severely than non-pensioners. The oldest, poorest pensioner households now have an average inflation rate of 9% compared to 5.4% for non-pensioners, according to new research published by IFS.

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http://www.ifs.org.uk/publications/4329 Thu, 09 Oct 2008 00:00:00 +0000
<![CDATA[Simplify VAT to cut costs, raise revenue and help the poor, says study prepared for the Mirrlees Review]]>

Abolishing zero and reduced rates of VAT would cut compliance and administration costs for business and government, interfere less with people's spending decisions, and raise enough revenue both to improve the living standards of poorer families and to cut other taxes by £11 billion, according to a study commissioned by the Mirrlees Review of the UK tax system, which is being chaired by Nobel prize-winner Professor Sir James Mirrlees for the Institute for Fiscal Studies.

Erratum: the effect of the illustrative proposal on the RPI was originally given as 0.35%; it should have been 3.5%. This has now been corrected.

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http://www.ifs.org.uk/publications/4300 Thu, 31 Jul 2008 00:00:00 +0000
<![CDATA[Longitudinal study of ageing shows extended working lives and health and wealth relationship]]> The poorest older people are more than twice as likely to die at any given age than the richest. This is one of the findings from the third wave of the English Longitudinal Study of Ageing (ELSA), which also shows that employment rates for people in their fifties and sixties have been rising in recent years.

The data, which are published on 16th July in the report 'Living in the 21st century: older people in England', make up the third set of results to be released from the most comprehensive study into the economic, social, psychological and health elements of the ageing process in Europe.

The multidisciplinary study follows the life experiences of a cohort of people born before 1952 through detailed interviews on many aspects of their life at two-year intervals 9771 people were interviewed in 2006-07. Aspects considered include: health, work, spending, receipt of healthcare, social participation and cognitive ability. In particular, the report examines an important aspect of diversity: how each of these areas varies according to an individual's level of wealth.

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http://www.ifs.org.uk/publications/4295 Wed, 16 Jul 2008 00:00:00 +0000
<![CDATA[Summer birth penalty persists into Higher Education]]> Children born later in the school year are significantly less likely to go to university at age 18 or 19 than children born earlier in the school year, according to new findings from the IFS. This suggests that summer-born children may face potentially damaging long-term labour market consequences.

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http://www.ifs.org.uk/publications/4292 Mon, 14 Jul 2008 00:00:00 +0000
<![CDATA[Don't expect much extra revenue from green taxes, says study prepared for the Mirrlees Review ]]> The UK's green taxes should be reformed to achieve their environmental objectives more effectively, but policymakers should be wary of calls for a big increase in green taxes to finance a significant shift away from the use of other taxes. So argues a study commissioned by the Mirrlees Review of the UK tax system, which is being chaired by Nobel prize-winner Professor Sir James Mirrlees for the Institute for Fiscal Studies.

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http://www.ifs.org.uk/publications/4290 Thu, 10 Jul 2008 00:00:00 +0000
<![CDATA[Allow social landlords to buy unsellable houses, says Cable ]]> Councils and other registered social landlords should be encouraged to engage in large scale acquisition of houses that cannot be sold in the current depressed housing market, in order to provide homes for the homeless or for those who cannot afford to buy or rent in the private sector, according to Liberal Democrat Treasury spokesman Vincent Cable.

In the IFS Annual Lecture, at the City Headquarters of Bloomberg this evening, Mr Cable argued that in addition to addressing social need, such a scheme would provide a cash-flow injection to the troubled house-building sector and would help banks cope with the credit crunch.

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http://www.ifs.org.uk/publications/4285 Tue, 08 Jul 2008 00:00:00 +0000
<![CDATA[London and West Midlands suffer highest rates of poverty in the UK]]> London and the West Midlands displace North-East England and Northern Ireland as the regions of the UK with the highest rates of poverty when we take account of differences in the cost of living around the country, according to Poverty and Inequality in the UK 2008, the annual analysis by IFS researchers of yesterday's Households Below Average Incomes data from the Department for Work and Pensions.

The annual Households Below Average Income report from the Department for Work and Pensions describes the pattern of household incomes after deducting direct taxes and adding tax credit and benefit payments, and adjusted for family size. It compares incomes both before housing costs (BHC) and after housing costs (AHC). A separate press release from the IFS dated 10 June 2008 detailed the main developments in the latest year, including low income growth and rises in poverty and inequality.

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http://www.ifs.org.uk/publications/4257 Wed, 11 Jun 2008 00:00:00 +0000
<![CDATA[Poverty and inequality rise again as benefit payments lag inflation and incomes grow fastest for the rich]]> Poverty and inequality both increased for a second successive year during 2006-07, as benefit and tax credit increases failed to keep pace with rising inflation, and as the richest households enjoyed the biggest increases in income, according to official statistics released today.

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http://www.ifs.org.uk/publications/4253 Tue, 10 Jun 2008 00:00:00 +0000
<![CDATA[Local authorities divert school funding for disadvantaged pupils]]> Local authorities in England allocate only around half the extra resources that Whitehall pays them to educate children from disadvantaged backgrounds to the schools that those children actually attend, choosing to spread the extra resources over all pupils in their area instead, according to a new study by researchers at the Institute for Fiscal Studies funded by CfBT Education Trust.

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http://www.ifs.org.uk/publications/4251 Tue, 10 Jun 2008 00:00:00 +0000
<![CDATA[Globalisation demands reform of UK corporation tax, say studies prepared for the Mirrlees Review]]> Corporation tax should be reformed or replaced by a higher VAT rate offset by lower National Insurance contributions) to reduce disincentives to invest in the UK, according to two studies commissioned by the Mirrlees Review of the British tax system, which is being chaired by Nobel prize-winner Professor Sir James Mirrlees for the Institute for Fiscal Studies. The studies both argue that globalisation and the growth of the financial sector require a new approach to the taxation of profits in a small open economy.

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http://www.ifs.org.uk/publications/4246 Thu, 05 Jun 2008 00:00:00 +0000
<![CDATA[18 million families set to lose if 'one-off' giveaways not extended]]> Eighteen million families will be worse off by an average of more than £150 a year from tax and benefit changes over the next two years, unless the Government finds the money to extend last week's 'one-off' income tax cut and to continue topping up the winter fuel allowance, according to analysis by IFS researchers.

The increase in the personal income tax allowance announced on May 13 means that (using Treasury costings) the Government is now giving away £5.5 billion this year through the various income tax, National Insurance, tax credit and benefit changes announced in Budget 2007 and subsequently - the largest such package since the general election year of 2001-02. Of this, around £2.6 billion is being financed through increases in other taxes (including green taxes, capital gains tax, business rates on empty properties and anti-avoidance measures) and around £2.9 billion by increased borrowing. The May 13 'mini-Budget' was a bigger giveaway - if maintained - than in any Budget or Pre-Budget Report since 2001, when the outlook for the public finances appeared much stronger.

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http://www.ifs.org.uk/publications/4223 Wed, 21 May 2008 00:00:00 +0000
<![CDATA[Reform tax credits to boost weak work incentives, says study prepared for the Mirrlees Review]]> Britain's tax credit and benefit system should be overhauled to strengthen work incentives for people on low incomes, to increase simplicity and certainty for families, and to reduce fraud and administration costs for the taxpayer, according to a study commissioned by the Mirrlees Review of the British tax system, which is being chaired by Nobel prize-winner Professor Sir James Mirrlees for the Institute for Fiscal Studies.

* Mirrlees Review documentation

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http://www.ifs.org.uk/publications/4188 Mon, 21 Apr 2008 00:00:00 +0000
<![CDATA[Taxes and the location of corporate headquarters]]> The decision by Shire plc this week to relocate its holding company to Ireland for tax reasons has reignited concerns that UK corporation tax deters companies from locating here.

Two papers on this issue, commissioned by the European Tax Policy Forum from researchers at the Centre for Business Taxation at Oxford University, will be published at a conference of the European Tax Policy Forum and the Institute for Fiscal Studies on Monday 21 April.

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http://www.ifs.org.uk/publications/4189 Mon, 21 Apr 2008 00:00:00 +0000
<![CDATA[Abolition of the 10p starting rate]]> A shortened version of this article appeared in the Sunday Telegraph on Sunday 20 April 2008.

Gordon Brown's decision to finance a 2p cut in the basic rate of income tax by abolishing the 10p starting rate drew some criticism for sleight of hand when he announced it in his swansong Budget last year. But no-one foresaw quite how far the controversy would escalate when the change took effect earlier this month.

Labour MPs report "pages of venom" in their postbags; more than 70 have signed motions urging a rethink; and party whips fear a rebellion on this year's Finance Bill. On Thursday, Mr Brown had to persuade a hitherto loyal ministerial aide not to resign in protest.

The lobby group Church Action on Poverty has put the case for the prosecution starkly: "It is immoral and wrong for the Government to increase taxes on the lowest paid, whilst those on much higher salaries benefit from the cut in the basic rate of tax", it argues. "This is a Robin Hood policy in reverse - robbing from the poor to reward the rich."

Cabinet minister Ed Miliband has tried to make the case for the defence - but with rather less conviction: "When you make a big set of changes in the tax system, some people do lose out. That is a matter of regret. Of course it is. But overall these changes make the tax system fairer."

So who is right? Why has it taken a year for people to get so upset? And what, if anything, can Mr Brown do to calm them down?

Let us start by looking at exactly who wins and loses. The impact of Mr Brown's income tax changes on an individual taxpayer goes as follows: last year people under 65 paid no income tax on the first £5,225 they earned, 10% on the next £2,230, and 22% on the next £32,370; this year they will pay nothing on the first £5,435 and 20% on the next £36,000.

Taken in isolation, this means that people on incomes between £5,435 and £19,355 this year would be worse off, because they lose more from the abolition of the starting rate than they gain from the cut in the basic rate. The loss is greatest at £232 a year for someone earning £7,755.

Most people on incomes between £19,355 and around £40,000 would gain noticeably from the reform, with the biggest gain of £337 a year at £36,140. Changes to the levels of income at which people stop paying the full rate of National Insurance contributions and start paying the higher 40p rate of income tax mean that most people on more than £40,000 will gain only marginally once all the Budget measures take effect next year.

If Mr Brown had left it at that, he would indeed have been robbing the poor to pay the rich. But he also spent £1 billion raising tax allowances for those aged 65 and over, £1 billion raising the child tax credit and £1.3bn raising the income at which tax credits start to be withdrawn.

Taking the whole Budget package into account, the poorest third of the population actually emerge as the biggest winners, thanks to the increase in tax credits. The richest third also gain, thanks to the income tax changes. The middle third are largely unaffected.

So why all the fuss? Well, Mr Brown has not been equally generous to all poor families. He has protected most pensioners and families with children, but has done little for childless adults of working age.

This explains why - in what was on average the "pro-poor" Budget that the Government claims it was - there are 5.3 million families left worse off and most of them in the poorer half of the population. Roughly one family in five loses; two in five gain and the rest are unaffected.

Most of the losers are of two sorts. First, childless single people who do not qualify for the working tax credit because they are under 25, work less than 30 hours a week, or earn too much. Second, childless couples who lose twice from the income tax changes, but gain at most once from the working tax credit because it is a family payment rather than an individual one. Another vocal category of loser is early retirees, who do not receive tax credits, but who are too young to benefit from the increase in the tax allowance for those aged 65 and over.

This difference in generosity between different family types is nothing new. Indeed, it is entirely consistent with Mr Brown's previous reforms.

Look at the cumulative impact of Labour's tax and benefit changes since 1997: they have increased the average incomes of the poorest tenth of the population by 12% and cut those of the richest tenth by 6%. But, within the poorest tenth, pensioners have gained 24% and families with children 18%, while childless working-age adults have gained only 1%. Indeed, childless working-age adults lose on average from Labour's tax and benefit changes across nine-tenths of the income distribution.

This has had a predictable effect on poverty. Measured as the number of individuals living in households with incomes below 60% of that enjoyed by the average (median) household, poverty has fallen by 600,000 among children, 200,000 among working-age parents and 200,000 among pensioners since 1996-97. But poverty has increased by 500,000 among working age adults without children.

You can certainly make a case for focusing help on pensioners and parents. The former have little scope to increase their incomes. And helping the latter helps their children, who are powerless to alter their own circumstances. You could also argue that many poorer childless working age adults will only be so temporarily, as they will climb the earnings ladder, have children, or reach pension age. But that is of little comfort to those feeling the hit in their pay packets this month.

It is perhaps not surprising that the individuals directly affected should only protest when the measures take effect. It is slightly less clear why Labour MPs did not pipe up earlier, as the number of losers has not been in dispute since the Budget measures were announced a year ago.

One obvious reason is that Mr Brown was seen as a leader in waiting last spring, but is seen as a leader on the wane now. Another is that since last year's Budget the Government has cut inheritance tax and executed a U-turn on capital gains tax reforms to which the Confederation of British Industry and other lobbyists objected. Many Labour loyalists feel the government should listen at least as sympathetically to the grievances of their natural supporters as to those of entrepreneurs and the wealthy.

So what if anything may be done now?

Restoring the 10p rate would cost nearly £7 billion - money the Government does not have to spare. That is no bad thing. The 10p band should never have been introduced in the first place. It complicated the income tax system and was poorly targeted on those it was claimed to help. Whatever else you might say about last year's Budget, it did leave the income tax and National Insurance system in simpler and better shape.

If Mr Brown does feel the need to reduce the number of families losing, one candidate would be to extend the working tax credit to the under 25s and/or those working less than 30 hours. To do both would cost £2.2 billion and remove 1.2 million losers if everyone took up the working tax credits to which they were newly entitled. In practice, the cost and the number of losers removed might be much smaller. And some of those no longer losing would be over-compensated and gain a lot.

A similar option would be to increase the working tax credit for single people without children by 50%. This would cost around £600m and remove 300,000 losers, again implausibly assuming full take-up.

But in neither case would the Government necessarily derive much political benefit. Constituents complaining about the removal of the 10p band frequently add that they do not wish to become entangled in a tax credit system that they see as complex, bureaucratic and stigmatising.

A more popular way to reduce the number of losers would be to increase the personal allowance people can earn before they start to pay income tax and National Insurance. This would also be more cost-effective, as it would in effect partially unwind the Budget reform that created the losers in the first place. Increasing the income tax and NICs allowance by £100 would remove 1.3 million losers and cost £800 million; increasing it by £300 would remove 3.3 million losers and cost around £2.5 billion; increasing it by £750 would remove almost all the losers and cost around £6 billion.

None of these options are cheap. Raising the personal allowance would be the most cost effective way to reduce the number of losers, although it is not the way Mr Brown would usually target money on the groups he favours. The political calculation is whether he could compensate enough losers to stem the protests, without having to spend so much money that he would need to do something even more unpopular to pay for it.

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http://www.ifs.org.uk/publications/4195 Mon, 21 Apr 2008 00:00:00 +0000
<![CDATA[Immediate Budget Analysis ]]> As an immediate reaction to the Budget, we look at the public finances and at measures directly affecting households.

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http://www.ifs.org.uk/publications/4160 Wed, 12 Mar 2008 00:00:00 +0000
<![CDATA[IFS Green Budget 2008]]> Alistair Darling would need to announce fresh tax increases worth about £8 billion in this year's Budget to keep public sector debt below the Government's self-imposed ceiling and to bring about the improvement in the public finances over the next five years that the Treasury wants to see, according to this year's IFS Green Budget.

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http://www.ifs.org.uk/publications/4113 Wed, 30 Jan 2008 00:00:00 +0000
<![CDATA[High Income Individuals: Racing Away?]]>

The outlook for inequality in Britain may depend more on the outlook for the stock market than on Government tax and benefit policies, a study by IFS researchers suggests today. Even though the current Government has increased taxes on people with high incomes, this has not prevented them from them racing further away from the average level of living standards across the country. In recent years, it is only in the wake of extended falls in the stock market that the incomes of the richest have fallen.

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http://www.ifs.org.uk/publications/4107 Thu, 17 Jan 2008 00:00:00 +0000
<![CDATA[When you are born matters for academic outcomes: urgent policy action needed to help summer-born children]]>

Children born later in the school year perform significantly worse in exams than those born earlier in the school year, even up to GCSE level, according to new research published today by IFS. Policy changes are needed if this unfair disadvantage is not to damage the chances of summer-born children.

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http://www.ifs.org.uk/publications/4075 Wed, 24 Oct 2007 00:00:00 +0000
<![CDATA[Pre-Budget Report and Comprehensive Spending Review 2007]]> The 2007 Pre-Budget report and Comprehensive Spending Review was presented to the House of Commons on Tuesday 9th October 2007. IFS outlines its initial response in this press release.

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http://www.ifs.org.uk/publications/4056 Tue, 09 Oct 2007 00:00:00 +0000
<![CDATA[Benefit changes could help 100,000 lone parents into work at relatively low cost ]]> Changes in the benefit regime for lone parents could have a significant impact on the number who chose to take up jobs and could help reduce child poverty, concludes research funded by the Joseph Rowntree Foundation and published today.

The research suggests that allowing lone parents to keep more of their benefits when they move into work could lead to an increase in the lone parent employment rate of up to 5.4 percentage points, equivalent to 100,000 people. At present, 57 per cent of the UK's 1.9 million lone parents are in employment, but the Government has set a target to have 70 per cent in work by 2010.

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http://www.ifs.org.uk/publications/4049 Wed, 03 Oct 2007 00:00:00 +0000
<![CDATA[HE student support Funding]]>

* The Government's newly announced reforms to student loans and grants will increase financial support for students in higher education from families with incomes above £17,500, but not for those from families with incomes below that level.

* Almost all graduates who go to university under the newly announced arrangements stand to gain around £850 from the new loan repayment holiday.

* People who do not participate in higher education will not benefit from the reforms but will have to help finance them through the taxes they pay. This is because the reforms have a net cost to the Exchequer.

* If the Government is keen to increase the number of students from poorer backgrounds who participate in higher education, it would probably be better to spend money trying to further improve school results rather than increasing subsidies for those who do make it to university.

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http://www.ifs.org.uk/publications/3996 Mon, 23 Jul 2007 00:00:00 +0000
<![CDATA[Pensioner poverty over the next decade: what role for tax and benefit reform?]]> Recent falls in poverty amongst those aged 65 and over are unlikely to continue after 2007-08, even after the implementation of the proposals outlined in the Government's Pensions White Paper.

This conclusion comes from researchers at the IFS, who today launch a new report looking at the prospects for pensioner poverty in England over the next decade. The authors find that that the proportion of those aged 65 and over living in poverty is set to remain at its current level - around one-in-five - between 2007-08 and 2017-18. This is despite the overall increase in the generosity of state pensions arising from the Pensions White Paper, and the fact that younger cohorts are expected to have more private pension income and higher employment rates at older ages than those preceding them.

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http://www.ifs.org.uk/publications/3990 Wed, 18 Jul 2007 00:00:00 +0000
<![CDATA[The Tax Law Review Committee: Taxation of the family]]>

A TLRC discussion paper published today reviews the current tax treatment of the family in the UK. It considers the income tax, capital gains tax, inheritance tax and stamp duty implications of different types of family unit. It seeks to show where inconsistencies, confusion and discrepancies lie and considers whether marriage or the entering into a civil partnership offers tax advantages or disadvantages to the persons involved. It considers the implications of European anti-discrimination laws and looks at the stated policies of the Government, the Conservative Party and the Liberal Democrats.

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http://www.ifs.org.uk/publications/3985 Mon, 18 Jun 2007 00:00:00 +0000
<![CDATA[Fiscal Studies, June 2007]]>

Distributional Implications of Tax Relief on Voluntary Private Pensions in Spain

Author and contact: Jose-Ignacio Anton, Universidad de Salamanca, janton@usal.es

Using taxation statistics, this paper explores the distributional implications of tax relief on private pensions in Spain in 2002. For this purpose, the author suggests a decomposition of the Kakwani index and its generalisations that allows us to distinguish between the regressivity caused by targeting and that due to benefits allocation among recipients. This paper finds that these tax incentives are regressive, mainly for the latter reason, and have negative although small distributional effects. Finally, this work presents several proposals for reform of the current system and simulates their implications for equity.

Understanding Pensions: Cognitive Function, Numerical Ability and Retirement Saving

Authors: James Banks, UCL and IFS james_b@ifs.org.uk and Zoe Oldfield, IFS, zoe_o@ifs.org.uk

Contact: IFS Press Office, 020 7291 4800

As the degree to which individuals are expected to provide their own resources for retirement increases, there is an increasing importance of individuals being able to understand the financial choices they face and to choose savings products, portfolios and contribution rates accordingly. In this paper, we look at numerical ability and other dimensions of cognitive function in a sample of older adults in England and examine the extent to which these abilities are correlated with various measures of wealth and retirement saving outcomes.

As well as finding that relatively large fractions of the older population can be seen to have low levels of numeracy, we show that individuals with higher numeracy are more likely to own private pensions and to invest in risky assets even when controlling for other dimensions of cognitive ability as well as educational attainment. Higher levels of numeracy are also associated with better understanding of private pension arrangements, and with greater perceived financial security.

In the short term, one policy goal might be to improve the type and amount of information and education available about pensions and other financial products. The government's "financial capability" agenda has explicitly targeted improvements in this area. The findings in this report suggest that it would be appropriate to focus this agenda at low-numeracy, low-education groups. A longer-run goal for retirement saving policy might be to try to improve numeracy levels more generally.

Business Optimism for Small, Medium and Large Firms: Does It Explain Investment?

Author and contact: Ciaran Driver, Imperial College, c.driver@imperial.ac.uk

We use UK survey data on variation in business optimism by manufacturing size group to estimate the determinants of optimism using OLS and SURE. There are similarities across the size groups but also some differences: the medium-size group seems to have been unusually affected by real interest rates in recent years. We also model investment authorisations, conditional on business optimism. Again, there are similarities across the size groups. However, the largest-size group, and possibly also the medium-size group, seem to be investing less in recent years in relation to reported optimism. By contrast, capital investment by smaller-sized firms has been stable in relation to business optimism. Some tentative explanations for these findings are explored.

Determinants of Bilateral Effective Tax Rates: Empirical Evidence from OECD Countries

Author and contact: Simon Loretz, University of Innsbruck Simon.Loretz@uibk.ac.at

This paper identifies the relevant determinants of a company's effective tax burden. Thereby, we account for bilateral aspects of corporate taxation by calculating bilateral effective tax rates as proposed by Devereux and Griffith (1999 and 2003). The empirical evidence of a large panel of nearly 8,000 bilateral effective tax rates within the OECD suggests that country size is an important determinant of the effective tax rate. In line with the literature, bilateral tax rates with small host countries exhibit a smaller overall effective tax rate, despite the fact that larger countries are more likely to reduce the tax burden by means of tax treaties at the bilateral level. Further, we find that geographically remote countries impose higher taxes, whereas economic integration tends to reduce the extent of the bilateral effective tax burden.

Making the Stability Pact More Flexible: Does It Lead to Pro-Cyclical Fiscal Policies?

Author and contact: Michal Mackiewicz, University of Lodz mackiewicz@uni.lodz.pl

One of the often-discussed negative aspects of the Stability and Growth Pact is the rigidity of its deficit rule. Several reform proposals aim currently to alleviate the rule in order to allow the automatic stabilisers to operate freely. However, such a reform is likely to cause even further deterioration of fiscal balances in the EMU member countries. The empirical evidence presented in this paper shows that, in the past, increasing the structural deficit had a strong negative impact on the degree of anti-cyclical fiscal stabilisation. This suggests that the reform of the Pact, through higher structural deficits, could decrease rather than increase the scope of anti-cyclical fiscal actions in the EMU member countries.

  Ends

Notes to Editors

  1. The June issue, Vol. 28, No. 2, of Fiscal Studies is published today, 4th June 2007. For press copies, contact the press office at IFS, 020 7291 4800.

  2. Fiscal Studies is a peer-reviewed journal and the articles published do not reflect the views of the editors or of the Institute for Fiscal Studies, which has no corporate views. For information about the articles summarised above, please contact the authors listed.

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http://www.ifs.org.uk/publications/3983 Mon, 04 Jun 2007 00:00:00 +0000
<![CDATA[DWP announces error in latest Households Below Average Income publication]]> On 23 April 2007, the Department for Work and Pensions announced that an error had occurred when producing the latest Households Below Average Income publication, because incorrect population estimates were used to generate the dataset for 2005/06, upon which the publication was based. The IFS Briefing Note 73, Poverty and Inequality in the UK 2007, was based on the same dataset and therefore suffers from similar errors.

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http://www.ifs.org.uk/publications/3956 Tue, 24 Apr 2007 00:00:00 +0000
<![CDATA[Poverty rises for the first time since 1997]]> Relative poverty has risen across the whole population for the first time since Labour came to power, with child poverty also rising for the first time in six years, according to official statistics released today on the distribution of income in 2005/06.

With the exception of a further fall in pensioner poverty, most measures of income poverty and inequality increased in 2005/06. The rise in poverty will be of particular concern to the Government given the impact of the tight spending squeeze announced in last week's Budget on its ability to pay more generous benefit and tax credit payments.

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http://www.ifs.org.uk/publications/3930 Tue, 27 Mar 2007 00:00:00 +0000
<![CDATA[Analysis of the Budget 2007]]> As an immediate reaction to the Budget, we look at the public finances and at measures directly affecting households.

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http://www.ifs.org.uk/publications/3912 Wed, 21 Mar 2007 00:00:00 +0000
<![CDATA[Analysis of the SNP proposal for a capped local income tax]]> The Scottish National Party today set out proposals for replacing council tax (and council tax benefit) with a local income tax in Scotland. The local income tax (LIT) would apply at the starting, basic and higher rates, to all taxable income except savings income, but would be capped so that local authorities would not be allowed to increase the rate above 3%. The SNP would continue to levy a property tax on second and empty homes.

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http://www.ifs.org.uk/publications/3897 Wed, 14 Mar 2007 00:00:00 +0000
<![CDATA[Government investment improves attainment in disadvantaged schools]]> Targeted government investment has improved the educational outcomes for secondary school pupils in disadvantaged areas, according to new economic research by Stephen Machin, Sandra McNally and Costas Meghir. The study, which evaluates the Excellence in Cities (EiC) programme shows that the most disadvantaged schools benefit and that the effect is mainly concentrated among pupils of medium to high prior achievement. Initial estimates suggest that the EiC policy could prove to be cost-effective, particularly if targeted where it is most effective, namely in the most disadvantaged schools.

EiC has been implemented in around one third of secondary schools in England and consists of three core strands:

  • Learning Mentors, to help students overcome educational or behaviour problems;
  • Learning Support Units, to provide short-term teaching and support programmes for difficult students;
  • a Gifted and Talented programme, to provide extra support for 5-10 per cent of pupils in each school.

Other aspects of the EiC policy are the designation of particular schools as Specialist (i.e. in particular subjects) or Beacon (to disseminate good practice to other schools).

The study evaluates the average impact of EiC on educational attainment and attendance at school over time since its introduction in 1999. This is done by assessing the extent to which the whole range of activities carried out as a result of EiC funding led to an improvement in important educational outcomes. The focus is on pupil-level attainment at age 14 (the end of Key Stage 3) and a measure of school attendance (the percentage of half days missed).

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http://www.ifs.org.uk/publications/3857 Thu, 22 Feb 2007 00:00:00 +0000
<![CDATA[IFS Green Budget 2007]]> If Gordon Brown vacates the Treasury this year, he will leave the public finances stronger than he found them a decade ago, but he will have presided over a smaller improvement than seen in most other industrial countries, according to the Institute for Fiscal Studies' 2007 Green Budget.

Twenty-five years after our first Green Budget was published in 1982, we are delighted that this is the third to be produced in collaboration with Morgan Stanley. We are also grateful to the Economic and Social Research Council for its financial support through the Centre for the Microeconomic Analysis of Public Policy that it funds at IFS.

Taking account of inflation and growth in the economy (Note: Unless otherwise stated, figures are shares of national income, converted to 2006-07 cash terms), Mr Brown is spending £22 billion more this year than Kenneth Clarke did in 1996-97 (mostly on investment), but raising £31 billion more in tax. This leaves him borrowing £9 billion less. Public sector net debt is £80 billion lower than in 1996-97 and the government's annual debt interest bill is £21 billion lower.

But over the past decade most industrial country governments have also reduced their budget deficits and lowered their debt burdens. Indeed, of 22 leading OECD countries, 17 have improved their structural budget balances and 15 have reduced their debt by more than the UK since 1996. After a decade of Mr Brown's stewardship, the UK still has a relatively big structural budget deficit by international standards and remains 'mid-table' when comparing the size of government debt across countries.

Looking forward over the period in which Mr Brown hopes to fight his first general election as Prime Minister, the Chancellor is aiming to cut his borrowing by a further £20 billion over the next five years to stay on course to meet his self-imposed fiscal rules. To that end, he is projecting a further £10 billion increase in the tax burden and has pencilled in a £10 billion cut in public spending.

To bring in most of the extra revenue, the Chancellor is relying on the usual Treasury assumption that he will gradually increase the average rate of income tax by failing to raise allowances and thresholds in line with rising real earnings. These revenue forecasts look realistic and we do not believe that Mr Brown needs to announce additional tax raising measures now to bring in the extra £10 billion he is looking for. But exploiting 'fiscal drag' may not be the most sensible way to raise the extra revenue. We note, for example, that he could choose to raise more money from environmental taxes, although to raise substantial sums from existing green taxes he would have to overcome his reluctance to increase road fuel duty in real terms.

On the spending side, the Chancellor has pencilled in £7 billion of spending cuts over the three years of the forthcoming Comprehensive Spending Review (CSR) - with more assumed to follow. If the Chancellor confirms these plans in the Budget, this will be Labour's toughest spending review yet and (if delivered) would be the tightest squeeze on spending since it stuck to the plans it inherited from the Conservatives in its early years in office - when it was helped by falling unemployment and debt interest costs.

Meanwhile, IFS analysis suggests that meeting the Government's 2010/11 child poverty target alone could cost at least an extra £4½ billion. Even if spending in areas such as defence and environmental protection were frozen in real terms, this could only be found by allocating the NHS less than the minimum recommended by the Wanless Review and/or by cutting education spending as a share of national income.

Mr Brown's most likely strategy may be to focus limited resources on health and education (which would still mean giving them smaller increases in resources than they have enjoyed in recent years), and to put off the tax credit increases necessary to help reduce child poverty to the target until later Budgets and Pre-Budget Reports, in the hope that revenues come in more strongly than expected. But time is short and we note that the Chancellor used unexpected improvements in the public finances to top up previous spending reviews, only to have to retrench when his later forecasts proved overoptimistic.

We argued during most of Labour's second term in office that the Chancellor's fiscal forecasts were too rosy. We thought he would need to announce tax increases and/or spending cuts worth around £13 billion in today's terms to bring about the improvement in the public finances he was looking for and to be able to expect to meet his famous 'golden rule' (to borrow only for investment) with the comfort he desired.

The Chancellor rejected any such suggestion as late as the 2005 general election campaign, but within a couple of months of Labour's victory it was clear that his forecasts were still overoptimistic and that he was on course to break the golden rule over the seven-year economic cycle that the Treasury then expected to run from 1999-2000 to 2005-06 . He promptly added two good years for the public finances to the beginning of the economic cycle, putting himself back on course to meet it. He also implemented the tightening that we and others had earlier said would be necessary, pencilling in the CSR spending cuts and announcing the first of a series of post-election tax increases that together will raise £6 billion by 2007-08.

The Treasury now claims that a 10-year cycle started in 1997-98 and will probably conclude in the current financial year, ending in March. Over this period we expect the golden rule to be met with £7 billion to spare (slightly less than the Treasury) and net debt to remain below the 40% of national income ceiling in the 'sustainable investment rule'. We also think it more likely than not that the golden rule will be met over the next cycle, but we expect net debt to move uncomfortably close to 40% of national income.

The Chancellor's expectation of meeting the golden rule depends crucially on the dating of the economic cycle over which it is judged. Without the extra two years that the Chancellor added to the beginning of the cycle in 2005, Treasury forecasts would now show him breaking the rule by £5½ billion. Using a statistical filter, rather than estimates by the Chancellor's officials, Morgan Stanley modelling would suggest that the current cycle may have started in 2003-04 and run to around 2009-10. Over this period Treasury forecasts imply that the golden rule would be broken by £57 billion; we would expect it to be broken by £66 billion.

By re-dating the economic cycle at a uniquely convenient moment, and delaying tax increases and spending cuts until just after the election, the Chancellor appears to have eroded the credibility of his fiscal rules as a meaningful constraint on his tax and spending decisions. The Financial Times concluded from its New Year survey of City and academic economists earlier this month that: "Almost none use the Chancellor's fiscal rules anymore as an indication of the health of the public finances".

We believe that the likelihood that Mr Brown will declare 'victory' in meeting the golden rule in April, and the expected arrival of a new Chancellor later in the year, creates a golden opportunity to improve the fiscal rules and restore lost credibility. This could legitimately be presented as building on Mr Brown's original vision and applying lessons from the widely-hailed success of his framework for interest rate policy.

We argue that the golden rule should be symmetric, forward-looking and less reliant on the ability to identify economic cycles precisely. The Treasury's forecasting of the public finances should also be made more transparent or perhaps even delegated to an independent body that would not be suspected of massaging the figures.

Other findings in the Green Budget include:

  • VAT revenue lost to fraud and evasion jumped by £2.7 billion to £12.4 billion in 2005-06, according to HM Revenue and Customs, of which 'carousel' and other missing trader fraud is thought to account for about a quarter. If the figures are right, and unless there has been an unexplained and significant increase in other types of fraud, HMRC are underestimating the impact of carousel fraud. Carousel fraud is best tackled by ending the zero-rating of exports. (Chapter 9)

  • Morgan Stanley is more pessimistic than the Treasury about the prospects for economic growth in the next couple of years, with some fall in house prices also likely in the next few years. It also believes that the estimates of trend growth the Treasury uses to forecast the public finances are a reasonable central estimate rather than cautious as Mr Brown claims. Even so on the Morgan Stanley central forecast the sustainable investment rule and golden rule are on course to be met, at least based upon the Treasury estimates of the dates of the economic cycle. (Chapter 4)

  • The current budget balance is likely to be £1-2 billion worse than the Treasury expects this year and next, but about £1½ billion better than the Treasury expects in 2011-12. We expect net debt to move slightly above 40% of national income if the economy evolves along Morgan Stanley's 'pessimistic' scenario, in which growth is weaker and spare capacity in the economy persists. We would not expect it to take much fiscal tightening to keep debt below 40%. (Chapter 5)

  • The cost of government borrowing is unlikely to be much affected if the government has to issue a few billion more pounds in gilts than it currently assumes in coming years. The government should issue a greater proportion of its debt in longer-dated conventional and index-linked form; the case for the government to issue longevity bonds is not compelling. (Chapter 6)

  • The net tax increases announced by Gordon Brown since 1997 will yield the Treasury £17 billion next year (in 2007-08 terms). Adding 'fiscal drag' and Conservative policy changes that Mr Brown maintained brings the total up to £57 billion, offset by £17 billion lost through developments in the economy. The resulting increase in the tax burden of £40 billion expected between 1996-97 and 2007-08 is equivalent to roughly £1,300 per family. (Chapter 2)

  • Measures announced in the Pre-Budget Report will do little to reverse the decline since 1999 in the proportion of national income collected in environmental tax revenues. But green tax revenues remain slightly higher in the UK than in OECD industrial countries on average. (Chapter 11)

  • Critics argue that the tax, benefit and tax credit system is inefficient in lifting couples with children out of poverty, that it can penalise parents who live together, and that it gives insufficient support to couples where one partner gives up work to care for young children. The impacts of proposals to address these issues on incomes and work incentives vary significantly, in part reflecting the different motivations of those who propose them. (Chapter 12)

  • The Government should consider replacing the UK's complex 'credit' system of corporation tax with the simpler 'exemption' system, perhaps recouping the lost revenue by ending the ability of companies to deduct debt interest from their taxable profits. But the revenue and distributional implications of such a change are uncertain and a matter of lively debate. (Chapter 10)

  • National Accounts measures suggest that the output of the public sector health and education sectors has been increasing in recent years, but that productivity has not. But output increases may be desirable even in the absence of productivity improvements. (Chapter 8)

  • In recent years the Treasury could be argued to have pursued a rolling target to achieve a current budget surplus of around 0.7% of national income after five years. This target was missed significantly in 2005-06 and is also set to be missed by a diminishing margin in coming years. (Chapter 3)

  • Treasury projections suggest that public spending will increase by about £50 billion in today's terms over the next 50 years if current policies remain unchanged. The Treasury's estimates of spending in the early 2050s have risen significantly in the last five years, in part reflecting upwards revisions to estimates of life expectancy by the Government Actuary. (Chapter 7)

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http://www.ifs.org.uk/publications/3840 Wed, 31 Jan 2007 00:00:00 +0000
<![CDATA[The UK's household debt problem: Is there one, and if so, who's at risk?]]> For the typical household, debt problems are not as bad as is often painted despite the increase in debt levels, but for low income families, access to high quality credit remains a problem.

Household debt now exceeds one trillion pounds in Britain. With buoyant consumer spending over Christmas, debt-financed consumer spending is commonly perceived to be out of control. But does this picture fit the facts, and which households are most at risk of debt problems? A talk by Richard Disney (Nottingham) delivered on 24th January at the IFS will provide some aggregate economic data and then focus on updating research, published by IFS in 2004, which examined the debts of low income households in the late 1990s, updating the picture to the recent past.

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http://www.ifs.org.uk/publications/3836 Wed, 24 Jan 2007 00:00:00 +0000
<![CDATA[Analysis of the Pre-budget Report]]>

The Chancellor yesterday added £1-2 billion each year to his Budget forecasts for public sector borrowing, despite modest tax increases and a more optimistic assessment of the potential for economic growth over the next few years.

Mr Brown announced tax increases worth £2 billion a year, half from air passenger duty and most of the rest from tackling tax avoidance. He also gave himself some extra revenue by assuming that, going forwards, the economy can grow by 2½ a year without pushing up inflation, rather than the 2¼ percent he assumed at Budget time.

The Chancellor said that he would meet his famous "golden rule" - to borrow only what he needs for investment over the ups and downs of the economic cycle - with £8 billion to spare, down from the £16 billion at Budget time.

But, for the second PBR running, Mr Brown changed the dates of the cycle over which he wants the golden rule to be judged - this time to a 10 year cycle ending this year. With just 3 months left to run it is now highly unlikely that the golden rule will be missed. There remains a strong case for an independent body to date the cycle.

The weakness of the underlying public finance forecasts suggests there will be no let up in Mr Brown's tough spending negotiations with Whitehall departments. In addition to sticking with his Budget assumption that public spending (excluding investment) will grow by just 1.9 percent a year on top of inflation over the three years of the forthcoming comprehensive spending review, the Chancellor pencilled in another year of spending growth at the same rate in 2011/12.

This suggests that Mr Brown is ready to fight the next election presiding over a steady fall in public spending as a share of national income. This did not stop him from attacking the Conservatives for proposing the same thing as a long-term goal.]]> http://www.ifs.org.uk/publications/3809 Thu, 07 Dec 2006 00:00:00 +0000 <![CDATA[Bank Deputy Governor nominated to be President of IFS]]> Rachel Lomax, the Deputy Governor of the Bank of England responsible for monetary policy, has been nominated to be the next President of the Institute for Fiscal Studies by the IFS's governing Council.

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http://www.ifs.org.uk/publications/3800 Fri, 01 Dec 2006 00:00:00 +0000
<![CDATA[The UK tax system and the environment]]>

The report, The UK Tax System and the Environment, funded by the Esmée Fairbairn Foundation, examines in depth the current system of green taxes in place in the UK, their design and effectiveness, and looks at the recent history of green tax revenues and greenhouse gas emissions.]]> http://www.ifs.org.uk/publications/3773 Thu, 02 Nov 2006 00:00:00 +0000 <![CDATA[Labour's tax and benefit reforms weaken average work incentives]]>

The report, funded by the Joseph Rowntree Foundation, provides new evidence on the trade-off between redistributing income and improving work incentives.]]> http://www.ifs.org.uk/publications/3743 Wed, 04 Oct 2006 00:00:00 +0000 <![CDATA[The mobility of English school children]]>

A recent research study undertaken by the Centre for the Economics of Education and published in Fiscal Studies has found pupil mobility (i.e. the extent to which children switch schools) to be strongly linked with measures of social disadvantage, pupil's previous academic attainment, and school test score performance. Children from lower-income families are more likely to change schools than other pupils, and this is true for pupils at all levels of schooling. Pupils who move schools are more likely to have a lower previous academic achievement than pupils who stay at the same school, and pupils at schools with lower Key Stage performance levels move more than pupils from higher performance schools.]]> http://www.ifs.org.uk/publications/3722 Tue, 05 Sep 2006 00:00:00 +0000 <![CDATA[Inheritance tax still has a role to play, says Alan Auerbach in IFS annual lecture]]> http://www.ifs.org.uk/publications/3720 Mon, 04 Sep 2006 00:00:00 +0000 <![CDATA[IFS launches "Mirrlees Review"]]>

Over the next 18 months, teams of experts will examine several key issues in tax design, including: the taxation of incomes, expenditure and saving; personal tax rates; VAT; environmental taxes; business taxation; compliance and administration; the impact of globalisation; the current state of the UK tax system; and the political economy of tax reform. There will also be a specific studies of small business taxation, and the responsiveness of a) labour supply and human capital and b) savings and consumption to the design of the tax system.

More details about the Review can be found on its website. ]]> http://www.ifs.org.uk/publications/3719 Mon, 04 Sep 2006 00:00:00 +0000 <![CDATA[Longitudinal study of ageing reveals health and wealth relationship]]>

The data, which is published tomorrow in the report ђetirement, health and relationships in the older population in EnglandҬ is the second set of results to be released from the most comprehensive study into the economic, social, psychological and health elements of the ageing process in Europe.

The multidisciplinary study follows the life experiences of a cohort of people born before 1952 through detailed interviews on many aspects of their life at two year intervals. In the 2004ֵ study, 8,780 people were interviewed on aspects of their life which included: health, work, spending, receipt of healthcare, social participation and cognitive ability. In particular, the report examines an important aspect of diversity: how each of these areas varies according to an individual's level of wealth.]]> http://www.ifs.org.uk/publications/3657 Fri, 07 Jul 2006 00:00:00 +0000 <![CDATA[An initial response to the Pensions White Paper]]> Responding to today's publication of the Pensions White Paper.

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http://www.ifs.org.uk/publications/3624 Thu, 25 May 2006 00:00:00 +0000
<![CDATA[Alternative measure of poverty rises under Labour]]>

The study, funded by the Joseph Rowntree Foundation, suggests that a useful alternative definition of relative poverty would be living in a household which spends less than 60% of the median-spending household, rather than the measure most used by the government, which is to be living in a household whose income is less than 60% of the median-income household.]]> http://www.ifs.org.uk/publications/3619 Wed, 17 May 2006 00:00:00 +0000 <![CDATA[Middle-aged English healthier than their American counterparts]]>

Americans aged between 55 and 64 suffer from diseases such as diabetes, high-blood pressure and lung cancer at rates up to twice those seen among similar aged people in England, reports the study, published on 3 May in the Journal of the American Medical Association.

By analysing a large representative sample of people from each country, researchers from the Institute for Fiscal Studies, UCL (University College London) and RAND3 in the US found that English people were less likely to report suffering from a wide array of diseases. The differences were confirmed when researchers analysed separate studies that collected blood samples from participants to look for biological markers of disease ֠showing that the differences were not just a result of Americans' increased willingness to report illness.]]> http://www.ifs.org.uk/publications/3608 Tue, 02 May 2006 00:00:00 +0000 <![CDATA[Taxes play an important role in multinationals' location and investment decisions]]>

The papers, published by the European Tax Policy Forum (ETPF), are being presented at a joint conference of the ETPF and the Institute for Fiscal Studies on 24 April. ]]> http://www.ifs.org.uk/publications/3605 Mon, 24 Apr 2006 00:00:00 +0000 <![CDATA[Mixed evidence of profit shifting by multinationals]]> http://www.ifs.org.uk/publications/3606 Mon, 24 Apr 2006 00:00:00 +0000 <![CDATA[More competition means lower unemployment]]>

The study by Rachel Griffith, Rupert Harrison and Gareth Macartney, which was presented at the Royal Economic Society's 2006 Annual Conference at the University of Nottingham, also finds that increased competition has raised workers' real wages. But in this case, the effect is smaller in highly unionised countries.

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http://www.ifs.org.uk/publications/3599 Tue, 18 Apr 2006 00:00:00 +0000
<![CDATA[Increasing mothers' education benefits their children's school performance]]> http://www.ifs.org.uk/publications/3600 Tue, 18 Apr 2006 00:00:00 +0000 <![CDATA[Foreign firms choose to locate R&D labs near top British universities]]>

Interestingly this phenomenon is not driven just by university ѳpin-outsҺ in some industries, foreign-owned firms are choosing to locate in close proximity to high quality research. This implies that multinational firms may be sourcing cutting-edge technologies from universities in Britain.

The study by Laura Abramovsky, Rupert Harrison and Helen Simpson, to be presented at the Royal Economic Society's 2006 Annual Conference at the University of Nottingham next week, finds that the evidence for clustering of R&D facilities close to university departments is particularly strong in the pharmaceuticals and chemicals sectors.]]> http://www.ifs.org.uk/publications/3598 Thu, 13 Apr 2006 00:00:00 +0000 <![CDATA[Retirement saving incentives: what is the impact of taxes, tax credits and the pension credit?]]> http://www.ifs.org.uk/publications/3594 Thu, 06 Apr 2006 00:00:00 +0000 <![CDATA[Analysis of the Budget 2006]]> http://www.ifs.org.uk/publications/3584 Wed, 22 Mar 2006 00:00:00 +0000 <![CDATA[Slow growth in average income but large fall in pensioner poverty]]> http://www.ifs.org.uk/publications/3576 Mon, 13 Mar 2006 00:00:00 +0000 <![CDATA[Government paying tax credits and benefits to 200,000 more lone parents than live in the UK]]>

HM Revenue & Customs and the Department of Work and Pensions together estimate that they are paying income-related support for children to 2.1 million lone parents, even though the best estimate from other evidence is that there are only 1.9 million lone parents living in the UK.]]> http://www.ifs.org.uk/publications/3577 Sun, 12 Mar 2006 00:00:00 +0000 <![CDATA[Government misses child poverty targets]]>

The target defines child poverty as the number of children living in households with equivalised household income (after deducting direct taxes and adding tax credits and benefit payments) below 60% of the median. If individuals were lined up in order of income from the richest to the poorest, adjusted for family size, median equivalised household income would be that of the person in the middle. The target is assessed both on incomes after housing costs (AHC) and before housing costs (BHC).]]> http://www.ifs.org.uk/publications/3573 Thu, 09 Mar 2006 00:00:00 +0000 <![CDATA[Taxation and Big Brother: information, personalisation and privacy in 21st century tax policy]]> http://www.ifs.org.uk/publications/3565 Wed, 08 Mar 2006 00:00:00 +0000 <![CDATA[Ethnic differences in birth outcomes in England]]> http://www.ifs.org.uk/publications/3566 Wed, 08 Mar 2006 00:00:00 +0000 <![CDATA[IFS Green Budget 2006]]> The Chancellor of the Exchequer would need to raise taxes by around £2½ billion to get the public finances back onto the path he was hoping for in last year's Budget - even if he carries out the £8½ billion of spending cuts he has tentatively pencilled in for the 2007 Comprehensive Spending Review, according to forecasts by economists at the independent Institute for Fiscal Studies in the 2006 Green Budget.

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http://www.ifs.org.uk/publications/3839 Wed, 25 Jan 2006 00:00:00 +0000
<![CDATA[Newborns and new schools: critical times in women's employment]]>

The study uses a large sample of families and a comparison sample containing individuals over all stages of the lifetime, including before, throughout and after family formation.

The report concludes that childbirth and a child entering school at age four or five are found to be critical times in women's employment.]]> http://www.ifs.org.uk/publications/3543 Thu, 19 Jan 2006 00:00:00 +0000 <![CDATA[Pricing pension insurance: the proposed levy structure for the Pension Protection Fund]]> http://www.ifs.org.uk/publications/3514 Fri, 16 Dec 2005 00:00:00 +0000 <![CDATA[Does early education have long-lasting effects?]]> http://www.ifs.org.uk/publications/3489 Fri, 09 Dec 2005 00:00:00 +0000 <![CDATA[Immigrants in the British labour market]]>

(i) Employment,
(ii) labour force participation,
(iii) self-employment,
and (iv) wages. ]]> http://www.ifs.org.uk/publications/3490 Fri, 09 Dec 2005 00:00:00 +0000 <![CDATA[Initial reaction to the Pre-Budget Report 2005]]>

The Chancellor pencilled in spending plans for the review covering the three years to 2010/11 implying that spending would peak next year and then fall by 0.7 percent of national income over the following four years - almost £9 billion in today's terms.

This would further intensify pressure for efficiency gains to maintain or improve the quality of public services. But it would also limit the incoming Conservative leader's options if he wants to offer tax cuts by increasing spending slower than the economy.

Following a rise in spending next year, the subsequent squeeze would deliver about a quarter of the £20 billion improvement in the current budget balance (in today's terms) he predicts over the next five years. He also expects revenues to rise by almost £16 billion in today's terms, helped by a new tax increase for oil companies.

For the seventh forecast running, he had to concede that the current budget deficit was overshooting his forecasts this year. The "golden rule" requires him to run a balance or surplus on the current budget over the economic cycle, which he defined in March's Budget as the seven financial years from 1999/00 to 2005/06.

His forecasts imply the rule would be missed narrowly over this period. But Mr Brown now says the cycle began two years earlier and will end three years later than he thought in March. This puts him on course to meet the rule over this cycle with £16 billion to spare, as well as making it easier to meet over the next. These fortuitously timed revisions strengthen the case for asking an independent body to date the cycle.]]> http://www.ifs.org.uk/publications/3486 Mon, 05 Dec 2005 00:00:00 +0000 <![CDATA[An initial response to the 2nd Pensions Commission report]]> Responding to today's publication of the Pensions Commission's 2nd report Matthew Wakefield, a senior research economist at the IFS, said: "The analysis contained in the Pensions Commission report is a welcome addition to the debate. The proposed reforms to state support for pensioners will require particularly careful consideration as the Commissions own calculations rightly underline the fact that if we want to maintain or increase the generosity of state support for pensioners without means-testing, politicians will inevitably face the painful task of raising funds, increasing the state pension age, or both".

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http://www.ifs.org.uk/publications/3485 Wed, 30 Nov 2005 00:00:00 +0000
<![CDATA[Are retirement resources adequate?]]>

These conclusions emerge from an analysis by researchers at the Institute for Fiscal Studies of new data on thousands of individuals in England aged between 50 and the State Pension Age (SPA) in 2002. The dataset includes detailed information about the value of their pensions (state and private), housing and other wealth, as well as expectations of inheritance and the length of their working lives. The report provides the most detailed picture yet of the provision that those soon to be pensioners in England have made for their retirement and their expectations of the future. It is particularly timely given the imminent release of the second report of the Pensions Commission on 30 November 2005.]]> http://www.ifs.org.uk/publications/3442 Tue, 11 Oct 2005 00:00:00 +0000 <![CDATA[Parental background and child outcomes:how much does money matter, and what else matters?]]> ]]> http://www.ifs.org.uk/publications/3457 Tue, 27 Sep 2005 00:00:00 +0000 <![CDATA[Well-being and policy evaluation]]> http://www.ifs.org.uk/publications/3431 Mon, 22 Aug 2005 00:00:00 +0000 <![CDATA[Perspectives on Euro area monetary policy]]>

These are some of the questions that will be addressed by Jordi Galí, Director of the Center for Research on International Economics (CREI), as well as Professor at Universitat Pompeu Fabra, Visiting Professor at MIT, and Programme Director of the CEPR, who will present ѐerspectives on Euro Area Monetary Policy' as part of the Institute for Fiscal Studies Lunchtime Policy Sessions, due to take place 19 ֠24 August 2005.]]> http://www.ifs.org.uk/publications/3430 Sat, 20 Aug 2005 00:00:00 +0000 <![CDATA[Education policy]]> http://www.ifs.org.uk/publications/3429 Fri, 19 Aug 2005 00:00:00 +0000 <![CDATA[Conservative proposal to increase support for pension saving]]>

Under the Conservatives' proposal contributions made on individuals' behalf by employers, those that attract higher rate relief, and those made to unfunded public sector pension schemes, would not qualify for the additional support.]]> http://www.ifs.org.uk/publications/3349 Mon, 18 Apr 2005 00:00:00 +0000 <![CDATA[Tax and Spend: Letter to the Telegraph]]> http://www.ifs.org.uk/publications/3345 Wed, 13 Apr 2005 00:00:00 +0000 <![CDATA[Tax rises and new tax credits cut average incomes, but reduce poverty and inequality]]>

These are some of key findings in Poverty and Inequality in Britain: 2005, an analysis by researchers at the Institute for Fiscal Studies of the latest annual Households Below Average Income data released this morning by the Department for Work and Pensions.]]> http://www.ifs.org.uk/publications/3327 Wed, 30 Mar 2005 00:00:00 +0000 <![CDATA[Are middle-earners saving in Stakeholder Pensions?]]> http://www.ifs.org.uk/publications/3325 Tue, 22 Mar 2005 00:00:00 +0000 <![CDATA[Higher Education funding policy: who wins and who loses?]]>

Our analysis has been modified (on 5 April) since publication of this report to incorporate new government fee revenue projections, and new estimates of the costs of student support. The original press release can still be downloaded here. ]]> http://www.ifs.org.uk/publications/3322 Fri, 18 Mar 2005 00:00:00 +0000 <![CDATA[Budget analysis 2005]]> This press release looks at the public finances and distributional consequences in the wake of the 2005 Budget.

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http://www.ifs.org.uk/publications/3319 Wed, 16 Mar 2005 00:00:00 +0000
<![CDATA[Analysis of Liberal Democrat tax proposals]]> The Liberal Democrats today announced further details of their alternative Budget proposals. On the tax side they would:

  • Introduce a new 49% rate of income tax on incomes above £100,000 a year
  • Abolish council tax (and council tax benefit)
  • Introduce a new local income tax
  • Increase the stamp duty threshold on property transactions from £60,000 to £150,000
  • Reduce stamp duty disadvantaged area relief for non-residential properties

The net revenue raised from these measures would, among other things, pay for a citizen's pension for those aged 75 and over, the abolition of higher education fees and the provision of free personal care for the elderly.

This press release sets out some initial analysis of the Liberal Democrats' tax proposals. Further analysis, incorporating the impact of their spending plans, will be published before the general election.

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http://www.ifs.org.uk/publications/3280 Mon, 28 Feb 2005 00:00:00 +0000
<![CDATA[Analysis of the Conservatives' proposed age-related council tax discount]]>

We estimate that, if all council tax rates rise only in line with inflation1 in 200506 and 200607, then the reform would cost 1.3 billion in 200607.2 The Conservatives have stated that their first Budget immediately after a general election would cut taxes by 4 billion,3 so this reform would leave them with scope for a further 2.7 billion in cuts. Extending the council tax discount to the rest of Great Britain would cost a further 0.2 billion.

Assuming that council tax rates rise in line with inflation, we estimate that approximately 3.8 million households, comprising 5.3 million individuals, would gain from the reform, each household gaining 341 per year (6.56 per week) on average. This represents 89% of eligible households (i.e. households in England in which all household members are aged 65 or over), or 90% of individuals in such households. The remainder are households whose council tax bill is fully covered by council tax benefit (CTB); they would be unaffected by the reform since they already pay no council tax. 68% of English households containing a pensioner 58% of British households containing a pensioner, since the policy only applies to England, or 15% of all British households would gain from the reform. 73% of individuals aged 65 or over in England (62% of those in Britain) are in households that would gain.]]> http://www.ifs.org.uk/publications/3275 Mon, 21 Feb 2005 00:00:00 +0000 <![CDATA[Green Budget 2005]]>

The Green Budget is widely regarded as the most authoritative analysis of the issues facing the Chancellor in making tax and spending decisions. For the first time, the Green Budget is produced this year in collaboration with Morgan Stanley, which has contributed analyses of the economic outlook and debt management policy. Financial support for the Green Budget is also provided through the Economic and Social Research Council's Centre for the Microeconomic Analysis of Public Policy at IFS.

The Green Budget baseline forecast suggests that the government is on course to miss narrowly its 'golden rule' (to borrow only to pay for investment) if the economic cycle ends in 2005-06, which is what the Treasury expects. But Morgan Stanley estimate that spare capacity in the economy has been exhausted and the cycle is already in its final year. If this position, which is consistent with analysis from the OECD and Bank of England, is right, the rule would probably be met. Whether or not the rule is met over the current cycle, the Green Budget baseline forecast suggests that government borrowing will be higher over the next few years than the Treasury thinks, in large part because tax revenues are not expected to grow as quickly as it hopes. To be reasonably confident of meeting the golden rule over the next cycle the government would need to announce fresh tax increases or cut its proposed spending. As the Labour Government's spending plans have now been laid down through to 2007-08, new tax increases look more likely.

Proposals by the Conservatives to cut public spending by 2% of national income over the next six years would in principle allow them to announce ô billion in tax cuts if they won the forthcoming election and still be able to expect to meet the Chancellor's ӧolden ruleԬ to which they have also subscribed. But our analysis suggests that if they want to achieve a fiscal position as strong as that which the government was looking for in Budget 2004 they would probably not be able to cut taxes again until some way into their second term in office. This, of course, assumes that the spending cuts could be delivered on schedule, which would be more difficult if they have to rely more over time on efficiency savings rather than slimming the role of government.

Conclusions from the other chapters in the Green Budget include:

  • The Treasury should take explicit account of the uncertainty around its forecasts for the public finances in judging whether it is on course to meet its fiscal rules. The rules could also be reformed to promote fairness between the generations more effectively and to create better incentives for policymakers. (The fiscal policy framework, Robert Chote & Carl Emmerson, IFS)
  • The Treasury's medium-term view of the economy is plausible, but it is probably too optimistic about growth in the short term. The Treasury claims that economic activity is still below the level consistent with stable inflation, but various techniques for analysing the economic cycle suggest that there is little or no spare capacity left in the economy. (The economic outlook, David Miles, with Melanie Baker & Vladimir Pillonca, Morgan Stanley)
  • The government is likely to have to issue much more debt over the next five years than the last five, but this need not require a significant rise in bond yields. The government should consider changing its funding policy, for example by issuing more long-dated and index-linked gilts, and by providing liquidity to the options market. Policies to encourage the development of a market in longevity bonds are desirable, though it is not clear that the government should be the issuer of such bonds. (Funding issues and debt management, David Miles, with Mark Capleton, Morgan Stanley)
  • On Treasury forecasts the tax burden will hit a 25-year high at the end of the decade. Over the next five years Ѯational income after tax' is set to grow at its slowest rate since the early 1980s. Labour cut taxes in its 2001 pre-election budget, but raised them significantly after both the 1997 and 2001 elections. (The tax burden under Labour, Carl Emmerson, Christine Frayne & Gemma Tetlow, IFS)
  • Poorer households have had their incomes increased by tax and benefit changes since 1997 while richer ones have had theirs cut. This progressive pattern is even more pronounced in Labour's second term than its first. Households will be ð.84 a week better off on average as a result of central government tax and benefit reforms since 1997, but ó.62 a week worse off after including changes in council tax. (The distributional impact of tax and benefit changes since 1997, Stuart Adam & Matthew Wakefield, IFS)
  • Corporation tax revenue is under threat from international tax competition and anti-discrimination decisions by the European Court of Justice. The Treasury's desire for the tax system not to influence the choice of legal status for small businesses will be hard to achieve as long as capital and labour income are taxed differently. (Issues in business taxation, Alexander Klemm, IFS)
  • The childcare tax credit is complex, poorly targeted and does little to improve childcare quality; money could be rerouted to childcare providers to improve quality or allocated in a way that does not try to influence the choice between formal and informal childcare. Government plans to expand free nursery places could cost another ñ.3 billion; targeting extra nursery provision on poorer households or neighbourhoods would be more cost-effective. (Reforms to childcare policy, Mike Brewer, Claire Crawford & Lorraine Dearden, IFS)
  Ends

Notes to editors:

  1. For embargoed copies of the report or other queries, contact: Emma Hyman or Bonnie Brimstone at IFS: 020 7291 4800, emma_h@ifs.org.uk, bonnie_b@ifs.org.uk; Anna Lenaghan at Morgan Stanley: 020 7425 5324, Anna.Lenaghan@morganstanley.com
  2. The IFS Green Budget 2005 will be launched on the morning of Wednesday 26th January 2005. Please contact Bonnie Brimstone (020 7291 4800, 07730 667013 or bonnie_b@ifs.org.uk) for details if you would like to register to attend.
]]>
http://www.ifs.org.uk/publications/3252 Wed, 26 Jan 2005 00:00:00 +0000
<![CDATA[Government surveys of parents disagree on how many working families use childcare]]>

This is the main finding from new IFS research funded by the Department for Work and Pensions, which compared how well four large-scale surveys of parents captured their use of childcare. The research was funded by the DWP in order to help the Department address inconsistencies across different survey sources.

The differences are most evident in the proportion of families with children using centre-based care, out-of-school clubs, and close relatives: the proportion using childminders or nannies, though, is reasonably similar across the datasets.]]> http://www.ifs.org.uk/publications/3242 Thu, 13 Jan 2005 00:00:00 +0000 <![CDATA[Testing The Regulatory Model: The Expansion of Stansted Airport]]>

The paper reviews the history of Stansted Airport and notes that its consistently poor financial performance over several decades has distorted competition and caused material harm to competing airports, such as Luton. Stansted declared operating losses for about 25 years and is still not expected to produce financial returns equivalent to its cost of capital until 2008. In spite of this, BAA plc, Stansted`s owner, has been able to balance its books by leveraging market power at Heathrow. Following changes last year, the airport Regulator will now assess the permissible rate of return at Stansted on a stand-alone basis only. Viewed from this perspective, further expansion at Stansted will not be commercially viable without a substantial hike in charges. These will have to more than double in real terms but Stansted has always struggled to increase its charges and, even today, these fail to reach the level permitted by the Regulator.

David Starkie says "I think one needs to question the motives of BAA management in their desire to develop a second runway at Stansted. I do not believe that shareholders will be well served by the adoption of public interest arguments that will have the effect of increasing the regulatory risk faced by the company. I also find it difficult to appreciate why the Government should want to encourage marginal aviation activity at Stansted in an era of increasing environmental concerns."

  Ends

Notes to editors

  1. David Starkie is on the CAA's panel of advisers for the review of NATS price control and is adviser to the Irish Airport Regulator. He is also a former aviation adviser to House of Commons Select Committees.
  2. All opinions expressed in this press release and the article are the author's own; they do not represent the views of the CAA or any other body with which he is associated.
  3. For enquiries, contact David Starkie by email at Economicsplus@aol.com. Contact the IFS press office on 020 7291 4800 for copies of the article.
  4. The paper is published in Fiscal Studies, Vol. 25, No. 4, December 2004.
]]>
http://www.ifs.org.uk/publications/3200 Fri, 10 Dec 2004 00:00:00 +0000
<![CDATA[PBR analysis: the public finances]]> Gordon Brown shrugged off the uncertainties that surround any forecast for the public finances and insisted in his Pre-Budget Report that he would meet his self-imposed constraints on borrowing without having to cut spending or announce new tax increases.

The Chancellor predicted in March that he would need to borrow £10.5bn this financial year to bridge the gap between tax revenues and non-investment spending. But over the first seven months spending has been stronger and tax revenues weaker than projected for the year as a whole. He would need around £23bn if these trends persist.

]]>
http://www.ifs.org.uk/publications/3195 Thu, 02 Dec 2004 00:00:00 +0000
<![CDATA[PBR analysis: childcare strategy]]>

The Government today published its 10 year strategy for childcare.

Lorraine Dearden, Director of the Centre for Early Years and Education Research at IFS, comments on the main proposals.]]> http://www.ifs.org.uk/publications/3196 Thu, 02 Dec 2004 00:00:00 +0000 <![CDATA[Increasing innovative activity in the UK? Where now for Government support for innovation and technology transfer?]]> http://www.ifs.org.uk/publications/3189 Sun, 28 Nov 2004 00:00:00 +0000 <![CDATA[The Tax Law Review Committee<br>Aligning tax and acounting profits: the need to review current legislation]]>

As part of this process existing legislation should be reviewed to see whether it should be modified or perhaps omitted altogether in the light of closer alignment with accounts. The opportunity should also be taken to consider the scope to rationalise the tax code for companies where the issues arising are not directly related to the tax and accounting aspect. There are clearly limits to alignment with accounts but exceptions should be based on recognized principles and not merely made "ad hoc".

This Discussion Paper provides detailed consideration of selected existing corporate tax legislation concerning schedule A, the antiavoidance rules for companies and the rules for group relief set out in schedule 18 TA 1988.]]> http://www.ifs.org.uk/publications/3190 Fri, 26 Nov 2004 00:00:00 +0000 <![CDATA[Labour's tax credit changes encourage lone parents to work, but discourage many potential second earners]]>

This contrast reflects the fact that, when increasing financial support for all parents on low incomes, the Government has been more generous to parents who work, but has then had to means-test that more generous support away as household income rises. Relative to the position in 1997, this encourages lone parents and one parent in a couple to work, but then discourages any effort to increase household income further.

These are the findings of new IFS research funded by the Joseph Rowntree Foundation and published today. It examines the success of the Government's "Make Work Pay" agenda, which seeks to improve financial incentives to work, and to reduce poverty amongst working families, mainly through changes to tax credits.]]> http://www.ifs.org.uk/publications/3160 Wed, 17 Nov 2004 00:00:00 +0000 <![CDATA[How could the UK's fiscal framework be improved?]]> The Treasury today announced that the Pre-Budget Report would take place in 3 weeks' time on Thursday 2nd December. To contribute to the government's thinking in the run-up to the Budget the IFS today publishes new research, funded by the Economic and Social Research Council, assessing the operation of the Government's Code

for Fiscal Stability since its introduction in 1998. This code sets out the five key principles that the government

should adhere to in formulating fiscal policy as responsibility, stability, transparency, fairness and efficiency.

]]>
http://www.ifs.org.uk/publications/3159 Thu, 11 Nov 2004 00:00:00 +0000
<![CDATA[Britain's booming business services: good news for jobs, exports and productivity]]>

These are among the conclusions of a report published today by the Advanced Institute of Management Research (AIM) on trends in ѯffshoring' of business services and its impact on the UK economy.]]> http://www.ifs.org.uk/publications/3138 Mon, 08 Nov 2004 00:00:00 +0000 <![CDATA[Analysis of the Liberal Democrats' Citizen's Pension]]> http://www.ifs.org.uk/publications/3156 Wed, 22 Sep 2004 00:00:00 +0000 <![CDATA[Conservatives' plans for Higher Education funding: who gains and who loses?]]>

The Conservatives make clear who the gainers would be from their proposals, but are less clear who pays for those gains. But there is no free money or magic bullet: any gains for some have to be paid for by losses for others.

The exact gainers and losers cannot be known with certainty, but they are likely to be as follows:

Universities

The university sector will gain overall. This is because the Conservatives not only pledge to replace all lost fee income, but also to endow universities with additional new money. The new money amounts to the equivalent of an increase in public spending on HE of ó80 million per year.[2]

  • But only universities that can raise matching funds will benefit from this new money. It is not yet clear which universities will prove successful in this, but it is likely to be those with generous alumnae, or with other outside sources of revenue.
  • The Conservatives also plan to change the way that they allocate existing funds to universities, by moving to a "National Scholarships" scheme. It is not yet clear which universities will gain or lose from this, but the change may have important distributional consequences.

Taxpayers

The policy is designed to be revenue neutral to the taxpayer. This means that the new money for universities must come from either graduates or students, or some combination of both.

Students

Whether students will gain or lose will depend on both their family background and the choices they make about how much to borrow.

  • Students from the poorest backgrounds[3] are likely to face the choice of either lower income at university or higher loan repayments later in life, compared to under Labour. This is because although they will retain the ñ,500 grant promised to them by the Labour government, they will lose the additional ñ,200 per year additional grant promised under Labour's Single Combined Higher Education Grant[4], as well as up to ó00 per year in bursaries from the university.
  • Students from better off backgrounds will be able to borrow more in maintenance loans than under the Labour system.

Graduates

Whether graduates will gain or lose will depend on their lifetime earnings, the amount that they chose to borrow as students and the interest rate charged by banks.

  • Almost all graduates will gain from the removal of fees[5].
  • But graduates will lose from the higher interest charged on maintenance loans, and the greater risk associated with this.
  • Graduates from the lowest income backgrounds may face higher loan repayments than they would under Labour even though they no longer have to pay fees. For example, a student entitled to full grants and bursaries under Labour would receive a state-sponsored income of around ö,500 each year.[6] The total value of loan repayments, including loans for full top-up fees for this student under Labour could be 25% lower than the loan repayments of the same student under the Conservatives' system, if they borrowed up to the maximum to ensure the same ö,500 income.[7]
  • Graduates who have relatively low earnings over their lifetimes will also tend to pay more under the Conservatives' system, although for the very lowest earners any outstanding balances will be written off after 25 years under both systems. This contrasts with the Labour system where those who earn less over their lifetimes will always repay less than higher earners.
  • Even those not on low lifetime earnings will typically see the value of their debt go up over time at the start of their careers. For example, graduates with an outstanding debt of ñ6,250[8] will have to earn more than ò1,500 in order to avoid their outstanding debt levels increasing over time rather than reducing.[9] If interest rates hit 8 per cent the relevant earnings point will increase to ò4,500. Those taking career breaks will also see the value of the outstanding value of their debt go up rather than down.

A detailed briefing note on the proposals, with examples of possible gainers or losers will be published shortly.

  Ends

Notes to editors

  1. See Conservative Research Department (2004), Funding the Future, A Conservative Policy for Universities and Student, London.
  2. This increase compares to total government funding to universities (via HEFCE) of õ.993bn in 2004-05.
  3. The grant is ñ,500 if family income is below ñ5,970 and is tapered to zero at a family income of ò2,260.
  4. See Department for Education and Skills (2004), Moving toward a Single Combined Grant for Higher Education, London.
  5. Under the Labour system some universities may choose not to charge fees for some courses, in which case there would be no gain.
  6. This would be made up of ò,700 in grants, ó00 in bursaries and ó,555 in maintenance loans for a student living away from home outside of London not in their final year.
  7. This example assumes an average male graduate earnings profile. The student under the Labour system borrows in total ñ9,335 over a 3 year course. The net present value of his repayments is ñ3,680, assuming a 2.5 per cent discount rate. Under the Conservative system his total borrowing is ñ5,000 over the 3 year course. The net present value of the repayments assuming a 6.5 per cent interest rate is ñ7,140.
  8. This will be the graduating debt in 2006/07 prices of a student who borrows the maximum õ,000 per year over three years at an interest rate of 6.5 per cent.
  9. Our estimates of the median graduate salaries at age 21, based on the Labour Force Survey, are ñ5,100 for males and ñ4,100 for females.
]]>
http://www.ifs.org.uk/publications/3157 Wed, 08 Sep 2004 00:00:00 +0000
<![CDATA[Pension reform and the welfare of pensioners]]>

These questions will be debated at this year's BA Festival of Science, in a session on "Pension reform and the welfare of pensioners". Top researchers from Europe and America will discuss the way forward for government policy, drawing on experience and data from the UK and abroad.

Frances Cairncross, Chair of the Economic and Social Research Council and author of a recent survey of retirement in The Economist, will be chairing the session. She says, "How we deal with pensions policy now and in the future is one of the most important questions facing our society today. At this session some of the leading thinkers on pensions will debate the key questions."]]> http://www.ifs.org.uk/publications/3161 Mon, 06 Sep 2004 00:00:00 +0000 <![CDATA[Retirement and pension arrangements in Britain: recent trends and prospects for the future]]>

This presentation at the festival of science from researchers at the ESRC Centre at IFS documents the pressures for change on retirement and pensioner income in Britain and examines their implications for future generations of pensioners.]]> http://www.ifs.org.uk/publications/3162 Mon, 06 Sep 2004 00:00:00 +0000 <![CDATA[Spending Review 2004]]> http://www.ifs.org.uk/publications/1829 Mon, 12 Jul 2004 00:00:00 +0000 <![CDATA[Educational inequality]]> http://www.ifs.org.uk/publications/1832 Thu, 24 Jun 2004 00:00:00 +0000 <![CDATA[Poverty or preferences?]]> http://www.ifs.org.uk/publications/1760 Thu, 24 Jun 2004 00:00:00 +0000 <![CDATA[Tax and benefit policy and inequality]]> http://www.ifs.org.uk/publications/1831 Wed, 23 Jun 2004 00:00:00 +0000 <![CDATA[Permanent Differences? Income and Expenditure Inequality in 1990s and 2000s]]> http://www.ifs.org.uk/publications/1830 Wed, 23 Jun 2004 00:00:00 +0000 <![CDATA[Debt and arrears amongst low-income families]]>

Research published in the forthcoming March issue of Fiscal Studies shows that the debt problem is a little different from that portrayed in some parts of the media: consumer debt is expanding rapidly on the back of a growth in real living standards and rising house prices but it is not homeowners who face difficulties in paying back debt; rather it is people with low incomes, typically without a job or their own property, who report problems with debt arrears. Moreover, the focus on credit card debt in the media ignores that fact that families use a great variety of sources of credit, including catalogues, store cards and mail order, and that arrears on some of these credit sources are much more prevalent among families with children than arrears on credit cards.

This research uses a large representative sample of single parents and of low-income couples with children (with incomes up to 35% above the Family Credit ceiling) to examine access to credit and arrears on debt. The sample covers those families most likely to get into difficulties. The sample is 'tracked' in subsequent years through the Family and Children Survey, which also expands the sample to be representative of all families with children.

The paper focuses on five areas of household finances where problems of arrears and default might arise. These are credit-financed purchases, loans from financial organisations (ranging from banks to local moneylenders), loans from family, and arrears arising from non-payment for housing and for utilities. The primary focus of this analysis is on the first wave of the data (collected in 1999), although the authors also carry out some simple analysis of persistence in the use of particular forms of credit and, in particular, in the persistence of default and arrears (using data from tracking the sample in 2000 and 2001).

The research, by Sarah Bridges and Richard Disney (University of Nottingham), reveals strikingly different patterns of debt between one-parent families and low-income couples with children, and between tenants and homeowners.

Key findings include:

  • There were striking differences in credit use (other than mortgages) between homeowners and tenants. 57% of home-owning couples and 54% of home-owning single parents were using credit cards or store cards, as opposed to 19% of tenant couples and 13% of tenant single parents.
  • Homeowners are roughly twice as likely as tenants to use bank loans and overdrafts. They are also more likely to have bank accounts in the first place. This could be because these types of credit are more readily available to home owners.
  • Conversely, catalogues and mail-order schemes were used more by tenants than by home-owners. Roughly 1 in 20 tenants face problems in repaying debt incurred through catalogue and mail-order schemes.
  • Informal sources of loans (friends and family) were used by roughly one in six families, especially tenants and lone parents. Default rates were high for all types of families for informal loans and for loans from moneylenders.
  • 12% of home-owning couples and 13% of home-owning single parents were having difficulties keeping up payments on loans from financial institutions or moneylenders, as opposed to 22% of tenant couples and 25% of tenant single parents. This seems to contradict the proposition that homeowners are more likely to default because they can borrow larger amounts, using the house as collateral. The more likely explanation is that problems of debt arise from low incomes, rather than from 'irresponsible lending' to homeowners by high-street institutions.
  • Over 40% of lone parents and 30% of low-income couples with children are behind with bills for various household utilities and services.
  • Given that renters are typically poorer than owner-occupiers and less likely to be in stable employment, it is not surprising to find that the incidence of rent arrears (34%) is much greater than that of mortgage arrears (9%).
  • Older respondents are associated with lower amounts of arrears. However, every extra child raises the average amount of arrears by õ7 for couples and ÷5 for single parents.
  • In terms of family income, having access to housing and disability benefits tended to reduce arrears, although 'other benefits' were associated with an increase.
  • There is evidence, particularly among single parents, that working increases average arrears - presumably because work is associated with greater access to credit arrangements and/or because work involves expenses. However, once people are in work, higher earnings significantly reduce arrears.
  • People with higher levels of qualifications, which are usually associated with higher incomes, had lower levels of arrears.

The results suggest that low-income families indeed utilise a variety of credit arrangements, with greater use of catalogues and mail-order schemes, relative to credit cards, and loans from sources other than high-street banks, relative to the population as a whole. This may illustrate constraints on access to normal 'high-street credit', but such families may also choose other sources of credit for a number of reasons that are unrelated to access. For example, temporary non-payment of regular bills such as utility bills, or loans from relatives, may be a less costly alternative to bank loans or credit cards as a means of financing current expenditures.

Persistence of arrears was found to be greatest in dealings with local authorities - through levy of council tax and possibly local authority renting - along with mortgage lenders and water utilities (who face legal limitations on their ability to cut off non-payers), but the annual rates of persistence are rather low. The figures (in the attachment) illustrate this. In addition, the pattern of arrears suggests that low income families utilise categories of credit arrangements where they can engage in some negotiation over payment of arrears and where interest is typically not charged on overdue amounts. There is also some evidence of rotation of arrears on utility bills - that is, switching between providers of different utilities in non-payment

  Ends

Notes to editors

  1. The article, by Richard Disney (Experian Centre for Economic Modelling, School of Economics, University of Nottingham and Institute for Fiscal Studies) and Sarah Bridges (Experian Centre for Economic Modelling, School of Economics, University of Nottingham) is published in the March issue of Fiscal Studies, (2004) vol. 25, no. 1, pp. 1-25. Press copies are available from the IFS press office (contact Emma Hyman on 020 7291 4800 or emma_h@ifs.org.uk).
  2. A briefing to launch the work will be held on Thursday 1st April at 12.30 at the Institute for Fiscal Studies. The authors will also present new data from 2001. Please contact Bonnie Brimstone on 020 7291 4800 or bonnie_b@ifs.org.uk if you would like to attend.
  3. The figures (in the attachment) show the persistence of debt for couples with children and for lone parents.
]]>
http://www.ifs.org.uk/publications/3158 Thu, 01 Apr 2004 00:00:00 +0000
<![CDATA[IFS analysis of the Budget 2004]]> Public finances

Public spending

Distributional analysis

Public finances

Gordon Brown's eighth Budget signalled that Labour will go into the next election offering voters a rising tax burden and much slower growth in public spending than we have seen in recent years. Not necessarily what the spin-doctor ordered. The Chancellor hopes to sweeten the pill by identifying 7.5% of efficiency savings from departmental spending by 2007-08, to keep the growth in spending on service delivery in line with recent trends. He demonstrated his intent by announcing a plan to cut a net 40,500 jobs from the tax collection and work and pensions departments.

Although the public finances are in good shape by international standards, Mr Brown needs to restrain spending and collect more tax to reduce government borrowing and thereby stick to his fiscal rules. Borrowing is significantly higher now than the Chancellor forecast a year ago, even though the economy has grown as strongly as he expected.

Setting out the envelope for this summer's Spending Review, Mr Brown announced that total public spending would rise by an average of 2.7% a year in real terms in 2006-07 and 2007-08, probably the first two full years of the next parliament. This is markedly lower than the average real increase of around 4% a year seen since April 1999.

Public sector investment and spending on the NHS and education will both grow more quickly than spending overall, squeezing other Whitehall budgets. On our estimates, total spending outside that on the NHS and education is set to rise by only 1.4% a year in real terms over the same two years - falling as a share of national income. This includes spending on defence, law and order and transport, although the Chancellor promised that spending in these three areas would continue to grow in real terms.

Following the decline Labour chose to inherit from the Conservatives, public spending overall has risen from 37.4% of national income in 1999-2000 to 41.2% in the financial year just ending. Over the next four years it is planned to increase much more modestly, to 42.2% of national income, with non-investment spending virtually static.

To meet the fiscal rules and pay for the increase in spending we have already seen, Mr Brown wants to see current receipts (mostly tax revenues) rising from 37.8% of national income this year to 40.5% in 2008-09, the highest level since the boom of the late 1980s. This relies in part on revenues generated by a more buoyant financial sector and also on "fiscal drag", as real earnings growth pushes more people into higher tax brackets.

The specific measures announced in the Budget will do little to affect the path of the public finances over the next few years. The Chancellor's eye-catching £100 payment for all households containing someone 70 or over will cost ô75m in 2004-05, but - for now at least - this expense will last for only one year.

Over the longer term, he has had to find òbn to put in his reserve for unexpected spending needs. In effect he has recouped some of this with a package of anti-tax avoidance measures and a new 19% minimum corporation tax rate on distributed profits.

The Chancellor's revenue projections are also slightly higher than those in the Pre-Budget Report because of forecasting changes: a reasonable but less cautious assessment of prospective VAT revenues, the impact of higher share prices on receipts from corporation tax, stamp duty and capital taxes, and higher consumer spending.

The Chancellor's golden rule says the government should only borrow to invest and that other spending should therefore be covered by tax revenue over the ups and downs of the economic cycle. This means the current budget balance - tax revenues minus non-investment spending - should be in balance or surplus.

The Chancellor forecasts that the current budget will move from a deficit of 1.9% of national income in 2003-04 to a surplus of 0.7% of national income in 2008-09. This implies that he would meet the rule over the current economic cycle (which runs from 1999-2000 to 2005-06) with an average surplus of just 0.1% of national income to spare. This is equivalent to just over øbn - a smaller amount than the £14bn he predicted just three months ago. With two years of the cycle still to go, this leaves little margin for error.

Indeed, on the method the Chancellor used in assessing whether the golden rule would be achieved in last year's Budget speech - adding together the cash values of the surpluses and deficits over the cycle - his forecasts now imply that he would be on course to break the rule by ñ.1bn. The measure the government currently focuses on gives greater weight to a pound of surplus at the beginning of the cycle than to a pound of deficit at the end.

Mr Brown has insisted he will meet the golden rule over this period and it would be a blow to his credibility if he did not. But more important in assessing the long-term health of the public finances is to ask whether his spending plans and tax decisions are consistent with meeting the rule looking forward. We can get a snapshot by asking what path the current budget would take if you removed the impact of the economic cycle.

Mr Brown believes that national output is running around 1.4% below its trend level and that the economy can therefore sustain two years of above-trend growth as the slack is used up. This would help to shrink the deficit by increasing tax revenues and restraining social security spending.

Adjusting for this cyclical effect, Mr Brown predicts that the underlying current budget balance will improve from a deficit of 1% of national income this year to a surplus of 0.7% in 2008-09. This is a slightly larger swing into the black than Mr Brown was expecting in December.

But it remains doubtful whether the bounce-back in revenues - above and beyond any bounce-back in the economy - will be large enough to turn the public finances around in quite this dramatic a fashion. If not, to maintain the credibility of his rules Mr Brown may find himself having to announce further measures to bring about the increase in the tax burden he needs. Whether he would do so before an election remains to be seen.

Figure 1. Predictions of the cyclically adjusted current budget balance from 1999-2000 to the end of the forecasting period, taken from recent Budgets

Cyclically adjusted Budget balance

Source: HM Treasury, various Budgets.

Public Spending

On the public spending front, the Budget announced small increases in the spending totals that were pencilled in for 2006-07 and 2007-08. These totals will be allocated among departments in this summer's spending review. However, the Chancellor has already committed himself to both substantial real increases in spending on the NHS until 2007-08 and an increase in net investment to 2ܥ of national income by the same year. In addition, he pre-announced his spending plans for education in 2006-07 and 2007-08. These promises will limit considerably the amount that is available for spending on other areas.

Figure 2, below, illustrates that total public spending will rise between this year and the end of the 2004 Spending Review period from 41.2% of national income to 42.2%. Within this total the following changes will occur:

  • The composition will shift in favour of spending on the NHS and education. These two areas will increase their share of national income from about 6.7% and 5.3% respectively this year, to 8.0% and 5.6% by 2007-08.
  • Spending on other departments and functions will therefore decline from 29.1% to 28.6%. This still represents a real terms increase of 2.3% per year on average as national income grows in real terms. It is from within this increase that the Chancellor will allocate spending on remaining departments and functions.
  • There will also be a shift away from current spending towards investment spending. Some of this increase in investment spending will be on NHS or education investment, so this corresponds to an overall shift in favour of current spending on the NHS and education, and on public sector net investment. Assuming that the spilt between current and capital spending on the NHS and education in the UK mirrors the split that the Chancellor announced for the totals for England, current NHS and education and overall investment will increase their share of national income from about 12.5% this year to 14.6% in 2007-08.
  • Based on the same assumptions about the current capital split for the NHS and education, other current spending, both that within Departmental Expenditure Limits and that planned on an annual basis, will decline from 28.6% to 27.6% over the same period.

The growth rates in non-NHS and non-education areas are relatively low compared both to spending growth during the 2002 Spending Review period and to expected real growth in national income during 2006-07 and 2007-08. They will grow at an average annual real rate of 1.4%, corresponding to a fall as a percentage of national income. Within this total the Chancellor has committed himself to increasing spending on defence, the home office and transport in real terms and to increase spending in housing, local government, children and the elderly in nominal terms. This could constrain the allocations to remaining departments.

Figure 2. Budget 2004's planned public spending as a share of national income, by component, 2003-04 compared with 2005-06 and 2007-08

Planned spending

Notes: The calculations made to produce this graph assume that the ratio of capital to current spending on the NHS across the whole UK will be the same in future years as the ratio of spending on the NHS in England alone.

Source: HM Treasury, Spending Review 2002 and Budget 2004.

The Chancellor will have a difficult job this summer reconciling the squeeze in non-NHS and education current spending with his policy aspirations and priorities. The biggest remaining spending areas are social security benefits, transport, defence and law and order. He has already made commitments on most of these areas and social security benefits are not a tempting target for spending cuts for a Chancellor who aims to eliminate both child and pensioner poverty.

Both of the main opposition parties had already outlined their public spending stances and priorities in advance of the Budget. Figure 3 shows how their proposals for total public spending compare to the Chancellor's public spending record since 1997 and his plans until 2007-08.

The Liberal Democrats have broadly endorsed Mr Brown's planned public spending totals for the next few years. Thereafter they have argued that over the medium term public spending should not change as a share of national income. However, within those totals, they would like to reshuffle spending, diverting at least 1% of Total Managed Expenditure a year away from areas they consider less beneficial to their five policy priorities. Sources of cuts include the abolition of the child trust fund, mergers and abolitions of eight government departments, privatisation of some nationally owned corporations and the relocation of civil servants to areas outside London. Mr Brown will, presumably, indicate this summer the extent to which he wants to reallocate spending in a similar fashion. The Liberal Democrats also propose to spend an extra óbn on replacing tuition fees and providing free personal care to the elderly. These would be paid for by a higher tax on incomes above £100,000.

Figure 3. The three main parties' projected paths for public spending in the next Parliament

Parties' projected spending

Source: HM Treasury, various Budgets, and the Conservative and Liberal Democrat parties.

The Conservatives, by contrast, want to reduce the size of public spending relative to national income so that it has returned by 2011-12 from 41.9% of national income back to the 39.9% it accounted for in 2002-03. Within this smaller total, they want to spend liberally on the NHS and schools. So the Conservatives' plans imply a more significant change in the composition of public spending - and bigger cuts in other (as yet unspecified) departmental budgets. The large areas of spending that have not been protected include higher education, transport, law and order and defence.

If our forecasts for the public finances prove to be correct, and if the Chancellor after the next election wants to continue to expect to meet the golden rule in the future, then a Labour or Liberal Democrat chancellor would probably have to announce fresh tax increases. A Conservative Chancellor, by contrast, might be able to avoid having to announce any further tax increases - the planned increase in the tax burden between now and the middle of the next parliament would be sufficient to finance their spending plans. But the price of avoiding new taxes would be having to make even tougher spending decisions than those Mr Brown now faces in the Spending Review.

Distributional Analysis

The pre-announced budget changes, which included the earnings indexation of both the Pension Credit and pensioner tax allowances, were mildly progessive. However, the absolute magnitude of these changes upon the distribution of incomes were small. The poorest decile group gained by 1.3%, with the second and third decile groups gaining by 0.7% and 0.4% respectively. Across the entire income distribution, these changes averaged at just 0.2%. The impact of changes by decile is shown in Figure 4.

Figure 4: % change in disposable income per week by decile

Decile

New
measures

Pre-announced
measures

Poorest

0.40

1.30

Decile 2

0.20

1.10

Decile 3

0.20

0.70

Decile 4

0.20

0.40

Decile 5

0.10

0.20

Decile 6

0.10

0.10

Decile 7

0.10

0.00

Decile 8

0.00

0.00

Decile 9

0.00

0.00

Richest

0.00

0.00

Total

0.10

0.20


Note: To see the amount of disposable income someone would need to be in a certain decile, download decile points spreadsheet.

Very few of the new announcments in Gordon Brown's eighth budget will impact upon the distribution of household disposable incomes.

While the duties on beer, bottled wine and cigarettes all rose in line with inflation, there were freezes for spirits, sparkling wine and cider. These freezes correspond to real decreases, so that households who consume these products, will be gaining in real terms. However, the gains for such groups are small relative to their incomes, so that the effect of these upon the income distribution is negligble.

At an estimated cost of £475 million to the exchequer, the Chancellor announced a one off payment of ñ00 for households containing at least one pensioner aged 70 or over. Single pensioners gain by an average of 0.6% this year, while pensioner couples gain by 0.3%. These gains are spread across the income distribution, and are slightly more concentrated in the poorer decile groups. The impact by changes by family type is shown in Figure 6. The cost of this change is around two-thirds of the estimated value of council tax benefit that pensioners fail to claim.

Figure 5: % change in disposable income per week by family type

Family type

New
measures

Pre-announced
measures

Single unemployed

0.10

0.10

Single employed

0.00

0.00

Single parent family

0.00

1.40

NE couple w/o kids

0.10

0.10

NE couple with kids

0.00

1.60

SE couple w/o kids

0.00

0.00

SE couple with kids

0.00

0.40

TE couple w/o kids

0.00

0.00

TE couple with kids

0.00

0.10

Single pensioner

0.60

0.40

Couple pensioner

0.30

0.20

Total

0.10

0.20


Note: NE = no earners; SE = single earner; TE = two earners.

  Ends

Notes to editors

  1. A briefing covering our Budget analysis will be held at IFS on Thursday 18th march at 1pm. Please contact Bonnie Brimstone if you would like to come.

  2. A spreadsheet with the figures from the two tables above can be downloaded here.
  3. The estimated take-up of Council Tax Benefit amongst pensioners in 2001/02 was 60%, with around £680m of support unclaimed.
]]>
http://www.ifs.org.uk/publications/2926 Wed, 17 Mar 2004 00:00:00 +0000
<![CDATA[IFS Green Budget 2004]]>

Planning the public finances

The Chancellor's tax and spending plans are constrained by two self-imposed fiscal rules: the golden rule and the sustainable investment rule. In the December 2003 Pre-Budget Report, the Treasury estimated that the average surplus on the current budget between 1999ֲ000 and 2005ְ6 (which it regards as the current economic cycle) would be positive and that the golden rule would therefore be met.

But the amount by which the Treasury expects to overachieve the golden rule has fallen substantially over the past three years, reflecting policy decisions and forecast revisions. This is partly to be expected as the uncertainties surrounding the out-turn over the rest of the cycle diminish. But given the size and direction of recent forecasting errors, even on the Treasury's own figures it is touch-and-go whether the golden rule can be met over the current cycle without reducing existing spending plans or raising more revenue.

The Chancellor has invested considerable political capital in meeting the golden rule and the credibility of the rule could suffer if it is broken on this basis. But judging compliance with the rule by calculating the average surplus on the current budget in the current cycle places too much emphasis on the legacy of past policy decisions and external shocks. The Green Budget argues that a better approach would be to ask if current policy appears consistent with meeting the golden rule in the future.

We can assess this by looking at what the expected path of the current budget balance would be if the economy were running at full capacity. Even in the absence of new policy announcements, the Treasury expects this cyclically adjusted balance to move from a deficit of 0.8 per cent of national income this year ֠the weakest since Labour came to power ֠to a surplus of 0.6 per cent in 2008ְ9. This would be consistent with meeting the golden rule looking forward.

This forecast implies that the rise in current spending as a share of national income seen since April 1999 comes to a halt this year, underlining the pressure facing many government departments to deliver noticeable improvements in public services without further increases in their resources. The forecast also implies a steady rise in tax revenues as a share of national income over the next few years. The question for Mr Brown in the Budget is whether he will have to announce new measures to deliver that rise.

IFS public finance forecasts

The Green Budget is marginally more optimistic than the Pre-Budget Report about the public finances during the current financial year, expecting a current budget deficit £600 million lower than the Treasury, at £18.7 billion, and public sector net borrowing £700 million lower than the Treasury, at £36.7 billion. For 2004ְ5, we are slightly more pessimistic than the Treasury, expecting a current deficit of £12.0 billion (compared with £8.3 billion in the Pre-Budget Report) and public sector net borrowing of £34.7 billion (compared with £31.0 billion in the Pre-Budget Report).

We are also more pessimistic than the Pre-Budget Report about the medium-term prospects for the public finances, because we expect revenues to be lower and spending higher than the Treasury projects. By 2007ְ8, we expect current receipts to be 0.6 per cent of national income lower than the Treasury. The overall impact is that we expect public sector net borrowing to be £38 billion in 2006ְ7 and 2007ְ8 rather than the £27 billion predicted in the Pre- Budget Report. And while the Treasury expects the current budget to be in balance in 2006ְ7 and in surplus by £4 billion in 2007ְ8, we expect a deficit of £11 billion narrowing to a deficit of £7 billion. Our forecasts imply an average current budget surplus of 0.0 per cent of national income a year over the current economic cycle, just meeting the golden rule, but with less margin for error than shown by the Pre-Budget Report.

Our forecasts do not imply that there is a crisis in the public finances. The government's debt remains modest by international and historical standards. But the Chancellor has said that he wishes to be judged by the fiscal rules he set himself in 1998. Against that benchmark, in the absence of fresh policy measures, we do not believe that he can expect to meet the golden rule on a forward-looking basis with the comfort he has sought in previous Budgets. We assume from past experience that if the Chancellor comes to share this view, he will opt to announce fresh tax increases rather than cut his spending plans.

Our forecasts suggest that the next economic cycle will begin in 2006ְ7 with a current budget deficit of 0.8 per cent of national income. To safeguard the golden rule in the future would require this gap to be closed. This would require the announcement of fresh tax increases worth around £10 billion.

But in the last Budget, Mr Brown aimed for a cyclically adjusted current budget surplus of 0.6 per cent of national income at the end of his forecasting period. This was justified in part on the grounds that the public finances might be less healthy than they seem if the Treasury has overestimated the amount of spare capacity in the economy. This seems a pertinent concern now, given that the IMF, OECD and Bank of England all appear to believe that the Treasury is overestimating the amount of spare capacity.

To achieve a cyclically adjusted surplus of 0.6 per cent of national income in the first year of the next cycle would require new tax measures raising £17 billion. But Mr Brown indicated in the last Budget that he was happy with a surplus of 0.4 per cent of national income in 2006ְ7, relying on fiscal drag to raise taxes by the extra 0.2 per cent of national income in the following year.

This implies that Mr Brown needs to announce extra tax increases worth £13 billion to expect to meet the golden rule looking forward with the comfort he sought in last year's Budget. There is no indication that the Chancellor shares this belief. But if he comes to do so, he should act promptly to maintain the credibility of his fiscal framework.

Options for raising revenue

Income tax, National Insurance (NI), VAT and excise duties are currently the government's largest sources of revenue. If the Chancellor decides that he needs to raise more money, they offer potential tax-raising opportunities. The simplest way to raise money would be to increase income tax or NI rates. The government has pledged not to increase the basic or higher rates of income tax during this Parliament, so higher NI rates look the more likely of the two. The last increase in NI rates took effect in April 2003 and meant employees and the self-employed paid contributions (at a rate of 1 per cent) for the first time on earnings above the upper earnings limit. Increasing this contribution rate from 1 per cent to 6 per cent would raise a little over £4 billion, with the burden falling overwhelmingly on the richest tenth of the population. Raising the upper earnings limit for NI to the point at which higher-rate income tax begins to be paid would raise a little over £1 billion.

Another alternative would be to freeze both income tax and NI thresholds. Taking into account the impact on income-related benefits this would raise an extra £8.8 billion a year in today's money by 2009ֱ0 and would result in an additional 2.4 million higher rate tax payers.

If the Chancellor does want to raise extra money, freezing the income tax personal allowance and National Insurance earnings threshold, raising the employees' National Insurance rate above the upper earnings limit, or moving the upper earnings limit closer to the point at which higher-rate income tax begins to be paid may be the least unattractive options.

The taxation of housing

The Treasury has been investigating whether tax instruments could be used to help stabilise the housing market and therefore the economy more generally, especially if Britain were to adopt the Euro. In that context, a study published by the Treasury last year argued that ѩnvestment in housing is relatively lightly taxed compared to other investmentsҮ This suggests that the Chancellor might consider raising housing taxes if he decides in the future that he needs more revenue or to create more stability in the housing market.

However, investment in principal residences does not appear to be particularly favourably taxed compared with other investments, such as private pensions or ISAs. Houses are consumption goods as well as investment goods, and the argument that they are lightly taxed by this yardstick has greater force. However, while housing is the only major durable good zero-rated for VAT, it is liable for both council tax and stamp duty.

The government has a number of options if it wants to tax housing more heavily although there has been no firm indication from the government that this is a route that it wishes to take. The Green Budget considers imposing VAT on new homes, increasing stamp duty on house purchases, introducing a property wealth tax or extending capital gains tax to principal residences.

Company taxation

Issues raised for consultation

In August 2003, the government published a corporation tax reform consultation document for the third summer in a row. Continual consultation does not provide a stable environment for business planning, but the corporate tax system is facing international pressures beyond the government's control. First, the UK is competing with other countries to make itself an attractive location for businesses. Second, multinational companies are becoming more willing to take national governments to the European Court of Justice if they believe that tax regimes discriminate against them. The Green Budget discusses some of the issues raised for consultation.

Incorporation

The 2002 Budget announced a new 0 per cent corporation tax rate for companies with taxable profits below £10,000. The Treasury predicted that this would cost £265 million in 2003ְ4, but IFS, among others, predicted that the costs would become much greater. The new rate increased the incentive for many self-employed people to form companies in which they are the sole employee and shareholder and thereby reduce their tax bill. The number of incorporations has jumped sharply in the wake of the 0 per cent rate's introduction.

The Chancellor now appears to be considering steps to reduce the differential tax treatment between the selfemployed and incorporated businesses, possibly by increasing dividend taxation. A simpler solution, if there is a concern over tax avoidance, would be to remove the 0 per cent corporation tax rate. However, frequent changes to the tax system, particularly if made without prior consultation, do not lead to a stable environment for businesses making long-term investment decisions.

Issues in public service delivery

The main public services have enjoyed large real increases in spending since April 1999. While there have been noticeable improvements in some outputs, in areas such as health, education and transport, there is more to do if the government's targets are to be met.

Progress on service delivery has been modest and mixed from area to area. Opinion polls show that most people believe public services have deteriorated since Labour came to power in 1997 and that many are also pessimistic about the future, especially with regard to public transport and the NHS. People are also pessimistic about law and order, but expectations for education are more finely balanced.

The Pre-Budget Report assumes that public spending rises by 3 per cent a year in real terms in the forthcoming spending review period, from 2005ְ6 to 2007ְ8, rising slightly as a share of national income. Increasing spending at the planned average annual rate for 1999ֲ005 would cost an extra £4.6 billion a year, while holding spending static as a share of national income would save £2.5 billion a year and freezing it in real terms would save £14.2 billion a year, relative to current plans.

  Ends

Notes to Editors:

  1. 1. The IFS Green Budget: January 2003, edited by Robert Chote, Carl Emmerson and Zoë Oldfield, is published on 28th January 2004 and is available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, price £40 (£15 to IFS members), telephone 020 7291 4800 or e-mail mailbox@ifs.org.uk
  2. 2. The Green Budget will be launched on 28th January, 11am at the IFS. For press places, please telephone IFS on 020 7291 4800.
  3. 3. The Green Budget will also be available from the IFS website, www.ifs.org.uk/gbfiles/gb2004.shtml after the conference.

]]>
http://www.ifs.org.uk/publications/1759 Wed, 28 Jan 2004 00:00:00 +0000
<![CDATA[Higher education finance bill]]> http://www.ifs.org.uk/publications/1828 Tue, 27 Jan 2004 00:00:00 +0000 <![CDATA[Evaluating nutrition and education programmes in developing countries]]> http://www.ifs.org.uk/publications/1827 Tue, 20 Jan 2004 00:00:00 +0000 <![CDATA[Supporting families]]> http://www.ifs.org.uk/publications/1826 Wed, 14 Jan 2004 00:00:00 +0000 <![CDATA[Pre-Budget Report analysis 2003]]>

For more detail public finance analysis, you can download further analysis. ]]> http://www.ifs.org.uk/publications/3142 Wed, 10 Dec 2003 00:00:00 +0000 <![CDATA[Service sectors holding back UK productivity performance]]> http://www.ifs.org.uk/publications/1833 Mon, 08 Dec 2003 00:00:00 +0000 <![CDATA[IFS analysis of the higher education funding options]]> http://www.ifs.org.uk/publications/1834 Fri, 05 Dec 2003 00:00:00 +0000 <![CDATA[Health, wealth and lifesyles of older people]]> http://www.ifs.org.uk/publications/1835 Thu, 04 Dec 2003 00:00:00 +0000 <![CDATA[Response to civil partnership consultation]]>

Responding to the DTI's consultation on Civil Partnerships, the TLRC has drawn attention to the variety of treatments currently accorded married and cohabiting couples under the taxing Acts. They suggest that Civil Partnerships could be accorded the same tax treatment as married couples, but at the same time urge the government to review and simplify the inconsistent assessment system currently in place for all families.

This confusion derives in part from the different approaches adopted by the tax and social security systems. It is just over 10 years since the introduction of separate taxation for married couples. The social security system, however, has necessarily continued to function by reference to the family unit, whether or not the unit is formally constituted by marriage. The recent introduction to the tax system of tax credits has produced an inevitable clash between these two approaches.

At the same time different taxes – such as inheritance tax and capital gains tax - have adopted different approaches to marriage, separation and divorce. Some of these differences are no more than a matter of history and legislative drafting; others are based on more solid policy grounds. The overall outcome is a policy mix that looks confused.

The DTI's consultation on a concept of Civil Partnership does not at this stage extend to the taxation arrangements for such partnerships. In theory it would be possible in many cases to extend the taxation treatment of married couples to those same-sex couples who enter into a civil partnership. The confused state of current arrangements for marriage, however, suggests that the time is ripe for a systematic review of the way in which the tax system recognises marriage and the family.

  Ends

Notes to Editors

  1. The Tax Law Review Committee was set up by the IFS in autumn 1994 to ask whether the tax system was working as intended, efficiently and without imposing unnecessary burdens. Its role is to keep under review the state and operation of tax law in the UK, which it does by selecting particular topics for study. It does not seek to question Government policy as such but to look at whether existing arrangements achieve the policy in a satisfactory and efficient way. Among its current projects is one that is considering the operation of the tax system in relation to the family.

    The Committee's members represent a broad cross-section of informed opinion from industry and commerce, the judiciary, academia, the professions and political and public life.

  2. For further information please contact Emma Hyman (IFS), Mark Robson (Lady Margaret Hall, 01865 274322, ) or Malcolm Gammie Q.C. (TLRC Research Director, One Essex Court, 020 7583 2000).
]]>
http://www.ifs.org.uk/publications/1836 Wed, 08 Oct 2003 00:00:00 +0000
<![CDATA[Two cheers for the pension credit]]>

The detailed findings of the research are that:

  • The Pension Credit reform will cost around £2 billion a year. Just over half of families with an individual aged 65 and over are eligible. The reform is progressive: the poorest ten percent of families containing an individual aged 65 or over will, if everyone who is eligible for the payment takes it up, see their income rise by over 8% on average.
  • The implementation problems that arose when the Child Tax Credit and Working Tax Credit were introduced in April are unlikely to reoccur with the Pension Credit. Those who used to be in receipt of the Minimum Income Guarantee should automatically receive the Pension Credit. Other pensioners, entitled to means-tested benefits for the first time, have a year to make their claims.
  • The Pension Credit is a more cost effective way of supporting low-income pensioners than increasing the Basic State Pension. But the Pension Credit will only reduce pensioner poverty if the pensioners claim it. The Government has a challenging target to pay the Pension Credit to 73% of eligible households by 2006.1 And even if this target is met exactly almost 1 million pensioner households would still be going without money to which they are entitled.
  • Economic theory suggests that those who newly expect to be eligible for means-tested benefits as a result of the Pension Credit will reduce their retirement saving. The impact of the Pension Credit on the saving behaviour of those who were already expecting to be in receipt of means-tested benefits is ambiguous. But the combined impact on aggregate (private plus public) saving is almost certain to be negative.
  • In the long-run, if the formal Government policy of increasing the Basic State Pension with growth in prices while increasing the Pension Credit with growth in average earnings is met, then it is likely that an increasing proportion of families with an individual aged 65 or over will be eligible for means-tested benefits. In this scenario, it is even more likely that the Pension Credit will reduce overall private saving in the long-run.

Carl Emmerson, a Programme Director at the Institute for Fiscal Studies said that "The Pension Credit will help many low to middle income pensioners and reward them for having saved in the past. But for many working age individuals it will discourage retirement saving."

Mike Brewer, a Senior Research Economist at the Institute for Fiscal Studies added "The Government has set itself a challenging target of paying the Pension Credit to 3 million families by 2006. But if this target is met exactly then nearly 1 million pensioners will still not be receiving the benefit to which they are entitled."

  Ends

Notes to Editors

  1. There were 1.8 million families receiving the Minimum Income Guarantee in May 2003. The Government's target is for 3 million families to be receiving the pension credit by 2006.
  2. Information about the pension credit can be obtained from the Pension Service.
  3. Two cheers for the Pension Credit will be available on-line.
  4. For press enquiries and advance press copies, contact Emma Hyman (020 7291 4850 or emma_h@ifs.org.uk).
  5. Financial support from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS (grant number M535255111) is gratefully acknowledged.]]> http://www.ifs.org.uk/publications/1837 Mon, 06 Oct 2003 00:00:00 +0000 <![CDATA[Conservative proposals for the future of the basic state pensions]]> http://www.ifs.org.uk/publications/1838 Sat, 04 Oct 2003 00:00:00 +0000 <![CDATA[Do we need a new Gateway to Saving? ]]> http://www.ifs.org.uk/publications/3979 Fri, 08 Aug 2003 00:00:00 +0000 <![CDATA[HE finance proposals]]> The Government and the Conservative Party have announced starkly different policies for funding Higher Education (HE). The Government wants to raise tuition fees and increase student numbers. The Conservatives want to abolish tuition fees and leave student numbers roughly where they are. Funding per student would rise in both cases.

    New research from the IFS compares the reforms proposed by the two parties, looking at the effect on student and graduate finances, the distributional impact on households with different incomes, and the cost to the Exchequer and taxpayers in general.

    We find that:

    • Under both proposals, students would be better off while at university than under the current system. The gains would be the same under each proposal, but still insufficient to cover living costs as calculated by the National Union of Students.

    • The overall cost to the taxpayer would be about the same under both systems (around £1.8 billion under the White Paper, and £1.7 billion under the Conservatives).

    • For a given amount of government spending, more students could go to university under the White Paper proposals because graduates would be contributing extra money through loan repayments to cover tuition fees.

    • The Conservative proposals would benefit the richest households more than the Government proposals, while the poorest households would be worse off.

    Financial effect on students and graduates

    The financial impact on students while they are at university would be essentially the same under the two proposals. However, once they finish studying, the effects on graduates could differ significantly.

    Higher contributions to tuition fees under the White Paper proposals mean that students would graduate with bigger debts than under the Conservative system. They would then have to repay their debts for longer over their working lives. Our research estimates that the "average" graduate (with no career breaks) would make loan repayments for:

    • 7 years under the current system;

    • 8 years under the Conservative proposals; and

    • 11 years under the White Paper proposals.

    Distributional impact on the whole population


    If the Government's White Paper proposals were to be adopted, a move to the proposed Conservative system would mean:

    • A redistribution of income from poorer to richer households (Figure 1).

    • Households in the poorest income decile would lose 1.5 per cent of their income on average, while households in the top income decile would gain by around 0.4 per cent from this switch in funding regimes (Figure 1).

    • This pattern of gains and losses would be driven by the fact that under the Conservative proposals, lower-income taxpayers (who are less likely to be graduates) would bear more of the total costs of tuition than under the White Paper. In addition, fewer people from lower income families would be likely to go to university.

    Redistribution implied by moving from White Paper to Conservative proposals for Higher Education finance

    Greg Kaplan, Research Economist at the Institute for Fiscal Studies said:

    ""The White Paper reforms would ask graduates to pay more of the costs of attending university and would extend the reach of the university system. On the face of it, this seems fairer and more efficient than asking taxpayers in general to pay more for each student, as the Conservatives propose. But the success of the White Paper proposals depends crucially on whether the government can persuade young people that taking on bigger loans should not deter them from entering higher education, given that the amount they have to pay back each year depends upon their income after graduation.""

    Ends

    Notes to Editors

    1. IFS Commentary No. 94, 'Study now, pay later' or 'HE for free' by Alissa Goodman and Greg Kaplan is available online from Wednesday 25th June. It can be ordered in hard copy for £25 (£10 to IFS members).

    2. If you would like a press copy, please contact Emma Hyman or Robert Markless on 020 7291 4800.

    3. This event is part of the Economic and Social Research Council's Social Science week.

    ]]>
    http://www.ifs.org.uk/publications/1839 Wed, 25 Jun 2003 00:00:00 +0000
    <![CDATA[IFS researcher awarded AIM Fellowship]]> AIM Fellowship. AIM (Advanced Institute of Management) is the UK management research initiative set up jointly by the ESRC (Economic and Social Research Council) and the EPSRC (Engineering and Physical Sciences Research Council). It is the first attempt to create a national team of researchers to address the key problems facing British business. AIM's mission is to improve understanding of management's contribution to organizational performance, and thus UK well-being. The more specific objectives are: to create and make readily available new research-based knowledge where new knowledge is needed; to improve the quality and quantity of management research capacity in the UK; and to develop the infrastructure to respond to additional needs for knowledge as they arise.

    Anne Sigismund Huff, director of AIM, said that the three-year appointments are Britain's biggest investment ever in management research. She said: "The people we have appointed are already senior management researchers in their own right. They are being given fellowships to structure their work as they wish, not grants for a pre-specified piece of research. This means that they will have the time and resources to pursue key problems of their own choosing in areas such as innovation, UK productivity and ways of spreading good practice throughout British companies. They will be setting up networks across the UK to perform and disseminate their research, and discussing the issues internationally. Interactions with business leaders and policy makers will be one of their main commitments."

    Ian Diamond, Chief Executive of the Economic and Social Research Council, said: "The idea of AIM is to increase UK capacity for management research that is intellectually strong, uses the best methodology and produces useful conclusions. These appointments are a massive step towards the objectives of AIM. We are especially pleased that the fellows come from across Britain. They are based in Scotland, Wales, the North of England and the Midlands as well as London and Oxford."

      Ends

    Notes to Editors

    For more information about the Fellowship, contact Rachel Griffith, rachel.griffith@ifs.org.uk. Details of her research interests can be found on her personal web page.]]> http://www.ifs.org.uk/publications/1840 Fri, 20 Jun 2003 00:00:00 +0000 <![CDATA[Budget 2003]]> Gordon Brown's eighth Budget signalled that Labour will go into the next election offering voters a rising tax burden and much slower growth in public spending than we have seen in recent years. Not necessarily what the spin-doctor ordered. The Chancellor hopes to sweeten the pill by identifying 7.5% of efficiency savings from departmental spending by 2007-08, to keep the growth in spending on service delivery in line with recent trends. He demonstrated his intent by announcing a plan to cut a net 40,500 jobs from the tax collection and work & pensions departments.

    Although the public finances are in good shape by international standards, Mr Brown needs to restrain spending and collect more tax to reduce government borrowing and thereby stick to his fiscal rules. Borrowing is significantly higher now than the Chancellor forecast a year ago, even though the economy has grown as strongly as he expected.

    Setting out the envelope for this summer's Spending Review, Mr Brown announced that total public spending would rise by an average of 2.7% a year in real terms in 2006-07 and 2007-08, probably the first two full years of the next parliament. This is markedly lower than the average real increase of around 4% a year seen since April 1999.

    Public sector investment and spending on the NHS and education will both grow more quickly than spending overall, squeezing other Whitehall budgets. On our estimates, total spending outside that on the NHS and education is set to rise by only 1.4% a year in real terms over the same two years - falling as a share of national income. This includes spending on defence, law & order and transport, although the Chancellor promised that spending in these three areas would continue to grow in real terms.

    Following the decline Labour chose to inherit from the Conservatives, public spending overall has risen from 37.4% of national income in 1999-2000 to 41.2% in the financial year just ending. Over the next four years it is planned to increase much more modestly, to 42.2% of national income, with non-investment spending virtually static.

    To meet the fiscal rules and pay for the increase in spending we have already seen, Mr Brown wants to see current receipts (mostly tax revenues) rising from 37.8% of national income this year to 40.5% in 2008-09, the highest level since the boom of the late 1980s. This relies in part on revenues generated by a more buoyant financial sector and also on "fiscal drag", as real earnings growth pushes more people into higher tax brackets.

    The specific measures announced in the Budget will do little to affect the path of the public finances over the next few years. The Chancellor's eye-catching ñ00 payment for all households containing someone 70 or over will cost ô75m in 2004-05, but - for now at least - this expense will last for only one year.

    Over the longer term, he has had to find òbn to put in his reserve for unexpected spending needs. In effect he has recouped some of this with a package of anti-tax avoidance measures and a new 19% minimum corporation tax rate on distributed profits. The Chancellor's revenue projections are also slightly higher than those in the Pre-Budget Report because of forecasting changes: a reasonable but less cautious assessment of prospective VAT revenues, the impact of higher share prices on receipts from corporation tax, stamp duty and capital taxes, and higher consumer spending.

    The Chancellor's golden rule says the government should only borrow to invest and that other spending should therefore be covered by tax revenue over the ups and downs of the economic cycle. This means the current budget balance - tax revenues minus non-investment spending - should be in balance or surplus.

    The Chancellor forecasts that the current budget will move from a deficit of 1.9% of national income in 2003-04 to a surplus of 0.7% of national income in 2008-09. This implies that he would meet the rule over the current economic cycle (which runs from 1999-2000 to 2005-06) with an average surplus of just 0.1% of national income to spare. This is equivalent to just over øbn - a smaller amount than the ñ4bn he predicted just three months ago. With two years of the cycle still to go, this leaves little margin for error.

    Indeed, on the method the Chancellor used in assessing whether the golden rule would be achieved in last year's Budget speech - adding together the cash values of the surpluses and deficits over the cycle - his forecasts now imply that he would be on course to break the rule by ñ.1bn. The measure the government currently focuses on gives greater weight to a pound of surplus at the beginning of the cycle than to a pound of deficit at the end.

    Mr Brown has insisted he will meet the golden rule over this period and it would be a blow to his credibility if he did not. But more important in assessing the long-term health of the public finances is to ask whether his spending plans and tax decisions are consistent with meeting the rule looking forward. We can get a snapshot by asking what path the current budget would take if you removed the impact of the economic cycle.

    Mr Brown believes that national output is running around 1.4% below its trend level and that the economy can therefore sustain two years of above-trend growth as the slack is used up. This would help to shrink the deficit by increasing tax revenues and restraining social security spending.

    Adjusting for this cyclical effect, Mr Brown predicts that the underlying current budget balance will improve from a deficit of 1% of national income this year to a surplus of 0.7% in 2008-09. This is a slightly larger swing into the black than Mr Brown was expecting in December.

    But it remains doubtful whether the bounce-back in revenues - above and beyond any bounce-back in the economy - will be large enough to turn the public finances around in quite this dramatic a fashion. If not, to maintain the credibility of his rules Mr Brown may find himself having to announce further measures to bring about the increase in the tax burden he needs. Whether he would do so before an election remains to be seen.

    Figure 1. Predictions of the cyclically adjusted current budget balance from 1999-2000 to the end of the forecasting period, taken from recent Budgets

    Source: HM Treasury, various Budgets.

    Public Spending

    On the public spending front, the Budget announced small increases in the spending totals that were pencilled in for 2006-07 and 2007-08. These totals will be allocated among departments in this summer\'s spending review. However, the Chancellor has already committed himself to both substantial real increases in spending on the NHS until 2007-08 and an increase in net investment to 2ܥ of national income by the same year. In addition, he pre-announced his spending plans for education in 2006-07 and 2007-08. These promises will limit considerably the amount that is available for spending on other areas.

    Figure 2, below, illustrates that total public spending will rise between this year and the end of the 2004 Spending Review period from 41.2% of national income to 42.2%. Within this total the following changes will occur:

    • The composition will shift in favour of spending on the NHS and education. These two areas will increase their share of national income from about 6.7% and 5.3% respectively this year, to 8.0% and 5.6% by 2007-08.
    • Spending on other departments and functions will therefore decline from 29.1% to 28.6%. This still represents a real terms increase of 2.3% per year on average as national income grows in real terms. It is from within this increase that the Chancellor will allocate spending on remaining departments and functions.
    • There will also be a shift away from current spending towards investment spending. Some of this increase in investment spending will be on NHS or education investment, so this corresponds to an overall shift in favour of current spending on the NHS and education, and on public sector net investment. Assuming that the spilt between current and capital spending on the NHS and education in the UK mirrors the split that the Chancellor announced for the totals for England, current NHS and education and overall investment will increase their share of national income from about 12.5% this year to 14.6% in 2007-08.
    • Based on the same assumptions about the current capital split for the NHS and education, other current spending, both that within Departmental Expenditure Limits and that planned on an annual basis, will decline from 28.6% to 27.6% over the same period.

    The growth rates in non-NHS, non-education and non-investment areas are relatively low compared both to spending growth during the 2002 Spending Review period and to expected real growth in national income during 2006-07 and 2007-08. They will grow at an average annual real rate of 1.4%, corresponding to a fall as a percentage of national income. Within this total the Chancellor has committed himself to increasing spending on defence, the home office and transport in real terms and to increase spending in housing, local government, children and the elderly in nominal terms. This could constrain the allocations to remaining departments.

    Figure 2. Budget 2004's planned public spending as a share of national income, by component, 2003-04 compared with 2005-06 and 2007-08

    Notes: The calculations made to produce this graph assume that the ratio of capital to current spending on the NHS and education across the whole UK will be the same in future years as the ratio of spending on the NHS and education in England alone.
    Source: HM Treasury, Spending Review 2002 and Budget 2004.

    The Chancellor will have a difficult job this summer reconciling the squeeze in non-NHS and education current spending with his policy aspirations and priorities. The biggest remaining spending areas are social security benefits, transport, defence and law and order. He has already made commitments on most of these areas and social security benefits are not a tempting target for spending cuts for a Chancellor who aims to eliminate both child and pensioner poverty.

    Both of the main opposition parties had already outlined their public spending stances and priorities in advance of the Budget. Figure 3 shows how their proposals for total public spending compare to the Chancellor's public spending record since 1997 and his plans until 2007-08.

    The Liberal Democrats have broadly endorsed Mr Brown's planned public spending totals for the next few years. Thereafter they have argued that over the medium term public spending should not change as a share of national income. However, within those totals, they would like to reshuffle spending, diverting at least 1% of Total Managed Expenditure a year away from areas they consider less beneficial to their five policy priorities. Sources of cuts include the abolition of the child trust fund, mergers and abolitions of eight government departments, privatisation of some nationally owned corporations and the relocation of civil servants to areas outside London. Mr Brown will, presumably, indicate this summer the extent to which he wants to reallocate spending in a similar fashion. The Liberal Democrats also propose to spend an extra óbn on replacing tuition fees and providing free personal care to the elderly. These would be paid for by a higher tax on incomes above £100,000.

    Figure 3. The three main parties' projected paths for public spending in the next Parliament

    Source: HM Treasury, various Budgets, and the Conservative and Liberal Democrat parties.

    The Conservatives, by contrast, want to reduce the size of public spending relative to national income so that it has returned by 2011-12 from 41.9% of national income back to the 39.9% it accounted for in 2002-03. Within this smaller total, they want to spend liberally on the NHS and schools. So the Conservatives' plans imply a more significant change in the composition of public spending - and bigger cuts in other (as yet unspecified) departmental budgets. The large areas of spending that have not been protected include higher education, transport, law and order and defence.

    If our forecasts for the public finances prove to be correct, and if the Chancellor after the next election wants to continue to expect to meet the golden rule in the future, then a Labour or Liberal Democrat chancellor would probably have to announce fresh tax increases. A Conservative Chancellor, by contrast, might be able to avoid having to announce any further tax increases - the planned increase in the tax burden between now and the middle of the next parliament would be sufficient to finance their spending plans. But the price of avoiding new taxes would be having to make even tougher spending decisions than those Mr Brown now faces in the Spending Review.

    Distributional Analysis


    The pre-announced budget changes, which included the earnings indexation of both the Pension Credit and pensioner tax allowances, were mildly progessive. However, the absolute magnitude of these changes upon the distribution of incomes were small. The poorest decile group gained by 1.3%, with the second and third decile groups gaining by 0.7% and 0.4% respectively. Across the entire income distribution, these changes averaged at just 0.2%. The impact of changes by decile is shown in Figure 1.

    Figure 4: % change in disposable income per week

    Family type

    New
    measures

    Pre-announced
    measures

    Poorest

    0.40

    1.30

    Decile 2

    0.20

    1.10

    Decile 3

    0.20

    0.70

    Decile 4

    0.20

    0.40

    Decile 5

    0.10

    0.20

    Decile 6

    0.10

    0.10

    Decile 7

    0.10

    0.00

    Decile 8

    0.00

    0.00

    Decile 9

    0.00

    0.00

    Richest

    0.00

    0.00

    Total

    0.10

    0.20


    Note: To see the amount of disposable income someone would need to be in a certain decile, download decile points spreadsheet.

    Very few of the new announcments in Gordon Brown\'s eighth budget will impact upon the distribution of household disposable incomes.

    While the duties on beer, bottled wine and cigarettes all rose in line with inflation, there were freezes for spirits, sparkling wine and cider. These freezes correspond to real decreases, so that households who consume these products, will be gaining in real terms. However, the gains for such groups are small relative to their incomes, so that the effect of these upon the income distribution is negligble.

    At an estimated cost of ô75 million to the exchequer, the Chancellor announced a one off payment of ñ00 for households containing at least one pensioner aged 70 or over. Single pensioners gain by an average of 0.6% this year, while pensioner couples gain by 0.3%. These gains are spread across the income distribution, and are slightly more concentrated in the poorer decile groups. The impact by changes by family type is shown in Figure 2. The cost of this change is around two-thirds of the estimated value of council tax benefit that pensioners fail to claim.

    Figure 5: % change in disposable income per week

    Family type

    New
    measures

    Pre-announced
    measures

    Single unemployed

    0.10

    0.10

    Single employed

    0.00

    0.00

    Single parent family

    0.00

    1.40

    NE couple w/o kids

    0.10

    0.10

    NE couple with kids

    0.00

    1.60

    SE couple w/o kids

    0.00

    0.00

    SE couple with kids

    0.00

    0.40

    TE couple w/o kids

    0.00

    0.00

    TE couple with kids

    0.00

    0.10

    Single pensioner

    0.60

    0.40

    Couple pensioner

    0.30

    0.20

    Total

    0.10

    0.20


    Note: NE = no earners; SE = single earner; TE = two earners.

      Ends

    Notes to editors

    1. A briefing covering our Budget analysis will be held at IFS on Thursday 18th march at 1pm. Please contact Bonnie Brimstone if you would like to come.

     

    • A spreadsheet with the figures from the two tables above can be downloaded here.
    • 3. The estimated take-up of Council Tax Benefit amongst pensioners in 2001/02 was 60%, with around £680m of support unclaimed.

     

    ]]>
    http://www.ifs.org.uk/publications/1841 Wed, 09 Apr 2003 00:00:00 +0000
    <![CDATA[Processing tax proposals and legislation]]> http://www.ifs.org.uk/publications/1842 Thu, 20 Mar 2003 00:00:00 +0000 <![CDATA[Child and pensioner poverty fall]]> http://www.ifs.org.uk/publications/1843 Thu, 13 Mar 2003 00:00:00 +0000 <![CDATA[Green Budget 2003]]> http://www.ifs.org.uk/publications/1844 Wed, 29 Jan 2003 00:00:00 +0000 <![CDATA[Child poverty and the child tax credit]]>

    By 2000-01 the number of children in poverty on this definition had fallen to 3.9 million. So if the government is to hit its target, child poverty must fall by a further 0.8 million. This is an average of 200,000 a year, which is faster than it has fallen to date.

    Our best estimate is that existing tax and benefit reforms will take 800,000 children out of poverty between 2000-01 and 2004-05, but that the rise in the median income from earnings growth will ѭove the goalposts' and put 200,000 back in. This implies that the government would fall 200,000 short of its target on the after-housing-costs measure, although there are uncertainties around this prediction.

    If our estimates are correct, the government could argue that it is on course to hit its target on the before-housing-costs measure of poverty. But what could it do to expect to meet the target on the after-housing-costs measure? We estimate that taking a further 200,000 children out of poverty could be achieved by raising the per-child element of the child tax credit by ó per week (on top of the increase in line with average earnings that has already been promised) at a cost of £1 billion.

    Greg Kaplan, one of the authors of the chapter, said "The Government is set to achieve a large reduction in the number of children in poverty. Despite this it might still fall short of its target, based on family income after housing costs, by 200,000 children. To expect to meet this target we estimate that the Chancellor will need to find an extra £1 billion for low-income families with children."

      Ends

    Notes:

    1. This is an analysis prepared for the IFS Green Budget 2003, our comprehensive analysis of the tax and spending issues confronting the Chancellor as he draws up his spring Budget. The Green Budget will be launched on Wednesday 29th January. A press briefing will take place at 11am at IFS, with the content of the briefing and the Green Budget itself embargoed for 14.30 on 29th January.
    2. The chapter can be downloaded here: What do the child poverty targets mean for the child tax credit?.
    3. The IFS Green Budget: January 2003, edited by Robert Chote, Carl Emmerson and Helen Simpson, is published on 29th January 2003 and is available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, price ô0 (ñ5 to IFS members), telephone 020 7291 4800 or email mailbox@ifs.org.uk.
    4. Other topics covered in the Green Budget will be: Planning the public finances; IFS public finance forecasts; Income tax and National Insurance contributions; Company taxation and innovation policy; Childcare subsidies; Measuring public sector efficiency; The distributional effects of fiscal reforms since 1997.
    ]]>
    http://www.ifs.org.uk/publications/1845 Mon, 27 Jan 2003 00:00:00 +0000
    <![CDATA[Employment status]]>

    The DTI paper states, though, that 'Government would welcome views on whether there is a need for a broader review of definitions across employment and tax law'. The TLRC considers that a broad and 'joined up' review of employment status definitions is needed across Government departments. Many of the issues that the DTI document highlights as important cannot be considered properly without taking into account a range of issues.

    For example, the effect of extending employment rights on the nature of the relationship between the work providers and working people cannot be calculated without considering the impact of any reclassification for tax and National Insurance purposes. For many people the first impact of any change in employment status would be felt in relation to tax and National Insurance. Decisions on whether to provide work might be affected by these costs. If employment protection is to be extended it will be important to decide as a matter of policy whether this results in any change in tax and National Insurance treatment. Another question posed by the DTI's paper is whether small businesses face any particular difficulties in relation to employment status. Classification for tax and National Insurance purposes may be one of the first problems faced by small businesses, compounded if there are apparent differences between different areas of law. In addition to the issues raised in the DTI's paper, there are long-standing difficulties in classifying workers for tax and other purposes. These have been highlighted again recently in relation to the personal service companies legislation, which has already thrown up questions about the relationship between tax and employment law. Further questions of this sort are likely to emerge. Further, economic and technological changes are encouraging new modes of working. The status of some special groups of workers, such as homeworkers, casuals and agency workers, raises problems alongside the more traditional issues that continue to cause concern. The suggestion that extending certain employment rights to all workers could increase certainty and clarity for those on the classification margins is only credible if all issues, including tax and National Insurance, are included in the clarification process.

    The DTI document claims that the IFS, amongst others, has called for harmonisation of the employment status definitions used in taxation and employment law. This is an over-simplification. A discussion paper published by the TLRC recognised that tax law and employment law often have very different objectives and that there may be good reasons for different definitions of employee to be adopted for different purposes. The paper favoured consistency where there are no explicit differences in the case law or statute, together with clearly expressed differences where justified by deliberate policy decisions. Any such differences, it argued, need to be transparent and spelt out in cross-departmental Government guidance for business owners and working people.

    The DTI document suggests that any review looking at the relationship between status for employment law and tax purposes might best be undertaken by the Law Commission. A thorough review of current case law and legislation such as the Law Commission would provide would no doubt be of value, but this body could not be expected to meet the need for inter-departmental Government action. A Governmental review is required to address fundamental policy issues about the relationship between different areas of the law as well as to provide consistent cross department guidance.

      Ends

    Notes to Editors

    1. The Tax Law Review Committee (TLRC) was launched by the Institute for Fiscal Studies in October 1994. Committee members come from a wide variety of backgrounds and are drawn from the judiciary, the professions, commerce and industry, former members of the Revenue departments and academia. The members include political supporters of the three main UK parties. The Committee is sponsored by a number of private sector companies and individuals. Its President is The Rt. Hon. The Lord Howe of Aberavon CH QC. The Committee is chaired by John Avery Jones CBE, and its Research Director is Malcolm Gammie.

      The TLRC has taken an interest in the tax problems surrounding employment status for some years. The Committee has considered these problems as part of the wider issue of horizontal equity between different groups of taxpayers. In 2001, the TLRC published a Discussion Paper (Employed or Self-Employed? TLRC Discussion Paper No. 1 by Judith Freedman) available from the IFS. This does not represent the TLRC's final views but raises a number of issues concerning legal status of workers for tax purposes. At a conference held to discuss the paper, attended by a wide variety of groups, there was strong support for an inter-departmental review of employment status, which would examine status for employment law, health and safety and tax and National Insurance purposes. Judith Freedman is KPMG Professor of Taxation Law at Oxford University and a Fellow of Worcester College, Oxford.

    ]]>
    http://www.ifs.org.uk/publications/1958 Fri, 15 Nov 2002 00:00:00 +0000
    <![CDATA[The benefits of parenting]]>

    Measured in 2002 prices, the average amount paid by the government to parentsfor each child will haverisen from ñ2.62 a week in 1975 to ó1.28 by the time the new child tax credit is introduced nextyear. This will takegovernment spending on financial support for childrento an historic high of ò1bn, compared to ùbn in 1975. This represents an increase from 3.4 to 4.7 percent of total government spending, and from 1.5 to 1.9 per cent of national income.

    The report also finds that:

    • Between 1978 and 1999, changes in the characteristics of families with children such as the increase in the proportion of children living in lone parent families explain more of the rise in support for children than successive governments' changes to taxes and benefits.
    • In 1979, 78 per cent of support for children was provided by child benefit. Since then, governments have become less reliant on child benefit, as means-tested support for children has expanded. In 2002, child benefit will still be the most important programme that supports families with children, but by 2004, more money will be spent on the new child tax credit than on child benefit.
    • Since 1975, support for children has become increasingly focused on families with younger children, those with one child, and lone parents. However, the growth in financial support for children since 1997 has been faster for couples than for lone parents.
      Ends

    Notes to Editors

    1. The benefits of parenting: government financial support for families with children since 1975 by Stuart Adam, Mike Brewer and Howard Reed is published on Friday 15th November 2002. It is available from IFS for £25 (£10 to IFS members). The report will be launched at a briefing at 10am: for details, contact Emma Hyman on 020 7291 4850 or by email.
    2. The report defines financial support for children as the difference in taxes paid and benefits received by a family with children compared to an otherwise-equivalent family without children. It does not include the considerable support provided for parents and children through public services, such as education or health services.
    3. More than 35 different taxes and benefits have been used since 1975 to provide financial support to families with children, and the way they interact means that the overall impact is difficult to analyse. This report aims to quantify explicitly the amount of support provided for children by using the IFS tax and benefit model, TAXBEN, run on representative samples of households between 1975 and 2003.
    4. The Joseph Rowntree Foundation (JRF) has supported this project as part of its programme of research and innovative development projects, which it hopes will be of value to policy makers, practitioners and service users. The facts presented and views expressed in this report, however, are those of the authors and not necessarily those of the Foundation. Future work at the IFS will compare the changes in government financial support to changes in the costs of children since 1975.
    ]]>
    http://www.ifs.org.uk/publications/1957 Fri, 15 Nov 2002 00:00:00 +0000
    <![CDATA[Fiscal Studies, September 2002]]> The Economic Costs and Benefits of UK Defence Exports

    Contact: Malcolm Chalmers, Department of Peace Studies, University of Bradford, 01943 872031, 07949 111243, m.g.chalmers@bradford.ac.uk; Neil Davies and Chris Wilkinson, Economic Adviser's Office, Ministry of Defence, London, DEA-PS@defence.mod.uk, DEA-GEN1@defence.mod.uk

    This study examines the economic costs and benefits to the UK of a 50 per cent cut in UK defence exports from the average level of 1998 and 1999. The net impact on the government budget is estimated to be an ongoing loss of between around £40 million and £100 million a year: around 0.2ְ.4 per cent of the total UK defence budget. In addition, there is estimated to be a one-off net adjustment cost, spread over five years, of between £0.9 billion and £1.4 billion. A further more speculative adjustment cost (estimated at around £1.1 billion) could result if the loss of income associated with the Ѵerms-of-trade' effect were also included. In terms of the wider debate about defence exports, the results of this study suggest first that the economic effects of the reduction in defence exports are relatively small and largely one-off, and secondly that the balance of arguments about UK defence exports should be determined mainly by non-economic factors.

    Targeting Fuel Poverty in England: Is the Government Getting Warm?

    Contact: Tom Sefton, ESRC Research Centre for Analysis of Social Exclusion, London School of Economics, T.A.Sefton@lse.ac.uk

    This paper examines the cost-effectiveness of the new Home Energy Efficiency Scheme (HEES), a key component of the UK government's Fuel Poverty Strategy. The impact on the fuel poverty gap is simulated using data on a large-scale and representative sample of households in England. The paper examines the scope for improving the targeting of the scheme by examining the optimal allocation of energy efficiency grants between households, and considers how far these potential gains might be achieved in practice using pragmatic criteria for distributing grants. It concludes that the current scheme is unlikely to have a very significant impact on fuel poverty. Considerable gains could be achieved by redesigning HEES, although the paper also highlights the difficulties involved in efficient targeting, including some additional complications not encountered in the analysis of more traditional anti-poverty measures.

    Trends in British Public Investment

    Contact: Carl Emmerson, Institute for Fiscal Studies, 020 7291 4800, carl.emmerson@ifs.org.uk

    British public investment has declined sharply both as a share of GDP and as a share of government spending since the 1970s. Only part of this decline is explained by privatisation, which transferred some public investment to the private sector. More important was the very large and permanent reduction in public house-building between the mid-1970s and the early 1980s. Between the late 1980s and the early 1990s, the rate of public investment recovered somewhat, but after that time it declined again, reaching a record low in 1999. The most recent decline in public investment has affected a range of central government programmes, and it has not been significantly offset by investment under the Private Finance Initiative. The government now plans to increase investment spending, although levels look set to remain low by historical standards for some time to come.

    The Croatian Profit Tax: An ACE in Practice

    Contact: Michael Keen or John King, Fiscal Affairs Department, International Monetary Fund, MKeen@imf.org, Jking@imf.org

    This paper discusses the experience of Croatia in applying, from 1994 to the beginning of 2001, a profit tax that was charged only on equity income in excess of an imputed normal return נand was thus, in essence, an сllowance for Corporate Equity' (ACE) scheme of the kind advocated by the IFS Capital Taxes Group and others. The computation of taxable profit under this system is summarised, and the theoretical attractions of the system are described. The paper then discusses a variety of criticisms that were made of the system in Croatia, including an alleged bias in favour of capital-intensive enterprises (and, in particular, large State-owned enterprises with overvalued assets), international complications, the complexity of the computations of taxable profit, the possibility that the rate of protective interest was set at an inappropriate level, and excessive revenue cost.

    Simplifying the Personal Income Tax System: Lessons from the 1998 Spanish Reform

    Contact: Horacio Levy, Universitat Autònoma de Barcelona, hlevy@selene.uab.es

    Governments often try to reduce the complexity of personal income tax systems by decreasing the number of tax filings. The 1998 reform of the Spanish income tax system has followed this approach by adjusting withholding on earned income to the income tax liability. In this paper, we assess to what extent the reform has fulfilled its purposes, making use of a micro-simulation tax֢enefit model for Spain, ESPASIM. The number of individuals exempt from filing a tax return has been reduced to around half of the total number of taxpayers. However, the quantity of tax returns sent to the tax administration has not changed so much because the new withholding system adjusts taxes for only 29 per cent of those exempt. Moreover, the new system increases the overall excess of tax withholding by 1.5 billion euro. We also study alternative reforms that could achieve better results than the one implemented.

      Ends

    Notes to Editors

    1. The September issue, Vol. 23, No. 3, of Fiscal Studies is published today, 26th September 2002. For press copies, contact the press office at IFS, 020 7291 4850.
    2. Fiscal Studies is a peer-reviewed journal and the articles published do not reflect the views of the editors or of the Institute for Fiscal Studies, which has no corporate views. For information about the articles summarised above, please contact the authors listed.
    ]]>
    http://www.ifs.org.uk/publications/1959 Sun, 29 Sep 2002 00:00:00 +0000
    <![CDATA[To save in a private pension, an ISA or not at all?]]>
  6. In the long-run pension tax relief is more generous than that available on Individual Savings Accounts (ISAs) for most feasible cases;
  7. For many individuals the tax system provides an incentive to save in an ISA before Ѥrip-feeding' their funds into a private pension in the run-up to retirement;
  8. Individuals who prefer to have access to their funds will find saving in an ISA relatively more attractive especially when dividends are high;
  9. People who expect to retire onto means-tested benefits will need to think particularly carefully about whether to save for their retirement at all, and if so whether to save in a pension or an ISA.

    The Government has chosen to make means-tested benefits for older individuals more generous (for example through the Pension Credit), and this will reduce the financial incentive to save for some individuals. Particular groups are especially likely to end up on means-tested benefits in retirement. These include those approaching retirement who are low earners, have little savings or live in rented housing. These people might judge that the sacrifices involved in saving today outweigh the likely future gains.

    Carl Emmerson, one of the authors of the report, said: Ӊt is clear that, for higher earners and those whose employers will contribute, private pensions remain a tax-favoured form of saving for retirement. For others, including many of those in the Government's Stakeholder Pension target group, private pensions appear less attractive.Ԋ
      Ends

    Notes to Editors

    1. "The Tax and Benefit System and the Decision to Invest in a Stakeholder Pension" is available online.
    2. For press enquiries and advance press copies, contact Emma Hyman (020 7291 4850 or emma_h@ifs.org.uk).
    3. All discussion of the relative merits of different saving strategies refers only to the broad picture and the current tax and benefit system; individuals should consider carefully their own situation.
    ]]> http://www.ifs.org.uk/publications/1960 Thu, 01 Aug 2002 00:00:00 +0000 <![CDATA[The variation of inflation across the population]]>

    But it's not 1½ percent for everybody. Indeed it's debatable whether inflation is exactly 1½ percent for anybody.

    In research published today, funded by the Nuffield Foundation, the IFS has looked at how inflation rates vary across the household population.

    Inflation differs across households because spending patterns vary and the prices of different goods and services change at different rates. If your household spends most of its budget on, say, food, and the price of food goes up relatively quickly, so will your own rate of inflation.

    The report shows that:

    • Inflation rates vary widely across different households. The headline rate of inflation is not necessarily a good guide to the actual rates of inflation experienced by individual households.
    • On average the proportion of households, whose inflation rates are likely to be within one percentage point of the headline measure, is around one third. In the last 25 years this proportion has been as low as one tenth and never higher than two thirds.
    • In general there are fewer households whose own inflation rate is close to the headline rate when inflation is high.
    • Over the last 25 years patterns in inflation rates for different sub-groups of the population have varied a great deal. Overall, however, richer-than-average households, non-pensioners, households paying a mortgage, the employed and childless households have all faced higher-than-average inflation.

    Official methods of measuring changes in poverty and economic inequality, do not take into account the different effects of inflation on living standards. The report shows that this risks giving a false picture of the changing nature of inequality in the UK.

      Ends

    Notes to Editors

    1. The distributional aspects of inflation by Ian Crawford and Zoë Smith is published on Wednesday 19th June 2002. It is available from IFS for £25 (£10 to IFS members).
    2. For press enquiries and press copies of the report, contact Emma Hyman (020 7291 4850).
    ]]>
    http://www.ifs.org.uk/publications/1962 Fri, 19 Jul 2002 00:00:00 +0000
    <![CDATA[IFS appoints new director]]> Robert, 34, has been an adviser and speechwriter to the First Deputy Managing Director of the International Monetary Fund since 1999, working first for Stanley Fischer and then for Anne Krueger. Between 1995 and 1999, he was Economics Editor of the Financial Times. Previously, he served as Economics Correspondent of the Independent and a columnist on the Independent on Sunday, where he was named Young Financial Journalist of the Year by the Wincott Foundation.

    Robert graduated in Economics from Queens' College, Cambridge, in 1989, before studying journalism at City University in London. He is a Governor of the National Institute of Economic and Social Research and served as a member of the Statistics Advisory Committee of the Office for National Statistics. He has carried out consultancy work for organizations including the United Nations and Commonwealth Secretariat.

    Welcoming Robert's acceptance of the appointment, Ken Etherington, Chairman of the Institute's Executive Committee said: "The Institute's Trustees are delighted that Robert has accepted this appointment. In keeping with the IFS tradition he is young and dynamic and we look forward to him leading the Institute effectively in the coming years".

    Robert Chote said: "I am delighted and honoured to be succeeding Andrew Dilnot as Director of the IFS. Under his leadership the institute has consolidated its reputation for authoritative, independent analysis of public policy issues, integrated with high quality academic research. I look forward to working with Research Director Richard Blundell and the rest of the IFS team to build on that tradition and to apply the skills and expertise of the institute to international as well as domestic policy questions. Our goal, as always, will be to deliver rigorous, independent policy analysis, without fear or favour."

      Ends

    Notes to Editors

    1. Andrew Dilnot will become Principal of St Hugh's College, Oxford, at the beginning of the forthcoming academic year. Andrew will be staying involved with IFS as a Research Fellow.
    ]]>
    http://www.ifs.org.uk/publications/1961 Thu, 27 Jun 2002 00:00:00 +0000
    <![CDATA[Should we abolish stamp duty?]]>
    • despite fears in some quarters, in the short term the government should be able to protect its existing stamp duty revenues against emerging avoidance schemes. However, revenues may be threatened in the longer term, particularly if multinationals opt to become pan-European companies under the European Company Statue;
    • but while stamp duty may be a viable tax into the future, there are major arguments against using it as a source of revenue. It reduces the efficiency of the stock market, it is worse for investment than other forms of taxation and it distorts merger and acquisition activity, producing a bias towards overseas rather than UK ownership;
    • given this, it is worth considering alternative sources of revenue that could replace stamp duty on shares. The most practical option would involve reducing or abolishing stamp duty and increasing the corporation tax rate. This should allow the government to raise the same revenue in a more efficient manner. Other options considered in the report would either be impractical or would fail to tackle the underlying distortions produced by the stamp duty system.

    Wider considerations may mean that the government would be reluctant to increase the corporation tax rate explicitly. But if this or a future government were to consider a reduction in corporation tax, the report's findings suggest that the revenue might be better used to cut or abolish stamp duty.

      Ends

    Notes to Editors

    1. Stamp duty is a worldwide tax on share transactions in UK incorporated companies. It is chargeable whether the transaction takes place in the UK or overseas, and whether either party is resident in the UK or not. It is currently levied at a rate of 0.5% of the transaction value and in 200001 raised ô.5 billion in revenue.
    2. "Stamp duty on share transactions" by Mike Hawkins and Julian McCrae is published on Monday 17th June 2002. It is available from IFS for £40 (£25 to IFS members). The report will be launched at a briefing at 1pm.
    3. For press enquiries and press copies of the report, contact Emma Hyman (020 7291 4850).
    ]]>
    http://www.ifs.org.uk/publications/1963 Mon, 17 Jun 2002 00:00:00 +0000
    <![CDATA[Five years of social security reform]]>
    • redistributed to the poor, pensioners and children
    • increased means-tested payments
    • weakened the link between National Insurance and benefit entitlements.

    Labour has traditionally been thought of as against expanding means-testing, but New Labour has increased means-tested benefit rates considerably - by, for example, 33% in real terms for an eligible lone parent with two young children, and by 31% for a low-income single pensioner under 75. These increases do not show up in social security expenditure: it is forecast to fall as a share of national income from 11.9% (1996/7) to 11.3% (2003/4). Nor have numbers on means-tested benefits changed much. Report author Mike Brewer explained: "Despite Labour's increases in means-tested benefits, expenditure on them has remained steady. This is because falling unemployment and increasing private pensions have helped contain the number of people entitled."

    Together with personal tax changes, these social security reforms have redistributed from rich to poor: the poorest third of households will gain by an average of £25 per week by 2003, and the richest tenth will lose an average of £11 per week. These measures helped reduce child poverty on the Government's preferred measure by 500,000 between 1996/7 and 2000/1. But in spite of the reforms overall income inequality changed little in Labour's first term.

    New credits from 2003 - for children, the low-paid and pensioners - will make means-testing even more central. But the Government claims it can reform income assessment to reduce hassle and stigma for claimants. This could encourage more entitled families to claim their benefits.

      Ends

    Notes to Editors

    1. The paper, Social Security Under New Labour: What did the Third Way mean for welfare reform? (by IFS economists Mike Brewer, Tom Clark and Matthew Wakefield) was presented at an ESRC-funded conference held at the IFS on 22nd May. At the conference, speakers from outside IFS also presented work on aspects of Labour's reforms to social security since 1997. Most of the papers or presentations are available online. The IFS, which has no corporate views, is not responsible for any of the views expressed.
    2. The outside speakers at the conference were: Ed Miliband (special adviser, HM Treasury), Lord Raymond Plant ( King's College, London), John Hills (Centre for the Analysis of Social Exclusion), David Hirsch (Joseph Rowntree Foundation), James Sefton (National Institute for Economic and Social Research and Imperial College, London), Fran Bennett (University of Oxford).
    3. Social security spending is defined to include tax credits which have replaced benefits since 1997.
    ]]>
    http://www.ifs.org.uk/publications/1964 Mon, 10 Jun 2002 00:00:00 +0000
    <![CDATA[How far has child poverty declined?]]>

    IFS analysis published today shows how three factors explain this shortfall:

    • Average incomes have grown since 1996/7, and this has raised the poverty line. If the Government had chosen a fixed poverty line, rather than one that increases each year with average incomes, the fall in child poverty would have been far bigger: around 1.3 million.
    • Timing: benefits and tax credits for poorer families increased half-way through 2000/1, but the new official figures cover the whole year. IFS analysis shows child poverty in the last six months of 2000/1 was 150,000 lower than across the year as a whole, making the decline 0.6 million since 1996/7.
    • Some low-income families do not actually receive their benefit entitlement, and so have not gained from the Government's main anti-poverty reforms.

    All this has made it harder to reduce the official child poverty count, but employment growth amongst parents has eased the Government's task. Unless this continues, achieving further reductions could prove even harder.

    Report author Alissa Goodman said: "the lesson for the future is that child poverty can be reduced, but this is likely to require that benefits for poor families increase rapidly - by more than earnings". IFS analysis suggests that halving child poverty could be achieved by a permanent increase in spending on support for children of around 1 per cent of GDP - a large amount, but less than the increase in the tax burden since 1996/7. But in the run-up to next week's Budget, the Government will need to consider the importance of this demand on its finances alongside other considerations, like public service spending and the level of taxation.

      Ends

    Notes to Editors

    1. This press release refers to children as being in poverty if their household income (after deducting housing costs) is below 60% of the median. This is one of many possible definitions, but one often emphasised by the Government.
    2. Official figures quoted are published by the Government today in Households Below Average Incomes, 2000/01. These figures are calculated by the Department for Work and Pensions, in conjunction with the IFS, using the Family Resources Survey.
    3. In 1999 Tony Blair announced his desire to 'abolish child poverty within a generation' (Beveridge Speech, March 1999, Toynbee Hall). Since then, the Government has made tighter commitments - in particular, to reduce the child poverty rate by a quarter by 2004/5 (See DSS website). The new data monitors progress towards these goals.
    4. The 2001 Budget claimed that "tax and benefit reforms announced in this Parliament [i.e. 1997-2001] will lift over 1.2 million children out of relative poverty".
    5. Estimates of the likely future cost of further poverty reduction policies are made using TAXBEN, the IFS tax and benefit model run on Family Resources Survey data from 1999/2000.
    6. IFS Commentary No. 87 The Government's Child Poverty Target: How much progress has been made?, by Mike Brewer, Tom Clark and Alissa Goodman is to be launched at a free conference at IFS on Thursday 11th April at 12 noon. Hard copies of the document can be ordered from IFS (020 7291 4800) for £25 (£10 to IFS members). Press copies are available from Emma Hyman on 020 7291 4850.
    ]]>
    http://www.ifs.org.uk/publications/1965 Thu, 11 Apr 2002 00:00:00 +0000
    <![CDATA[Can mothers afford to work?]]>

    Working patterns of mothers

    Mothers, particularly those with younger children, are substantially less likely to be in paid employment than women without children. Somewhat surprisingly, there is no sudden increase in employment when the youngest child starts school: school does not entirely resolve the childcare issue.

    Figure: Employment Rates for Women

    If they do work, mothers with children are much more likely to be in part-time than in full-time work compared to women without children:

    • 36 per cent of mothers with partners do not work, while 37 per cent work part-time and 28 per cent work full-time (compared to 27 per cent, 22 per cent and 51 per cent for women with partners without children)
    • 61 per cent of single mothers do not work, while 20 per cent work part-time and 19 per cent work full-time (compared to 32 per cent, 12 per cent and 56 per cent for single women without children)

    Are mothers constrained?

    Some mothers may choose not to work, but there is also new evidence that mothers are constrained in their ability to work.

    • About one quarter of non-working mothers report they would like to have a regular paid job, but are prevented from seeking work by having to look after children.
    • Approximately 1 in 10 mothers who are working part-time say that they would work longer hours if there were some form of suitable childcare available.

    The availability of formal childcare places falls far short of those required to offer a place to every child of a working mother:

    • 8 day nursery places for each 100 children under the age of 5
    • 7 childminder places for each 100 children under the age of 8
    • 6 out-of-school club places for each 100 children aged 5 to 7

    Relating the availability of the childcare places to the proportion of mothers in employment across local authorities shows that there is a link between childcare availability and the likelihood that a mother works. But whether this means (a) that mothers are less able to work in areas with fewer places or (b) that areas with more mothers working and demanding care naturally draws forth an additional supply of places cannot be determined.

    How do working mothers manage childcare and what does it cost?

    • Informal care is an important source of childcare for working mothers. Some 62 per cent of pre-school children and 77 per cent of school children (under the age of 12) of working mothers who use non-maternal care receive some care from relatives, friends and neighbours.
    • Childminding is the most popular type of formal care for working mothers, yet the availability of childminder places has been declining over recent years.
    • Out-of-school clubs and holiday schemes are used by only a very small proportion of school children of working mothers under the age of 12 (less than 4 per cent)
    • Working mothers, with at least one pre-school child, who pay for care spend an average 13 per cent of their net income on childcare, while those with only school children spend an average of 7 per cent during the term and 14 per cent during the holidays. For some groups this proportion is much higher: single mothers with pre-school children who are working full-time and paying for care spend almost a quarter of their net income on childcare.

    Childcare subsidies

    Childcare policies which aim to make childcare more affordable, such as the nursery education grant and the Working Families Tax Credit, can have some impact:

    • A lower childcare price for formal care is associated with greater use of formal care and a higher quality level even if there is no change in work behaviour.
    • But the generous childcare subsidies under the WFTC are predicted to have relatively limited effects on employment, raising the employment rate for single mothers by 3 percentage points but having virtually no impact on the employment rate for mothers with partners because of the partner\'s increased WFTC benefit payment when the mother is not working.

    Hence, childcare subsidies may have high costs for the government with little impact on mothers' employment, although greater use and quality of formal care may be a welcome side-effect.

      Ends

    Notes to Editors:

    1. Mothers' employment and childcare use in the UK, by Gillian Paull and Jayne Taylor with Alan Duncan, is published by the Institute for Fiscal Studies (March 2002) and is available from IFS, 7 Ridgmount Street, London WC1E 7AE, 020 7291 4800, mailbox@ifs.org.uk. Copies can be bought for £40. Press copies can be obtained from Emma Hyman at IFS.
    2. The work for this report was generously supported by the Nuffield Foundation. Dr Gillian Paull is a Programme Coordinator at the IFS, Jayne Taylor was working at the IFS during the preparation of the report, but is now employed by MORI, and Alan Duncan is Professor of Microeconometrics at Nottingham University and an IFS research fellow.
    ]]>
    http://www.ifs.org.uk/publications/10 Mon, 25 Mar 2002 00:00:00 +0000
    <![CDATA[The new pension credit proposals]]>

    The Pension Credit will be introduced in October 2003. It aims to:

    • Increase the incomes of poorer pensioners.
    • Ensure saving is better rewarded by reforming the system so that poorer pensioners can keep more of an private income.

    Overall, the package means the Government will pay about £2 billion extra annually to pensioners.

    Poor pensioners will gain most — the bottom 10% will gain most, an average of £11 a week. The proportional effect on incomes falls off steadily as income rises, as the figure shows. On average pensioner couples will gain £6.60 a week, while singles will gain £5.30.

    Figure: Effect of Pension Credit reform across the Pensioner income distribution

    Pensioner poverty could be substantially reduced. We estimate the reform could cut the proportion of pensioners below one widely-used poverty line by five percentage points. And this is in addition to the poverty reduction achieved by the large increase in the Minimum Income Guarantee for the poorest pensioners, which is currently being phased in. But the decline in poverty will only materialise if pensioners can be persuaded to claim the benefit that they are entitled to, and at present around 30% of pensioners entitled to means-tested benefits do not claim them.

    Report author Tom Clark said: "Whether the Pension Credit succeeds in alleviating pensioner poverty will depend on whether pensioners can be encouraged to apply for the extra money they are entitled to. Achieving a simpler and more pensioner-friendly benefit claims procedure is therefore crucial."

    The Autumn 2001 Pension Credit proposals modified the original plans. In particular, the Government has:

    • Decided against plans to abolish entirely the rules which reduce benefit entitlement when pensioners hold capital. Outright abolition could have undermined the incentive to save in stakeholder pensions.
    • Increased the generosity of housing and council tax benefit for pensioners. These changes ensure that reductions in these benefits do not eat into gains from the Pension Credit. These changes have approximately doubled the cost of the reform.

    The changes to housing benefit and council tax benefit ensure that the effect of the Pension Credit reform on the incentive to save for retirement is more positive than it was when we analysed the original proposals. The number of pensioners for whom building up extra private pension entitlement would not be worthwhile — because reduced benefit entitlement would completely or almost completely offset it — will be sharply reduced. But the overall effect on saving incentives remains mixed, because the retirement incomes that the reform brings about could lead some individuals to decide that they need to save less than they otherwise would have done to achieve a comfortable retirement.

    The policy represents a further move towards a means-tested pension system. It will increase the number of adults aged 65 or over in families entitled to one or more means-tested benefit by almost 700,000, and this number is likely to grow over time. Indeed, the main outstanding questions hanging over the policy concern the longer term — not only the large number of individuals who will eventually be entitled, but also how much it will cost and whether or not it will fit in coherently with the rest of the pension system. The answers to all these will depend entirely on how the new benefit is indexed.

      Ends

    Notes to Editors

    1. All cash amounts are in 2001 prices.
    2. Results estimated using TAXBEN, the IFS tax and benefit model, run on 1998/99 Family Resources Survey.
    3. Modelled reform is only planned structural changes to benefit system. The increase in the rate of the Minimum Income Guarantee due over the next few years is excluded.
    4. TAXBEN assumes full take-up of all benefits. If the proportion of pensioners failing to claim means-tested benefit entitlement remains unchanged, the effect on pensioner incomes will be significantly smaller in practice than theory.
    5. Constant levels of real non-benefit income have been assumed.
    ]]>
    http://www.ifs.org.uk/publications/1966 Tue, 19 Feb 2002 00:00:00 +0000
    <![CDATA[An end to the trend towards early retirement?]]>

    Professor Blundell\'s analysis of the prospects for early retirement begins with recent changes in the patterns of life expectancy and labour force participation:

    • Life expectancy has grown and is continuing to grow rapidly in the UK as in most developed countries. It has increased by more than ten years since 1950. Chart 1 shows that the additional life expectancy for those aged 65 is now over fifteen years for men and nearly twenty years for women.
    • Partly as a consequence of this increase in life expectancy, the population as a whole is ageing. Chart 2 shows that the relative proportion over 65 is increasing. Moreover, there is evidence of 'compression of morbidity' - the growth in life expectancy has not been accompanied by a longer time spent with disabilities.
    • Since the 1960s, the participation rate in work for people aged over 55 (especially among men) has fallen quite dramatically. Chart 3 shows that for men in the age group 60-64 the labour force participation rate has more than halved to around 30%. The \'statutory\' retirement date is no longer relevant for many retirement decisions.
    • There are many routes to retirement including the invalidity benefit and incapacity benefit system. Chart 4 shows the strong growth in recipients of this benefit during the late 1980s and 1990s. This growth occurred as much among those individuals with occupational pensions as it did for those in the state pension scheme.

    As a nation gets wealthier, it will want to spend more time in leisure activities and retirement is a reflection of this. But individuals will also want to have access to sufficient resources to maintain their standard of living in retirement. With earlier retirement and longer expected lives, this means a need to save more, often considerably more, for retirement.

    There is strong evidence that during the 1980s and early 1990s, some people retired or left the labour market \'too early\', partly as a consequence of adverse financial incentives in public and private pension schemes. But the early retirement trends of the 1990s are very unlikely to continue for the majority of men and women in the UK. Professor Blundell points to a number of factors that have conspired - or will conspire - to reduce the incentives for early retirement:

    • There is the decline in generosity of state system (with some exceptions for low-income pensioners - see below).
    • There is the decline in the generosity of invalidity/disability schemes since the 1995 reform.
    • There is the increase in retirement age for women.
    • There is a decline in the value of occupational pension funds and the consequent reduction in opportunities to create early retirement windows.
    • There is a strong move from 'defined benefit' occupational pension schemes to personal pensions or 'defined contribution' schemes among younger workers. This move effectively removes the link between retirement saving and actual retirement.
    • Finally there is the likely reform of many public sector schemes.

    There are some notes of caution in this prediction of a change in trend. The very substantial increase in generosity of the minimum income guarantee (MIG) for those over 60 years of age will increase incomes in retirement for certain low income pensioners and the taper rate will reduce the incentives to part retire. The decline in 'back loaded' defined benefit schemes will induce some of those who have moved into defined contribution schemes to retire earlier, no longer having to wait for their 'best years'. The slow growth in the real wages of older unskilled workers and the low demand for their skills will also mitigate against any swift upturn. But these are unlikely to be enough to change the broad conclusion.

    To make solid and precise predictions requires good data on individual health, wealth and labour market attachment. Such a source of information has been sadly lacking in the UK. But this will change with the new ELSA data (English Longitudinal Survey of Ageing). This survey collects data from a nurse\'s visit as well as detailed economic, quality of life and psychological information. The first full wave of the new data will be collected this Spring. It promises to revolutionise our ability to make precise predictions and policy recommendations in this important field. See ELSA online.

      Ends

    Notes to Editors

    1. For further information, contact Professor Richard Blundell and Carl Emmerson on the IFS press office on 020 7291 4820.
    2. Richard Blundell will be presenting Pension Incentives and the Pattern of Retirement [575KB] at the Westminster Economics Forum on Friday 8 February 2002. The research report, co-authored with Costas Meghir and Sarah Smith, will be published in the March 2002 issue of the Economic Journal.
    3. The Westminster Economics Forum is a forum for policy makers and business launched by the Economic and Social Research Council (ESRC) and the National Institute for Economic and Social Research (NIESR).
    4. Richard Blundell is Professor of Economics at University College London, Director of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy at the Institute for Fiscal Studies (IFS) and Research Director of IFS.
    ]]>
    http://www.ifs.org.uk/publications/1967 Fri, 08 Feb 2002 00:00:00 +0000
    <![CDATA[IFS Green Budget 2002]]>

    An audit of the public finances

    We expect the current budget surplus in 2001-02 to be ñ4.0bn compared to the ñ1.1bn forecast by the Treasury last November, mainly reflecting lower than planned public spending this year. In the medium term we expect receipts to be at a similar level to the November 2001 Pre-Budget Report forecast but expect public spending to be higher.

    If the Government were to maintain the level of caution seen in recent years in the public finances, and pay for new measures which have been announced but not yet included in its costings, the Chancellor would need to announce new spending cuts or tax increases of õbn. Alternatively, the Chancellor could choose to increase borrowing and still meet the fiscal rules, but with increased risk of breaking them in future.

    This assumes as a baseline that public spending in 2004-05 and 2005-06 grows in line with national income. In its last two spending reviews the Government decided to increase public spending as a share of national income. Increases in capital spending can be financed by increases in borrowing without breaching the fiscal rules. Increases in current spending as a share of national income require the Chancellor either to reduce the caution in his forecasts or to ensure that tax revenues rise. If the Government were to increase current spending by 2ޥ a year in real terms then this would require around an additional ñbn each year in borrowing or tax revenues. Therefore to increase current spending at 2ޥ a year in real terms in 2004-05 and 2005-06, to finance the new measures, and to restore the level of caution in its plans to the March 2001 Budget level, the Treasury would need new tax increases of around ÷bn in the Budget. This is made up of the õbn for restoring caution, paying for the new measures and keeping spending constant as a share of national income, and an extra ñbn for each year of increasing current public spending at 2ޥ.

    Improving public services?

    UK spending on health and schools is relatively low by international standards. But current increases in health and education spending are historically large, and are planned to continue at least until March 2004. If continued substantial spending increases in the health and education budgets are deemed necessary beyond 2003-04, then one option would be to try and fund them from savings out of other departments. But this does not look easy - it seems unlikely that falling unemployment will continue to provide significant savings on social security, and the claims of many other spending departments, for example, transport and defence, might be seen as relatively strong at the moment. It seems likely, therefore, that continued large increases in health and education spending beyond 2003-04 would need finance from either increased borrowing or taxation.

    Options for raising tax

    Possible sources of significant extra revenue in the 2002 Budget are National Insurance and VAT. But the decision to rule out increases in income tax rates might seem disadvantageous should the Government want to raise significant revenue. The pledge limits the potential to increase the single biggest tax, and it does so more severely now than it did in Labour's first term, as many of the means used to increase income tax revenue without changing the rates are now exhausted. It might also seem disingenuous to simulate tax rate rises using National Insurance. The National Insurance option would be less progressive than a rise in income tax: National Insurance increases leave untouched the unearned income of the wealthy, and would hit moderately high earners harder.

    Personal tax reforms: the Child Tax Credit and the Working Tax Credit

    The Government has promised to announce the rates of two new tax credits - the Child Tax Credit and the Working Tax Credit - in Budget 2002. These credits will be introduced in 2003-04, and are likely to have a full-year cost of ò-3bn a year. After a worrying lack of public discussion and openness, many of the operational details may be announced in the Budget: these details will determine whether people in the target group understand the credits and choose to claim them.

    Tax policy and companies

    The Government intends to introduce a further R&D tax credit open to larger firms in Budget 2002 and now looks likely to opt for a volume-based credit with relatively low compliance and administrative costs.

    The 2001 Pre-Budget Report outlined proposals for a training tax credit. This represents another proposed reform to the provision of post-school education and training, following the introduction and subsequent withdrawal of Individual Learning Accounts. Few doubt that there is some role for government in the provision of training. But the Government should clearly identify, and consider evidence on the magnitude of the market failures that it is trying to tackle, and use this to develop an effective policy. It is not clear that the current proposals have followed this route. The planned piloting of the scheme, with plans for an evaluation of its effectiveness, is therefore welcome.

    Developments in asset-based welfare policy

    At the time of the Pre-Budget Report the Treasury published a consultation document discussing two proposed asset-based welfare policies, the Saving Gateway and the Child Trust Fund. It is not clear that spending on matched savings accounts (the Saving Gateway) represents a better way of supporting lower-income families than increasing benefit expenditures or funding more financial education. Equally, it is not clear that children will be better supported by the provision of an asset that matures at 18 (the Child Trust Fund) than by targeted increases in financial support to their families or by targeted education spending.

    A graduate tax for the UK?

    The recent interest in a graduate tax continues a long running, but unresolved debate about student finance in the UK. It is unclear whether there is to be a formal consultation on the issue, or whether concrete proposals will appear. We examine the potential impact of a graduate tax scheme. Graduates tend to be better off than the average, and to come from families with above average incomes. A graduate tax operating through increases in basic and higher rates of income tax would have progressive effects. But fundamental questions about whether it would be appropriate to use such a vehicle as a means of funding higher education remain unanswered, as do many questions about the design and implementation of such a tax.

      Ends

    Notes to Editors

    1. The IFS Green Budget: January 2002 was funded by the Economic and Social Research Council.
    2. The IFS Green Budget: January 2002, edited by Andrew Dilnot, Carl Emmerson and Helen Simpson, is published on 30th January 2002 and is available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, price £40 (£15 to IFS members), telephone 020 7291 4800 or e-mail mailbox@ifs.org.uk
    3. The Green Budget will be launched on 30th January, 11am at Barber Surgeons' Hall, 1a Monkwell Square, London EC2Y 5BL. For press places, please telephone IFS on 020 7291 4800.
    ]]>
    http://www.ifs.org.uk/publications/1968 Wed, 30 Jan 2002 00:00:00 +0000
    <![CDATA[New Centre to promote policy evaluation]]>

    In some respects the UK is in quite good shape. The government collects large sets of valuable data about the state of society, which could help to formulate properly targeted policies that people really need. Unfortunately, the number of people in government and elsewhere qualified to carry out the necessary analysis is inadequate; as Gordon Marshall, Chief Executive of the ESRC, puts it, ӂritish universities and colleges are not producing quantitatively competent social scientists in sufficient numbers.ԠA recent report by the Cabinet Office's own Performance and Innovation Unit into the use of analytical and modelling techniques in government concluded that whilst macroeconomic skills were good, analysis of microeconomic and microsocial data was less than state of the art.With this in mind, the Leverhulme Trust is funding a new centre, to be launched on 6th December 2001. Its goals are to develop improved methods for the statistical analysis of microdata and to encourage good practice amongst academics and practitioners. The centre, a joint venture by the Institute for Fiscal Studies and the Economics Department of University College London will take a detailed look at advanced methods for working with microdata and disseminate this information throughout the policy and academic world.

    Many types of research today benefit from the use of microdata, collections of data about individuals, gathered using large surveys. This kind of data about large numbers of people can be used to build a more accurate picture of our social and economic environment and of people's behavioural patterns, information that makes a crucial contribution to informed policy making. Statistical analysis of large sets of data is used in fields as diverse as epidemiology, economics and many other social sciences anywhere where we want to discern patterns from large and complex sets of information. Familiarity with methods for analysing and understanding microdata is an invaluable tool to researchers in many areas, but currently such skills are in short supply in the UK. Many social scientists and those involved in forming policy have less expertise in statistics than their transatlantic or European counterparts.

    The centre will run courses at several levels, from master-classes for postdoctoral researchers to practical statistical techniques for government officials. With core funding from the Leverhulme Trust, cemmap is developing links with experts at home and abroad, whose visits to the centre will provide a forum for sharing knowledge and collaborating on new ideas.

    In this spirit of international co-operation and learning, year 2000 Nobel Laureates, Professor James Heckman (University of Chicago) and Professor Daniel McFadden (University of California, Berkeley) will speak at cemmap's launch. Professors Heckman and McFadden were awarded the Prize in recognition of their seminal work in laying the foundations for this kind of analysis, which has been pioneered in America, but whose benefits can be extended to benefit the UK through a more intelligent approach to evidence-based policy.

    Other speakers will reflect upon the vital importance of the analysis of microdata in government and business. They are: Professor Richard Blundell (Institute for Fiscal Studies and University College London), Evan Davis (Economics Editor, BBC), Sir Andrew Turnbull (Permanent Secretary to the Treasury), Baroness Sarah Hogg (Chairman, Frontier Economics), Susan Linacre (Director, Methodology and Statistical Development, Office for National Satistics), Professor John Vickers (Director General, Office of Fair Trading).

      Ends

    Notes to Editors

    1. More information about cemmap can be found on its website.
    2. The Centre will be launched at a conference on Thursday 6th December. For more details, contact Emma Hyman.
    ]]>
    http://www.ifs.org.uk/publications/1970 Thu, 06 Dec 2001 00:00:00 +0000
    <![CDATA[Public investment falling for 25 years]]>
  10. The downward trend dates from the mid-1970s and continued through both the 1979-97 Conservative Governments and the early years of the new Labour administration - in 1999 public investment hit a new post-war low.
  11. Over 1987-92 the decline was checked, and investment in most public services increased, but a new decline got underway in 1993, so that a record low was reached in 1999.

    Figure: Gross public sector investment as a proportion of national income

    investment bn

    Private Finance Initiative (PFI) investment in public services remains small relative to total public investment and so does not change the story dramatically. Report author Sarah Love said: "Even if PFI capital expenditure is counted as public spending, the public investment rates seen over the years 1997 to 2000 remain lower than at any time since the Second World War."

    The decline in investment since the 1970s seen in the figure can be split into three elements:

    • Privatisation, which saw public investment replaced by private activity, most clearly in the utilities.
    • The scaling back of council housing - housing investment alone fell by 2% of GDP. In 1976 councils completed over 100 times more homes than in 1998. Private investment should have picked up much of the slack, but the supply of low-cost housing is likely to have been reduced by the cuts.
    • Public services: cuts in these explain much of the overall decline in capital spending over the 1990s. Reduced investment in this area is the most worrying, as private companies are least likely to step in and fill the gap.

    Different public services have fared differently since the 1970s:

    • Investment in health held steady over the 1980s and in 1992 was at a rate equal to its post-war peak. But between 1992 and 2000, it halved from around 0.4% GDP to around 0.2% of GDP, even if PFI spending is included for 2000. Government plans mean that over the next few years total state-sponsored health investment (including PFI) should return to 0.3% of GDP, a level of investment last seen in 1995.
    • Education investment fell sharply - from over 0.7% of GDP in 1973 to less than 0.2% of GDP by 1982. It has never significantly recovered, remaining below 0.25% of GDP over the rest of the 1980s or 1990s. It has increased slightly in the last few years, and, once allowance is made for various technicalities, it is now higher than at any point during the 1990s.
    • Capital spending on public order & safety is unusual - it trended upwards during the 1980s and 1990s, rising particularly rapidly in the late 1980s, when it roughly doubled from around 0.1% of GDP to almost 0.2% of GDP. It fell back a little, along with public service investment generally over the rest of the 1990s, but in 2000 remained at a rate that is double that of 1979.
    • Road investment fell sharply over the 1970s, but held steady over the 1980s and early 1990s. But during the later 1990s it fell by a half - from 0.8% of GDP in 1992/93 to 0.4% of GDP in 2000/01. By contrast capital spending on rail seems to have increased in the late 1980s, and even though it has fallen back since, it remains higher than in the mid-1980s.

    Looking forward, the Government plans to increase public investment over the next few years, but its plans would leave investment rates far lower than twenty years ago, and will probably remain below even early 1990s rates. Report author Tom Clark said: "If both PFI and public investment spending grow in line with current projections, then by 2003-04 total publicly-sponsored investment might have recovered to its 1989 rate, but would probably remain below the level seen in 1992. Current plans to increase public investment will only prove to be a turning point in the long-term trend if they are sustained and expanded on in future years."

      Ends
    1. For more information see IFS Briefing Note no. 20, 25 years of falling investment? Trends in capital spending on public services, by Tom Clark, Mike Elsby and Sarah Love.
    2. For advance copies, contact our press officer, Emma Hyman
    3. Data displayed in the figure is from the Office for National Statistics.
    4. Research financed by the ESRC Centre for Microeconomic Analysis of Public Policy at IFS (grant number M535255111).
    ]]> http://www.ifs.org.uk/publications/1971 Tue, 20 Nov 2001 00:00:00 +0000 <![CDATA[Assessing the new tax credits]]>

    The new credits have so far been excluded from the Treasury's public finance projections. The report finds that the credits could cost around ò.1 billion a year to introduce if they are not to make any poor families worse off. This could rise to ò.8 billion a year - the approximate yield of an extra penny on the basic rate of income tax - to ensure that no dual-earner families who currently receive the children's tax credit lose out. The gains from both credits are largest amongst lower-income families, and they tail off as income rises: the poorest tenth of families are set to gain an average of 2.7%, while the richest families are predicted to lose slightly.

    Distributional effect of the integrated child credit and the employment tax credit


    Distributional effect

    Around 5.7 million families with children could receive the integrated child credit. A majority will gain from the reforms, but these are principally low-income families. Tom Clark, one of the authors of the report, said: "lone parents stand to gain by the most, by an average of ñ0.37 a week compared to ó.16 a week for couples with children."

    The integrated child credit aims to make benefits for children simpler and more certain. Families will get the same payment for children when in low-paid work as when not working, and, in general, payments should be fixed for the whole tax year. But in order to preserve the safety net and concentrate money on the poorest families, the Government will ask claimants to report some changes in circumstances to the Inland Revenue, and this could make the system more complex and less certain for many families. Mike Brewer, one of the authors of the report, said: "whether the reforms achieve simplification depends on how many claimants will have to deal with the Inland Revenue within the tax year, as well as at the start and end. As yet, the Government has provided no indication of how many people will be in this position".

    The employment tax credit for workers without children aims to reduce poverty and to make work pay for low-paid families without children. Research included in the report shows that, in practice, workers without children who are in poverty tend to be young or working part-time. Michal Myck, one of the authors of the report, said: "the employment tax credit looks set to go only to those 25 or over who work at least 30 hours a week, so the direct impact on poverty will be small. Only around 400,000 families will be entitled to receive an average payment of around ñ6 a week." Nor will the work incentive effect be great. For most people without children, entering work already increases income significantly because the benefits available when unemployed are low.
      Ends

    Notes to editors


      On 31st October 2001, IFS published Commentary 86, Credit where it's due? An assessment of the new tax credits, by Mike Brewer, Tom Clark and Michal Myck. The commentary is available to download from the IFS website.

      The integrated child credit will bring together three different parts of the tax and benefit system that support families with children: the children's tax credit, and the child credits and allowances in the working families' tax credit and income support or jobseekers' allowance. Child benefit will not be affected. The employment tax credit will potentially be paid to people with and without children in low-paid work. Both credits will be run by the Inland Revenue. Many details of the policies are still unclear, and the authors had to make a number of assumptions (detailed in the report) when modelling and costing them.

      A recent Inland Revenue consulation document on the new tax credits, New Tax Credits: Supporting Families, Making Work Pay and Tackling Poverty, is available on the Inland Revenue's website.

      The figures underlying the chart are given below. All incomes were are adjusted for family size.

    Distributional effect of the integrated child credit and the employment tax credit

    Decile

    Average gain (%)

    1st (poorest)

    2.7

    2nd

    3.0

    3rd

    2.3

    4th

    1.7

    5th

    0.7

    6th

    0.2

    7th

    0.0

    8th

    -0.2

    9th

    -0.2

    10th

    0.0

    Average

    0.4


    Source: Institute for Fiscal Studies.

    ]]> http://www.ifs.org.uk/publications/1972 Wed, 31 Oct 2001 00:00:00 +0000 <![CDATA[Pension reform in OECD countries]]>

    A new book, edited by Richard Disney and Paul Johnson, launched today Friday 19th October at a conference at the Institute for Fiscal Studies looks at pension systems in nine major OECD countries.1 This work focuses on the incomes that pensioners actually receive in each of these countries, and the future cost and sustainability of the pension systems that they currently have in place. The main findings of the work are:

    • Pension systems vary significantly. The French and German social insurance systems have much in common with their continental European counterparts but are completely different from the Australian system where the state provides just the basic minimum. The UK, US, Canada and Japan operate systems at various points between these two models.
    • Despite these differences, countries are introducing surprisingly similar sets of reforms. Many countries have raised pension ages, reduced the generosity of the way in which pensions are indexed and cut back on earnings-related schemes.
    • There has been an increase in the private sector coverage in all countries except for New Zealand.
    • Average levels of pensioner income are not greatly divergent between these countries. The main exception is Australia which had a lower average level of income due to its reliance on means-tested benefits and lump-sum pay-outs from pension funds.
    • There are significant differences in the distribution of income among pensioners. Countries such as France, Germany and Italy with extensive social insurance systems have higher levels of pensioner inequality due to the fact that the social security system is closely related to an individual's previous wages.

    Professor Richard Disney, an editor of the book, said "the country-specific analyses show that future problems with spending levels are more a function of the pension system than they are of population ageing per se. While the private sector can play a role, those countries with minimal state systems combined with greater reliance on the private sector do tend to end up with more pensioners with incomes below average earnings".

    There were also a number of lessons that could be learned about the reform process. Professor Richard Disney went on to comment that, "the private sector needs a conducive framework to operate in, but mistakes in the other direction have also been made in the past. For example the UK experience with personal pensions demonstrates that overgenerous incentives can lead to massive 'opting out' of state provision with little budgetary gain for the government."

      Ends

    Notes to editors

    1. The countries considered are: Australia, Canada, France, Germany, Italy, the Netherlands, New Zealand, the United Kingdom and the United States.
    2. "Pension Systems and Retirement Incomes across OECD Countries", edited by Richard Disney and Paul Johnson and published by Edward Elgar will be launched at a conference on the 19th October at 11am at the IFS.
    3. Copies of the publication are available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, telephone 020 7291 4800 or e-mail mailbox@ifs.org.uk, price £65 (£50 to IFS members).
    4. The research was funded by the Institute of Chartered Accountants of Australia (ICAA). The project was originally discussed at a conference at the IFS in March 1998, which was funded by the National Association of Pension Funds (NAPF).
    ]]>
    http://www.ifs.org.uk/publications/1973 Fri, 19 Oct 2001 00:00:00 +0000
    <![CDATA[The Child Trust Fund and the Saving Gateway]]> In a new report published today by the Institute for Fiscal Studies, Carl Emmerson and Matthew Wakefield address some of the many questions about these policies that remain unanswered:

    • What are the exact aims of these policies?
    • Would this new approach of providing lower-income families with financial support in the form of assets be better suited to achieving these aims than extensions of traditional welfare state benefits and services?
    • How will the Child Trust Fund and the Saving Gateway be targeted?
    • How much are the policies likely to cost?
    • How will these new policies interact with the flagship policies of Individual Saving Accounts and Stakeholder Pensions?

    The commentary presents new evidence from the British Household Panel Survey (BHPS), which shows that only a carefully targeted Saving Gateway could be a cost-effective method of creating new savers and savings. Many lower income families already have some savings. If eligible for the Saving Gateway, such families could take advantage of the government match by simply transferring their resources. This would not be new saving, but could make the policy very costly.

    A simple income test would also allow many students, pensioners and unemployed people to be eligible for accounts. These are people who often have good reasons not to want to save. They would not gain fully from the incentives that the Saving Gateway provides. Author Matthew Wakefield suggested that the Government might like to consider a very targeted policy: 'Initially a group such as the newly employed could be singled out as containing people who are likely to gain from incentives to save. A Saving Gateway targeted at such a group could be viewed as a pilot version and evaluated before a decision was taken as to whether a larger scale of policy is a good idea.'

    Further new BHPS evidence suggests that targeting is a difficulty with the Child Trust Fund. Here the problem is that the first contribution to the fund is paid several years before the assets become available for expenditure. The evidence shows that families' circumstances can change considerably during a child's upbringing.

    One Government justification for the Child Trust Fund is that it will provide all young adults with an asset to invest in their future. Author Carl Emmerson commented that if this is the main aim of the policy, then 'it is not clear why the asset will be provided at birth and then locked away. It may be that the Government believes that a means-test based on family circumstances at birth is particularly important. Alternatively the Government may believe that children stand to benefit from seeing how a financial asset grows. Clarification of the aims which justify the design of the policy would be welcomed.'

    **** ENDS ****

    Notes to Editors
    1. A Saving Gateway and a Child Trust Fund: Is asset-based welfare 'well fair'?, by Carl Emmerson and Matthew Wakefield is published on 24th October 2001. Copies are available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, telephone 020 7291 4800 or e-mail mailbox@ifs.org.uk.

    2. Electronic versions of the publication and slides from the conference will be available free of charge online.

    3. The publication will be launched at a conference at the IFS on 24th October.

    4. The research was carried out under the research programme 'The changing distribution of consumption, economic resources and the welfare of households' at the Institute for Fiscal Studies, funded by the Leverhulme Trust.]]> http://www.ifs.org.uk/publications/2 Mon, 01 Oct 2001 00:00:00 +0000 <![CDATA[Latest poverty and inequality figures]]>

    What has happened to child poverty?

    The Government report shows:

    • In the year up to April 2000, 1 in 3 children (4.1 million children) lived below the government's headline poverty measure.
    • This number has fallen by 300,000 (6%) since Labour took power in 1997.

    The Government has said that tax and benefit reforms announced in the last Parliament will lift 1.2 million children out of relative poverty. This is a bigger drop than the figures up to April 2000 show. This is because:

    • Today's figures tell us about poverty as it stood over a year ago. More children may have been lifted from poverty since then.
    • Child poverty is a moving target ֠it is measured relative to average incomes across the whole population. Overall income rises since 1997, which have been particularly large for the better-off, have raised the poverty line. This means that many of those poorer families whose benefits the government has increased remain in poverty even though their incomes have gone up.
    Figure 1. Proportion of children, pensioners and all people in poverty

    Pensioner poverty

    • 1 in 4 pensioners lived in poverty in the year up to April 2000 (2.4 million pensioners), using the government's headline poverty measure.
    • This number has fallen by 100,000 (4%) since Labour took power in 1997.

    What has happened to income inequality?

    Today, 13 th July 2001, IFS publishes a new Briefing Note explaining the trends behind some of the latest figures. It shows that:

    • Income inequality went up in the first two years of the last parliament before falling in 1999-2000.
    • Inequality remained higher in the year to April 2000 than it was before Labour came to power, and higher than its previous peak at the start of the 1990s.
      Ends

    Notes to editors

    1. Today, Friday 13th July, IFS publishes Briefing Note No. 19, Inequality and Living Standards in Great Britain: Some Facts, by Alissa Goodman. The note is available to download free of charge.
    2. The Department for Work and Pensions today publishes Households Below Average Income, 1994/95 - 1999/00, Corporate Document Services, Leeds. It can be downloaded from the Department's website.
    3. The Government's headline poverty measure is 60 per cent of median income.
    4. The Government set out the number of children to be lifted out of poverty as a result of its tax and benefit reforms in HM Treasury, Economic and Fiscal Strategy Report, March 2001, Hc279, The Stationery Office, London, 2001.
    ]]>
    http://www.ifs.org.uk/publications/1974 Fri, 13 Jul 2001 00:00:00 +0000
    <![CDATA[New findings for the New Deal]]>

    The research compares young people in the New Deal pilot areas (where the policy was introduced three months early) compared to non-pilot areas. It also looks at how well the younger unemployed fared compared to the older unemployed who where not eligible for the New Deal. Both of these control groups gave the same basic result:

    • Young unemployed men are about 20% more likely to go into jobs between their sixth and tenth months of unemployment as a direct result of the New Deal. This figure was then used to estimate the costs and benefits of the New Deal
    • The level of employment of young people is about 17,000 higher per year higher as a result of the New Deal.

    The jobs created are much smaller than the total numbers of young people who have gone through the New Deal and into jobs (well over 250,000). This is mainly because the majority of those people would have attained employment even in the absence of the New Deal.

    Nevertheless, the policy has successfully stimulated some more employment for young people and the social benefits probably outweigh the social costs. The New Deal has been a modest success.

      Ends

    Notes to editors

    1. The New Deal was introduced in pilot form in January 1998 and nationally in April 1998. There are many component parts to the New Deal. After six months of unemployment a young person now enters the "Gateway period" where he or she is given extensive job search assistance. If a job is not secured during this period the unemployed person has to move on to an option. These options include a wage subsidy of £60 per week ("employer's option"), full-time education and training, public employment ("environmental task force") or work in the voluntary sector. It is mandatory program, effectively time limiting benefits.
    2. No More Skivvy Schemes? Active Labour Market Policies and the British New Deal for the Young Unemployed in Context by John Van Reenen, Institute for Fiscal Studies Working Paper W01/09.
    ]]>
    http://www.ifs.org.uk/publications/1975 Tue, 15 May 2001 00:00:00 +0000
    <![CDATA[2001 election briefing]]> IFS has published the first six notes in its Election Briefing Note (EBN) series. These look backwards over the last four years and compare the Parliament just ending with earlier Parliaments. There are six Briefing Notes, all available to download here free of charge. Once the main parties\' manifestos have been published, we will publish further Election Briefing Notes analysing their content.

    Overall tax and spending (EBN2)
    Between 1996-97 and 2000-01, government revenues have risen by 2.9% of GDP from 37.6% to 40.5%, while spending has decreased from 41.2% of GDP to 38.8%. As a consequence, over this four-year period, public sector net borrowing fell by a total of 5.3% of GDP, moving from large deficit to large surplus.

    Changes in taxation and spending, different periods

      Annualised average real increase(%)
     

    Total taxes

    Total spending

    Comparisons across Parliaments

       

    This Parliament: April 1997 to March 2001

    4.8

    1.3

    Last Parliament: April 1992 to March 1997

    2.0

    2.0

    Conservative years: April 1979 to March 1997

    1.8

    1.7

    Other periods of interest

       

    Current plans: April 2001 to March 2004

    1.5

    3.8

    First two years of this Parliament: April 1997 to March 1999

    4.5

    -1.0

    Five-year increase from start of first CSR: April 1999 to March 2004

    2.9

    3.8

    Source: IFS Election Briefing Note 2.

    The table shows the movements in taxation and spending seen since 1979. During the Conservative years, the economy grew at an average of 2.1% per year, implying that both tax and public spending fell as a share of national income. In the last four years, taxes have risen as a share of national income but spending has fallen. Part of this is explained by a rapidly growing economy, which tends to boost taxation receipts and depress spending.

    Spending on public services (EBN3)

    Although overall public spending has grown slowly in the last four years, spending in some areas - most notably health and education - has grown significantly more rapidly than in the 18 years of Conservative government that preceded this Parliament. This has been possible in spite of an overall reduction in spending as a share of national income because of particularly slow growth in social security spending and a reduction in debt interest payments.

    Public spending grew significantly more quickly in the last year of the Parliament than in the previous three, and is planned to grow quite rapidly over the next three years.

    Public sector investment spending, which had fallen in the years before the last election, has fallen further as a share of national income and in real terms, despite the government\'s intention to increase it.

    Living standards under Labour (EBN4)

    Actual living standards are the result of not just changes to the tax and benefit system, but also changes to the underlying distribution of income. Data to examine this are only available for the first three years of the Labour government.

    During this period, the incomes of the poorest fifth of households grew at an average annual rate of 1.4%, with subsequent fifths growing respectively at 1.5%, 1.8%, 2.4% and 2.8%. Although the direct effect of government measures was to reduce inequality, the underlying distribution of income widened by enough to more than offset the effects of tax and benefit changes in the first three years of the Parliament.

    Fiscal reforms affecting households (EBN5)

    We have modelled the impact of changes to the tax and benefit system as it affects households. Many of the tax increases seen in recent years cannot readily be included, most notably the increased taxation on company incomes and pension fund dividends. We have assumed in these calculations that all entitlements to means-tested benefits are taken up, which they are not, which should be borne in mind in interpreting the results. The broad pattern of the results is unaffected by this.

    Effect of major fiscal reforms implemented July 1997 to June 2001

    Note: The first decile contains the poorest 10% of the population, while the tenth decile contains the richest 10%.
    Source: IFS Election Briefing Note 5.

    The figure shows gains concentrated on lower incomes. The substantial gains at the bottom end are mainly a result of higher means-tested benefits, especially for pensioners and families with children. Reforms to National Insurance contributions have also helped those on lower earnings. It is important to remember that while, on average, families in each decile gain, some families within each decile lose from the reforms, often because of indirect taxes.

    Labour and business tax (EBN6)

    The Labour government has cut the main corporation tax rate from 33% to 30%, abolished advance corporation tax, removed repayable dividend tax credits from pension funds, and moved to a quarterly system of tax payments for large firms. The combined effect of these changes has been to raise significant revenue during this Parliament, but in a way that is largely temporary, giving a boost to revenues during the Parliament just ending which will not be available in the longer term.

    ]]>
    http://www.ifs.org.uk/publications/1976 Wed, 09 May 2001 00:00:00 +0000
    <![CDATA[Did subsidising private medical insurance hekp the NHS?]]>

    New IFS research, financed by the Economic and Social Research Council, and published today by the King's Fund(2), shows that the government's decision to do away with tax subsidies for Private Medical Insurance (PMI) will have saved the government money despite the fact that some individuals choose to return to the NHS.

    Writing in Health Care UK Spring 2001, Carl Emmerson, Christine Frayne and Alissa Goodman consider the effect of the July 1997 Budget decision to abolish the subsidy for those over 60 who take out Private Medical Insurance. They find that the saving to the Treasury from removing the subsidy more than outweighs the additional cost to the NHS from treating those who decided not to take out PMI as a result of the subsidy being removed. Christine Frayne, one of the authors of the report, said "We find that around 4,000 fewer individuals took out Private Medical Insurance as a result of the reform. While this will have led to an increase in demands on the NHS, the cost of treating any additional patients will be far less than the £135 million saved."

      Ends

    Notes to editors

    1. Prior to the July 1997 Budget individuals aged 60 and over and their partners, who took out Private Medical Insurance, were entitled to a subsidy equivalent to the basic rate of income tax. The decision to remove this subsidy affected a total of 550,000 people and raised a total of ñ35m a year for the Treasury by 1999-2000.
    2. Health Care UK Spring 2001, is the latest King's Fund bulletin on health policy in Britain. It is available from the King's Fund bookshop on 020 7307 2591, price ù.99.
    3. Contacts: Carl Emmerson, Christine Frayne or Alissa Goodman. Press Copies from Mel Capper at the King's Fund on 020 7307 2581.
    4. This research is funded by the Economic and Social Research Council as part of the research programme of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy at IFS.
    ]]>
    http://www.ifs.org.uk/publications/1977 Wed, 09 May 2001 00:00:00 +0000
    <![CDATA[UK investment: high, low, rising, falling?]]>

    The Chancellor's 14 per cent figure is the correct answer to a hypothetical question: "what share of GDP would the business sector have needed to spend on investment in order to buy the capital goods that were purchased last year, if firms had been obliged to buy those capital goods at their real price in 1995?"

    Just as the real price of computers has fallen, so the real price of capital goods bought by business was substantially higher back in 1995. But firms did not buy capital last year at 1995 prices, and they did not actually invest the higher notional amount indicated by this calculation. Nor is it likely that they would have purchased the same capital goods if they had in fact faced higher prices. This may not be the most transparent way of presenting figures for business investment as a share of GDP.

    The Treasury have also recently published a graph that appears to show business investment as a share of GDP to be higher now in the UK than in the USA, Germany or France (Chart 2.3, Productivity in the UK, November 2000). This chart presents a series for UK business investment as a share of GDP that is higher than those published by the Office for National Statistics, or by the OECD in their Economic Outlook. The Treasury chart also presents comparisons based on 1995 real prices, although the same publication points out that the national investment goods price deflators used to construct these constant price series are not measured in a consistent way across countries.

    OECD Economic Outlook data for the shares of GDP actually spent on business investment show the UK share to be level with that in Germany and lower than that in the USA. Broader measures of investment, which do not exclude investment by general government or investment in housing, continue to show a comparatively low level of total investment spending as a share of GDP in the UK. The 'business sector' investment comparisons emphasised in recent government publications exclude two major categories of investment - general government and housing - in which UK spending as a share of GDP happens to be low.

      Ends

    Notes to editors

    1. For more details, see IFS Briefing Note No. 18 UK Investment: High, Low, Rising, Falling? by Nick Bloom and Steve Bond can be downloaded on-line.
    2. If you would like an advance press copy, please contact Emma Hyman in the IFS press office (telephone 020 7291 4850).
    ]]>
    http://www.ifs.org.uk/publications/1978 Wed, 11 Apr 2001 00:00:00 +0000
    <![CDATA[Recent pensions policy and the Pension Credit]]>
    • above-inflation basic pension increases in 2001 and 2002;
    • substantially above-inflation increases in the means-tested Minimum Income Guarantee (MIG) in each of the next three years;
    • and, from April 2003, the introduction of a new element into the means-tested benefit system known as "Pension Credit".

    Overall, the package means the Government will pay over £4 billion extra annually to pensioners by 2003/04. This is revealed in new analysis by the Institute for Fiscal Studies, published today.

    The effect on pensioner incomes will be substantial. By 2003 the average single pensioner will gain £9.68 per week, while the average pensioner couple should pocket £11.05. And the impact will be greatest for those on lower incomes. In the chart, all families with someone of over sixty have been ranked by net income (adjusted for family size) and then divided into ten equally-sized 'deciles'. The poorest 10% of pensioners should see average incomes increase over 20%, and each of the bottom five deciles should see an average gain above 5%.

    0

    Report author Tom Clark said: "There can be no doubt that the Government is diverting significant extra resources to pensioners. But its basic strategy is still to extend means testing, a policy which raises a number of issues." Once the full package is implemented 60% of the entitlement created will be income based. More generous targeted benefits will see more pensioners being means-tested. By 2003, increases in the MIG alone mean that the number of adults in entitled families will rise by 600,000 from 2.6 million to 3.2 million. As the current system of means testing has widely-perceived flaws, the Government has chosen to couple its extension with the introduction of the Pension Credit.

    The current system 'tops-up' the incomes of all poorer pensioners to the same level. So a low-income pensioner, who has saved to provide an extra weekly £1 of income, simply receives ñ less top-up: net income is unchanged by private income, a situation widely seen as unfair. Pension Credit addresses this by reducing entitlement by just 40p for each £1 of private income, which should mean pensioners are always better-off from saving, as 60p of each ñ provided for themselves can be kept. But in practice, the reform's effectiveness might be reduced by interaction with other benefits. Unless housing and council tax benefits are also reformed, then someone who received these as well as Pension Credit would actually gain only 9p for each pound of private income.

    A related concern is that the current system might mean that people planning for retirement are put off bothering to save, increasing welfare bills in the long term. Whether Pension Credit helps here is unclear. Certainly, saving becomes 'better value' for those who would in any case have been on benefit, and this should encourage more saving. But the more generous rules of Pension Credit mean 2.3 million adults in families who were ineligible for MIG will be entitled to the Credit, and so exposed to the means test on an income top-up for the first time, making saving 'worse value' for them. Finally, by boosting the incomes of all poorer pensioners, the reforms will cut the amount of saving required to attain any particular 'target retirement income', which might also discourage saving. Theoretical analysis of the reform leaves its impact on overall saving an open question.

    The current benefit system reduces benefit entitlement in respect of capital, but Pension Credit will consider only the income capital generates, a change aimed at encouraging saving. The reform will introduce a market distortion, which makes it more attractive for pensioners to hold assets that produce high capital gains rather than income-generating assets, like annuities. In other aspects of policy, notably the plans for stakeholder pensions, Government policy has worked in the opposite direction, encouraging purchase of annuities.

      Ends

    Notes to editors

    1. All cash amounts are in 2000 prices.
    2. Results estimated using TAXBEN, the IFS tax and benefit model, run on 1998/99 Family Resources Survey.
    3. TAXBEN assumes full take-up of all benefits. If the proportion of pensioners failing to claim means-tested benefit entitlement remains unchanged, the effect on pensioner incomes will be significantly smaller in practice than in theory.
    4. Constant levels of real non-benefit income have been assumed.
    5. For more details, see IFS Briefing Note No. 17 Recent Pensions Policy and the Pension Credit, by Tom Clark.
    ]]>
    http://www.ifs.org.uk/publications/1979 Wed, 21 Feb 2001 00:00:00 +0000
    <![CDATA[Employed or self-employed?]]>

    In a discussion paper prepared by for the Tax Law Review Committee, Professor Judith Freedman of the LSE has examined a number of questions on this topic:

    • do changing work patterns require a new approach to worker classification for tax purposes?
    • is the case law which governs the area sufficiently robust and clear, especially following the 'IR35' legislation?
    • what is the relationship between classification of workers for taxation and classification in other areas of law, particularly employment law?
    • are taxation developments consistent with the Government's employment law policy?
    • is taxpayer guidance on classification adequate or could Government do more?
    • do administrative arrangements and appeals on worker classification work well?

    The discussion paper looks especially at the problems of homeworkers, casual workers, construction workers, agency workers and personal service companies. It also considers the tension between the Government's use of tax incentives to encourage entrepreneurship and its desire to stamp on tax avoidance.

    The discussion paper is published to encourage debate on the issues and to inform the TLRC's further work on this subject. Comments are invited to Judith Freedman c/o The TLRC, IFS, 7 Ridgmount Street, London WC1E 7AE.

      Ends

    Notes to editors

    1. The discussion paper, Employed or Self-Employed? Tax Classification of Workers and the Changing Labour Market, by Judith Freedman, is available from IFS, 7 Ridgmount Street, London WC1E 7AE for £30 (£15 to IFS members).
    ]]>
    http://www.ifs.org.uk/publications/1980 Wed, 07 Feb 2001 00:00:00 +0000
    <![CDATA[IFS Green Budget 2001]]>

    The public finances

    As last year, the public finances seem healthier than the government forecast. We expect public sector net borrowing (PSNB) to record a surplus of £15.9 billion in 2000-01, virtually unchanged from 1999-2000. This is £10 billion better than the March 2000 Budget forecast and £5.8 billion better than the November 2000 Pre-Budget Report forecast. The better-than-expected performance in the public finances reflects a combination of greater buoyancy in tax receipts and an undershoot in public spending. The government's fiscal rules continue to be met with ease.

    For our medium-term forecasts, we have adopted the Treasury's cautious assumption of trend GDP growth of 2¼% a year. Even so, we expect the surplus on current budget in the medium term to run about 0.5% of GDP above the path in the 2000 Budget and Pre-Budget Report. The Chancellor could announce additional discretionary measures costing £3-4 billion by 2002-03 to bring the public finances broadly onto the path envisaged in the 2000 Budget and Pre-Budget Report. If trend GDP growth turns out to be stronger, as we expect, the Chancellor of the day will have further room for manoeuvre in future years.

    We consider how the public finances have evolved relative to the projections set out in the Conservatives' last Budget, in November 1996. Our main findings are the following:

    • Tax receipts in 2000-01 are likely to be £24 billion higher than projected in the November 1996 Budget. Higher-than-expected inflation explains £7 billion of this increase; hence, in real terms, taxes are £17 billion higher than the November 1996 forecast.
    • Up until 1999-2000, all of the additional real increase in taxes was used to reduce public borrowing. Public spending in the first three years of the parliament was actually lower in real terms than the Conservatives' plans.
    • By reducing public borrowing, the government has made significant savings on debt interest payments. Falling unemployment has reduced cyclical social security spending. Discretionary public spending has risen, on average, by 2.1% a year in real terms during the past four years. This is slightly less than the annual increase in discretionary public spending by the Major Government.
    • The government plans further significant increases in public spending in 2001-02 and beyond. If this parliament were to run for a full five-year term and the spending plans were delivered, real discretionary public spending would increase by an average of 2.9% a year, compared with the 1.4% a year recorded during the Conservative period of office from 1979 to 1997 and the 2.2% achieved during John Major's period as Prime Minister.

    Personal taxes and benefits

    Given the likelihood of some give-away in the Budget, the Chancellor will be considering a range of options on personal taxes and benefits. An increase in the value of the children's tax credit from the £8.50 per week proposed to £10.00 has been widely discussed. But such a move would not help the poorest families, who pay no income tax. We therefore consider a package that adds increases to the child allowances in income support and the working families' tax credit, which could together deliver a highly progressive result and would help to achieve the government's aim of reducing child poverty. We also examine the alternative of a general tax cut that would benefit those both with and without children. Options considered are cutting the basic rate of income tax, widening the 10% tax band, increasing the value of personal allowances and raising the higher-rate threshold. All of these tax reductions are substantially less progressive than a reform including benefit increases.

    Taxation of fuel and the environment

    The recent debate surrounding the taxation of private motoring has succeeded in highlighting the complex nature of tax design in this area. One message that is clear is that trying to address the wide range of different social costs associated with motoring with a single tax cannot be optimal. In most cases, finding a suitable tax base is difficult, but where a more appropriate tax base is available, such as congestion, it would be sensible to move away from a fuel tax towards a more targeted tax. In the Pre-Budget Report, the government attempted to improve incentives for motorists to behave in a more environmentally friendly way. The extent to which this was achieved can, at best, be described as mixed.

    Tax policy and companies

    Raising productivity remains high on the Chancellor's agenda, with tax policy one of the possible instruments for achieving change. We discuss the arguments for extending the provision of research and development (R&D) tax credits from small and medium-sized enterprises (SMEs) to larger firms, in response to the relative decline in the UK's R&D spending in recent decades.

    We note that, in common with many other industrialised countries, the UK has recently reduced corporate tax rates while at the same time broadening the tax base. In the UK, these changes have led to a net increase in taxes on company profits. We also discuss recent debates about double taxation relief and North Sea oil taxation.

    Longer-term welfare reform

    The government's welfare reforms since 1997 have blurred the distinction between taxes and benefits. These reforms include the introduction of the working families' tax credit in 1999 and the children's tax credit in 2001, and the promise of the integrated child credit and the pension credit. These developments have taken place alongside increases in generosity of means-tested transfers and a greater use of the family as the unit of assessment. The increases in generosity have undoubtedly meant that extra resources have been targeted at the less well-off. Other reforms improve the incentives to work for some and may increase take-up of the transfers. But these effects come at a cost of subjecting more individuals and families to a means test, the inconvenience of having to claim support and the need to provide detailed information to the authorities about their private lives.

      Ends

    Notes to editors

    1. The IFS Green Budget: January 2001, edited by Andrew Dilnot, Carl Emmerson and Helen Simpson is published on 31st January 2001 and is available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, price £40, telephone 020 7291 4800 or e-mail mailbox@ifs.org.uk .
    ]]>
    http://www.ifs.org.uk/publications/1981 Wed, 31 Jan 2001 00:00:00 +0000
    <![CDATA[Helping families with children]]>
    • how can three mechanisms which are assessed on different measures of income, over different time periods, and are of differing generosity, be combined into one?
    • how generous should the new credit be? Should the greatest support be given to younger or older children?
    • will the credit involve a massive extension of means-testing? Does this matter?
    • how much will the introduction of the integrated child credit cost?

    New research published today by the Institute for Fiscal Studies aims to answer these questions by using a simulation model of the way the integrated child credit will work, and building on past work on child poverty and the administration and design of taxes and benefits. Some of the main findings are:

    • around 2.5 million families with children in the UK currently undergo a means test assessed against joint family income. The introduction of the integrated child credit will extend a means test to 6 million families, nearly all families with children in the UK.
    • introducing the integrated child credit is likely to cost around ñ billion a year. From April, the poorest families will not receive the highest levels of support for their children because they do not pay income tax and so will not benefit from the Children's Tax Credit. Creating an integrated system means giving all low-income families the same support, so the introduction of the integrated child credit will help families at the bottom end of the income distribution.
    • depending on exactly how the Government implements the credit, some better-off families could gain or lose from the move to full joint assessment of income in an integrated child credit. It would cost an extra ö50m to guarantee that no family loses from the move to joint assessment;
    • paying the integrated child credit to the main carer in couples - usually the mother - may affect the distribution of income between partners in couples in a large number of families, but this switch may increase children's well-being.
    • it will be difficult for the Government to meet its objectives for a new integrated child credit without losing some of the welcome features of the current system.

    Michal Myck, one of the authors and a Research Economist at the Institute for Fiscal Studies said, "The integrated child credit represents a radical reform of the tax and benefit system for families with children. It will affect nearly all of the 7 million families with children in the UK. The reform represents a unique chance for the Government to simplify the financial support for families with children. It will mean that out-of-work families will be treated in the same way as low-paid families."

    Another author, Mike Brewer, a Senior Research Economist at the Institute for Fiscal Studies said, "From 2003, more money could be spent on children through the new integrated child credit than through Child Benefit. But many details of the integrated child credit have yet to be decided upon and announced by the Government. We hope this report provides information and analysis to contribute to a full debate about these important issues."

      Ends

    Notes to editors

    1. The Commentary is available from The Institute for Fiscal Studies, 7 Ridgmount Street, London WC1E 7AE, telephone 020 7291 4800, fax 020 7323 4780, email mailbox@ifs.org.uk. The Commentary costs ñ5 for IFS members and ò0 for non-members.
    2. The Commentary will be launched on Wednesday 24th January. Please contact the IFS for further details.
    3. The Government's plans for the integrated child credit were announced in HM Treasury, Tackling Poverty and Making Work Pay: Tax Credits for the 21st Century, The Modernisation of Britain's Tax and Benefit System 6. It is available from HM Treasury's Public Enquiry Unit (020 7270 4558) or http://www.hm-treasury.gov.uk/budget2000/taxcredit.pdf.
    ]]>
    http://www.ifs.org.uk/publications/1982 Wed, 24 Jan 2001 00:00:00 +0000
    <![CDATA[Households below average income]]>
    Table 1: Real percentage change in median before housing costs income, by decile

    Before housing costs income decile

     
    1994/5-1996/7

     
    1996/7-1998/9

    Whole period
    1994/5-1998/9

    1

    1.8

    1.9

    3.7

    2

    2.7

    3.4

    6.3

    3

    2.7

    4.2

    7.0

    4

    3.7

    3.6

    7.5

    5

    4.0

    3.5

    7.7

    6

    3.8

    3.4

    7.4

    7

    3.0

    4.4

    7.6

    8

    3.3

    5.0

    8.4

    9

    4.1

    4.7

    8.9

    10

    4.3

    7.1

    11.7

    Table 2.9; Real percentage change in median after housing costs income, by decile

    After housing costs income decile

     
    1994/5-1996/7

     
    1996/7-1998/9

    Whole period
    1994/5-1998/9

    1

    10.6(*)

    5.5

    16.7

    2

    0.9

    5.5

    6.5

    3

    2.8

    5.4

    8.3

    4

    3.4

    5.6

    9.2

    5

    4.9

    3.6

    8.7

    6

    4.6

    3.9

    8.6

    7

    4.3

    4.7

    9.2

    8

    4.4

    4.4

    9.0

    9

    5.4

    4.5

    10.2

    10

    5.9

    6.8

    13.1

    *The particularly large real increase in median AHC incomes in the bottom decile are largely a product of falling interest rates, which generate proportionately bigger reductions in the housing costs of those with temporarily low incomes but large mortgages.
      Ends

    Notes to editors

    1. For more information contact Jayne Taylor at IFS on 020 7291 4800
    2. We refer to a press release issued today by the Department of Social Security.
    ]]>
    http://www.ifs.org.uk/publications/1983 Mon, 31 Jul 2000 00:00:00 +0000
    <![CDATA[Funding for the arts in England]]>

    Sir Alan Peacock's article, published today, Friday 23rd June, in Fiscal Studies, is the first serious attempt to disentangle the complicated financial relationships between the Department for Culture, Media and Sport (DCMS) and its clients and to illustrate the use of economic analysis to highlight policy problems. He commends the efforts of the DCMS to improve methods of appraisal and control of programmes but contends that these attempts are likely to be only partially successful because of the strong opposition of the big players in the arts world, who fight to follow their own agenda. The result would be likely to be a continuation of the situation where some of the more expensive art forms such as opera and ballet will remain the least popular and the BBC will remain a protected species until the renewal of its Charter in 2005. The author argues that a policy shift is needed which would reduce the influence of peer-group assessment on the programmes of grant-aided arts and heritage organisations and increase that of the public. This would entail the retention of charging for entry to museums and galleries (subject to suitable exemptions) and the appointment of representatives of the public to boards of management of arts organisations who would be elected from amongst their subscribers.

      Ends

    Notes to editors

    1. 'Public financing of the arts in England' by Sir Alan Peacock is published in Fiscal Studies, vol. 21, no.2.
    2. Fiscal Studies articles are available online from Wiley.
    3. Professor Sir Alan Peacock was Chair of the Arts Council Committee on Orchestral Resources in Britain (1970) and the Home Office Committee on the Financing of the BBC (1985-86). He was a member of the Arts Council of Great Britain (1986-92) and Chairman if the Scottish Arts Council (1986-92). He also spent three years in government as Chief Economic Advisor to the DTI (1973-76) during which period he was a member of the Board of the London Philharmonic Orchestra. Now retired, he continues to write on the economics of public finance and on public policy in general. He also writes music.
    4. Contact: Professor Sir Alan Peacock
      telephone 0131 447 5917 or 0131 650 4633
      peacock@ebs.hw.ac.uk
    ]]>
    http://www.ifs.org.uk/publications/1984 Sat, 24 Jun 2000 00:00:00 +0000
    <![CDATA[Challenges for the NHS]]>

    A new report carried out by the Institute for Fiscal Studies, and financed by the King's Fund, considers some of the challenges that the NHS faces. The findings of this new research include:

    • The spending plans in context. Although not unprecedented, the spending increases announced in the Budget mean that the NHS is now in a period of sustained and relatively high spending growth. Planned average increases of 6.1 per cent per year over the next four years are substantially higher than the average funding increases seen in recent parliaments and over the history of the NHS.
    • International comparisons of healthcare systems. The UK system of healthcare, in which the NHS is mostly financed through taxation, and services are publicly provided, is fairly unusual. Other countries have different systems, ranging from the social insurance models, adopted by France and Germany, to more private sector oriented systems, seen in Switzerland and the United States. It is also true that levels of spending vary dramatically. The UK devotes just 6.8 per cent of national income to healthcare - less than any of the other G7 countries. Comparisons of health outcomes are less clear. The UK performs relatively badly compared to other G7 countries on measures such as infant mortality and life expectancy, but it does perform better than the US, which spends almost 14 per cent of GDP on healthcare. On other measures of quality such as cancer survival rates, the UK performs poorly compared to both Europe and the US.
    • Waiting lists and waiting times in the NHS. While there is no single indicator of NHS performance, it is clear that the public, media and politicians tend to focus on waiting lists and waiting times as one measure of quality. The government looks set to achieve its manifesto commitment of reducing waiting lists by 100,000 over the course of the parliament. It is still the case that at the next election waiting lists will be very high by historical standards. On average, patients have to wait over 4 months for treatment.
    • Variations in performance both across and within regions. The government has stated that at least some of the additional money announced in the Budget will be used to reduce inequalities in the provision of healthcare. While there will always be some differences in quality of care, it is clear that the current levels of variation are substantial. For example, death rates within 30 days of surgery after non-emergency admissions to hospital vary enormously both between regions and between health authorities. The authors suggest that, in some cases at least, these differences are not the result of the inefficient use of resources. For example, some regions with relatively high numbers of people waiting for treatment per hospital bed actually treat more patients per bed year.
    • The impact of an ageing population. The authors' baseline forecasts suggest that, simply due to the growth of the elderly population and other demographic changes, NHS spending will have to increase by some 30 per cent over the next fifty years. This is less than the expected increase in GDP over the period. It is also true that such costs are similar to those already borne by the NHS to pay for the demographic change which has taken place over the last fifty years. Taken alone such costs should not present an overwhelming burden on NHS resources, but there will also be other pressures on the NHS budget, for example from wage increases in the economy and the cost of new treatments.
    • The role of the private sector. Substantial growth in private healthcare over the last twenty years means that the NHS is no longer the sole provider of healthcare in the UK. Nearly 7 million individuals are now covered by private medical insurance, and many people also pay directly for private treatment. The research provides an extensive analysis of the characteristics of those with private medical insurance using data from the Family Resources Survey, showing that those covered tend to be higher-income individuals with managerial or professional jobs. While it is true that any future growth in the private sector will help free up public spending within the National Health Service, the authors show that it is extremely unlikely that any subsidy to encourage individuals to take out private medical insurance would be self-financing.

    Alissa Goodman, one of the authors of the report, said "The NHS spending increases announced in the recent Budget are indeed substantial. Providing the improvement in patient care that is expected by the public will be far from easy. Waiting lists are still high and substantial variations in quality of healthcare exist across the country."

    King's Fund chief executive Rabbi Julia Neuberger said, "This IFS report is an important contribution to the current debate about the future of the NHS. It shows that, despite recent claims to the contrary, the NHS should be able to afford to support an ageing population. However it also shows that there are tough choices ahead and that the NHS must now improve standards of care if it is to provide the service of choice to those who can afford private health care."

      Ends

    Notes to editors

    1. "Pressures in UK Healthcare: Challenges for the NHS", by Carl Emmerson, Christine Frayne and Alissa Goodman is published on 18th May 2000. Copies are available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, telephone 020 7291 4800 or e-mail mailbox@ifs.org.uk, price ò5 (ñ5 to IFS members).
    2. The publication and slides from the conference will be available free of charge from the IFS website at www.ifs.org.uk/healthindex.shtml.
    3. The publication will be launched at the King's Fund, 11-13 Cavendish Square, London. For more details contact the IFS press office on 020 7291 4800 or e-mail emma_hyman@ifs.org.uk.
    4. The research was partly funded by the King's Fund. Co-funding was provided by the Economic and Social Research Council as part of the research programme of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy at the IFS.
    ]]>
    http://www.ifs.org.uk/publications/1985 Sun, 14 May 2000 00:00:00 +0000
    <![CDATA[Tax harmonisation in Europe]]>

    The report reviews recent trends in corporate taxation, problems associated with maintaining 15 distinct and imperfectly co-ordinated corporate income taxes within the EU, and the extent to which these problems may be addressed, both by the Code of Conduct initiative and by more ambitious proposals for harmonisation.

    Some of the main conclusions include:

    • corporate tax rates are falling, but corporate tax revenues are not; the impact of rate cuts has been offset by widening of corporate tax bases and improvements in underlying company profitability;
    • even if corporate tax rates continue to fall and this produces a switch away from taxes on corporate profits and towards taxes on income from employment in the future, it is not clear that this development would be bad for employment; taxes on corporate profits may also affect levels of employment, by encouraging capital to migrate to more lightly taxed locations;
    • lack of co-ordination between national corporate income taxes leads to a number of problems, including distortions to the location and organisation of economic activity by firms in Europe, and opportunities for tax avoidance that make corporate tax revenues increasingly difficult to collect;
    • the scope of the Code of Conduct may be too narrow to address the sources of many of these opportunities for tax avoidance and distortions to economic activity;
    • full harmonisation on a single EU corporate income tax would deal more effectively with distortions and difficulties arising within the EU, but even this could do little to deal with pressures that arise from interactions between the EU and the rest of the world.

    Stephen Bond, Director of the Corporate Sector at IFS, said, "Taxing international companies raises complex and challenging questions for national policymakers. It is not clear that limited steps towards greater co-ordination within Europe will bring significant benefits. Many of the pressures on corporate tax rates, opportunities for tax avoidance and distortions to economic activity arise from interactions between the EU and the rest of the world."

      Ends

    Notes to editors

    1. Corporate Tax Harmonisation in Europe: A Guide to the Debate by Stephen Bond, Lucy Chennells, Michael P. Devereux, Malcolm Gammie and Edward Troup is available from IFS for ò5.
    2. The report will be launched at a conference on the afternoon of Thursday 11th May. For details, please contact the IFS press office on 020 7291 4800.
    ]]>
    http://www.ifs.org.uk/publications/1986 Thu, 11 May 2000 00:00:00 +0000
    <![CDATA[Press coverage of 'The labour market impact of the Working Families' Tax Credit']]> The Daily Telegraph
    ran an article by Anne Segall, Economics Correspondent, which began with the sentence:

    'The Working Families Tax Credit, which will cost taxpayers £5 billion in the year ahead, could prove among the costliest failures in social engineering ever attempted by a British government, a damning new report says.'

    The headline was 'Family Tax Credit will be £5bn a year failure says report'.

    The article in Fiscal Studies, to which The Daily Telegraph refers, makes no reference to social engineering, or to failure, or to costly failure. What the article attempts is an objective assessment of the effect of the WFTC on the distribution of income and on labour market behaviour. Normative judgements, which were not made by the authors, should not be attributed to them.

    A similar problem is seen in an article in The Daily Mail of April 4, which includes the sentence 'A devastating report from the independent Institute for Fiscal Studies concluded that the grandiose scheme Šwould be a massive flop.' Neither 'massive flop', nor 'flop', nor any similar statement appears anywhere in the report referred to.

      Ends

    Notes to editors

    1. The original press release on this article can be found here
      Summaries of previous work on the WFTC can be found in The employment effects of the WFTC (Briefing note No. 6) and Family Credit and the WFTC (Briefing note No. 3).
    2. The article "The Labour Market Impact of the Working Families' Tax Credit" by Richard Blundell, Alan Duncan, Julian McCrae and Costas Meghir is published in Fiscal Studies, vol. 21, No. 1. This is available from the Institute for Fiscal Studies, 7 Ridgmount Street, London, WC1E 7AE, 020 7291 4800, mailbox@ifs.org.uk
    3. Current Fiscal Studies articles are now available online to institutional subscribers from Wiley.
    ]]> http://www.ifs.org.uk/publications/1987 Tue, 04 Apr 2000 00:00:00 +0000 <![CDATA[Taxation and growth]]> Research, published in Fiscal Studies today, Friday 31st March, reviews the theoretical and empirical evidence to assess whether a consensus arises as to how significant this effect may be. It is shown that the theoretical models isolate a number of channels through which taxation can affect growth and that these effects are potentially substantial. Despite this, empirical tests of the growth effect point very strongly to the conclusion that the tax effect is very weak.

      Ends

    Notes to editors

    1. The article, 'Taxation and Economic Growth' is published in Fiscal Studies, Volume 21, No. 1, available for ñ0 from IFS, 7 Ridgmount Street, London WC1E 7AE, 020 7291 4800, mailbox@ifs.org.uk.
    2. Current Fiscal Studies articles are now available online to institutional subscribers with Ingenta. They can be purchased online for ñ3 each.
    3. Contact: Gareth Myles, University of Exeter, 01392 264487
    ]]>
    http://www.ifs.org.uk/publications/1990 Fri, 31 Mar 2000 00:00:00 +0000
    <![CDATA[The labour market impact of the Working Families' Tax Credit]]>

    Research at the IFS has sought to evaluate this claim. In a paper published today in Fiscal Studies, IFS researchers Richard Blundell, Alan Duncan, Julian McCrae and Costas Meghir consider the impact of WFTC on household income and employment. Their method of analysis combines a large-scale household survey (the Family Resources Survey) with the IFS tax and benefit model TAXBEN3 to model both the distributional changes and the labour supply responses to the WFTC. From a distributional point of view, they find that:

    • working lone parents are most likely to benefit from the WFTC reform. Nearly 80% of lone parents in part-time paid employment (of between 20 and 30 hours) will benefit from the new tax credit.
    • for women in couples where the male partner is in work, the WFTC will be most generous to households in which the women are not in paid employment; around one third of this group will benefit from the introduction of the tax credit. For women in part-time work, the figure falls to around 5%.

    The economic model used to simulate the impact of WFTC on hours and employment allows for fixed costs of employment and for childcare costs which vary with hours of work and the quality of childcare used. Assuming full take-up for the pre-existing Family Credit and other benefits and full take-up of the new tax credit , the authors' analysis (summarised in Table 1) suggests that:

    • The participation rate for single mothers will increase by 2.2 percentage points, corresponding to 34,000 individuals.
    • The participation rate for married women with employed partners will decrease by 0.57 percentage points, a decline which corresponds to around 20,000 individuals.
    • The combined behavioural effects of the WFTC imply a small increase in overall participation by just under 30,000 individuals.
    • Labour supply responses to the WFTC will act to reduce the cost of the program by around 14%.
    Table 1. Simulated Responses to WFTC
    Household Type

    Simulated responses to WFTC (per cent)

    Change in participation

     

    Non-work
    to work

    work to
    non-work

    part-time
    to full-time

    full-time
    to part-time

    Per-cent

    Numbers

    Single mothers

    2.2

    0.0

    0.5

    0.2

    +2.20

    34,000

    Women in couples, partner working

    0.2

    0.7

    0.0

    0.1

    -0.57

    -20,000

    Women in couples, partner not working

    1.3

    0.0

    0.4

    0.1

    +1.32

    11,000

    Men in couples, partner working

    0.0

    -0.3

    - (1)

    -

    -0.30

    -10,500

    Men in couples, partner not working

    0.4

    0.0

    -

    -

    +0.37

    13,000

    Note: (1) On data evidence, men in our model are restricted to a choice between not working and full-time employment.

      Ends

    Notes to editors

    1. The article "The Labour Market Impact of the Working Families' Tax Credit" by Richard Blundell, Alan Duncan, Julian McCrae and Costas Meghir is published in Fiscal Studies, vol. 21, No. 1. This is available from the Institute for Fiscal Studies, 7 Ridgmount Street, London, WC1E 7AE, 020 7291 4800, mailbox@ifs.org.uk
    2. Current Fiscal Studies articles are now available online to institutional subscribers from Wiley.
    3. Contacts: Alan Duncan or Richard Blundell, IFS, 020 7291 4800

    ]]>
    http://www.ifs.org.uk/publications/1988 Fri, 31 Mar 2000 00:00:00 +0000
    <![CDATA[Retirement saving: the tax effect]]>

    When it comes to saving for their retirement people have several options. They could put their money in a pension, or they could save in an Individual Savings Account where they could get at their money before retirement if needed. New work at the Institute for Fiscal Studies, funded by the Economic and Social Research Council, has looked at how the tax system might affect where basic rate taxpayers choose to save. A saver with money in an ISA would continue to benefit from the dividend tax credit, but with a pension they would benefit from the tax-free lump sum. The question is which is worth more.

    The main findings are:

    • Since the dividend tax credit to ISAs is set to last for just five years, the tax system provides a strong incentive for individuals to save in a private pension.
    • Should ISAs continue to receive the tax credit for 30 years, then assuming a ten per-cent real rate of return, they would be more tax-favoured than individual contributions to a private pension.
    • This assumes that the contributions are made by the individual. Tax relief on employer contributions to a pension is even more generous since these are not subject to employers' or employees' National Insurance Contributions.

    Carl Emmerson, one of the authors of the article, said, 'while there may be reasons to encourage individuals to save for their retirement, there is no obvious economic rationale for favouring one type of pension contribution over another. It is also worth remembering that giving a tax advantage to pensions tends to favour those who can afford to tie up their money for a long time'.

    Table: The Impact of Different Tax Treatments on the Return to Saving for a Basic Rate Taxpayer

    Real annual rate of return

    Savings vehicle

    1%

    5%

    10%

    15%

    Private Pensions

    Individual contributions, tax-free lump sum, as now

    10.5

    10.5

    10.5

    10.5

    Employer contributions, tax-free lump sum, as now

    31.7

    31.7

    31.7

    31.7

    Individual contributions, tax-free lump sum plus 20
    per cent dividend tax credit, as before July 1997

    12.4

    21.8

    37.2

    55.7

    Tax-free savings schemes

    No dividend tax credit

    0.0

    0.0

    0.0

    0.0

    10 per cent dividend tax credit for 5 years, as now

    0.0

    0.2

    0.6

    1.1

    10 per cent dividend tax credit for 30 years

    0.8

    4.7

    10.8

    17.5

    20 per cent dividend tax credit for 30 years,
    as with PEPs prior to April 1999

    1.7

    10.3

    24.2

    40.6

    Note to table: These percentages express the additional net fund value after 30 years saving in alternative vehicles, compared to investing in a tax-free savings scheme where no dividend tax credit is paid.
      Ends

    Notes to editors

    1. The article 'A note on the tax treatment of private pensions and Individual Savings Accounts' by Carl Emmerson and Sarah Tanner is published in Fiscal Studies, vol. 21, No.
    2. This is available for ñ0 from the Institute for Fiscal Studies, 7 Ridgmount Street, London, WC1E 7AE, 0207 291 4800, mailbox@ifs.org.uk
    3. Current Fiscal Studies articles are now available online to institutional subscribers from Ingenta. They can be purchased online for ñ3 each.
    4. This research was funded by the Economic and Social Research Council as part of the research programme of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy.
    ]]>
    http://www.ifs.org.uk/publications/1989 Fri, 31 Mar 2000 00:00:00 +0000
    <![CDATA[Child support reform]]>

    New research by authors at the IFS and the University of Warwick provides the first estimates of the likely impact of the proposed reforms. Using data from two household surveys, the Family Resources Survey and the British Household Panel Survey, the main predictions are:

    • Average Child Support liabilities will fall and average actual payments decline from ó6 to ò6 if there is no change in compliance. But if compliance rises to the government's target of 80%, the average payment will rise to ô1.
    • Even if compliance remains unchanged, mothers caring for their children will not see a major fall in their average net income because of the "cushioning" effect of the benefit system. If compliance rises to anywhere above 60%, they will experience a rise in income on average.
    • The overall poverty rate for children living with separated parents will fall if compliance improves at all. If compliance rises to 80%, the likelihood of poverty declines from 33.4% to 30.1% for children living with their mothers, but rises for children living with non-resident fathers in second families from 20.6% to 25.6%.
    • The proportion of mothers caring for children and choosing to work, particularly part-time, will increase.
    • The reforms will cost the taxpayer ø00 million a year if compliance is unchanged, but are roughly revenue neutral if compliance rises to the target 80%.
      Ends

    Notes to Editors

    1. The article, 'Child Support Reform: Some Analysis of the 1999 White Paper' is published in Fiscal Studies, Volume 21, No. 1, available for ñ0 from IFS, 7 Ridgmount Street, London WC1E 7AE, 020 7291 4800, mailbox@ifs.org.uk.
    2. Current Fiscal Studies articles are available online to institutional subscribers from Ingenta. They can be purchased online for ñ3 each.
    ]]>
    http://www.ifs.org.uk/publications/1991 Fri, 31 Mar 2000 00:00:00 +0000
    <![CDATA[The Budget 2000]]> The Public Finances

    The Budget contained a substantial fiscal loosening. However the Chancellor still remains on course to meet his two strict rules for public borrowing. In a historical context, levels of borrowing remain low. The discretionary loosening in fiscal policy announced in the Budget yesterday came from three areas:

    • Small cuts in taxation
    • An increase in the generosity of the Working Families' Tax Credit and the 'winter warmer' for pensioners
    • An increase in spending on education, transport, law and order and the National Health Service.

    The Chancellor announced large real increases in public spending for the three years from April 2001. Overall public spending is set to grow at 3.4 per cent a year in real terms. This will lead to increases in public spending as a share of GDP. The Budget also set out spending plans for the NHS until March 2004. Spending will grow in real terms by 6.1 per cent a year. This will represent a sustained period of real increases in NHS spending that are higher than the long term average increase of 3.4 per cent since 1951.

    Distributional Analysis

    The main new measures announced by the Chancellor in the Budget speech were increases in benefits paid to working and workless households with children under 16, an increase in the generosity of the Children's Tax Credit due to be implemented next year and a õ0 rise in the winter fuel allowance for pensioner households. Distributional analysis of the new reforms announced in the Budget shows that the poorest 10% of households in Britain gain on average by just over ó per week, and the next poorest 10% by around 0.50 per week. The biggest gaining types of family are single parents and unemployed couples with children. The cumulative impact of the four Labour budgets since 1997 in real terms is to increase the income of the poorest 10% of households by around 9%, or ñ0 a week on average. The richest 10% of households lose marginally on average. In addition, we find that the government's medium-term plans for an Employment Tax Credit for low-income working people without children would be most effective at relieving poverty if they were targeted at older workers.

    Note to editors

    1. Slides from the IFS Post Budget Briefing are available online at http://www.ifs.org.uk/budgets/budget2000/index.html
    2. An article which appeared in the Financial Times on Wednesday 22nd March is also available online at http://www.ft.com/budget2000/bd33f2.htm

     

    Distributional impact of Budget measures by income group

    The table below splits the British population into ten equally sized segments going from the poorest 10% (at the top) to the richest 10% (at the bottom). The numbers give average changes in disposable income for each group.

    Decile

    Impact of new announced
    measures in this Budget

    Cumulative impact of all
    measures since April 1997

    1st (poorest)

    +3.0%

    +9.2%

    2nd

    +2.4%

    +8.4%

    3rd

    +1.4%

    +4.9%

    4th

    +0.7%

    +3.2%

    5th

    +0.3%

    +1.6%

    6th

    +0.1%

    +1.1%

    7th

    0

    +0.4%

    8th

    0

    +0.2%

    9th

    0

    -0.1%

    10th (richest)

    <0

    -0.5%

    overall

    +0.4%

    +1.3%

    Note: The Budget measures included here do not include changes to Corporation Tax, Capital Gains Tax, Inheritance Tax or Stamp Duty.

    ]]>
    http://www.ifs.org.uk/publications/1992 Wed, 22 Mar 2000 00:00:00 +0000
    <![CDATA[Virtual Economy II]]>

    VE II puts in the hands of the public two large-scale simulation packages, formerly available only to government and research institutions:

    • A version of the IFS Tax and Benefit model, which simulates the effect of changes to taxes and benefits on British households, and which was used most recently to produce the IFS Green Budget 2000; and
    • a version of the Treasury's macroeconomic forecasting model, which predicts the effects of tax and interest rate changes on inflation, growth and unemployment using the Treasury's own assumptions.

    VE II is a development of the original Virtual Economy (VE I), launched in March 1999. The new release features updated versions of the models and new user-interface technology which allows the kind of interaction and responsiveness that users brought up on computer games such as Sim City or Civilisation have come to expect. A version using current, simpler technology will also be maintained.

    VE I has been a considerable success: it has been run over 70,000 times and has been particularly widely used in schools, colleges and universities as part of Business and Economics A Level and degree courses. VE I itself developed from the IFS's Be Your Own Chancellor web model, which was the first of its kind when first launched in 1995, and ultimately from the famous Phillips Machine now found in the Science Museum.

    IFS Director Andrew Dilnot said, "We've been delighted by the popularity of Virtual Economy. It is central to IFS's aims that we produce accessible information, not only to policy-makers and academics, but to all members of the community, including those still in education. The VE model can give everyone a unique insight into the way an economy works."

    OEF Director Adrian Cooper said, "We're delighted that Virtual Economy allows a sophisticated macroeconomic model of the UK economy to be used over the internet by a wide audience, who can experiment with the tools of economic policy and see the impact of their changes on the economy quickly and easily."
      Ends

    Notes to editors

    1. The VE II launch event will be held at 12 o'clock on Wednesday 1st March at the IFS, 7 Ridgmount Street, London WC1E 7AE. Contact Emma Hyman if you would like to attend.
    2. VE II will run on any computer which is connected to the internet and capable of running Java (TM) 1.1. This includes almost all PCs running Windows 9x or above or other operating systems such as Linux or BeOS, as well as most Apple Macs. A simpler "CGI" version will still be available for other users. Pre-release versions of VE II will be available from the VE site during February.
    3. Java is a trademark of Sun MicroSystems and Windows is a trademark of Microsoft Corp.
    ]]>
    http://www.ifs.org.uk/publications/1993 Wed, 01 Mar 2000 00:00:00 +0000
    <![CDATA[IFS Green Budget 2000]]>

    Economic prospects

    The fears of recession that held sway at the time of last year's Green Budget have now given way to concerns that growth in the UK economy may be too strong to be consistent with the government's inflation target. Prospects are good for continued above-trend GDP growth in coming quarters. For 2000 we forecast GDP growth of 2.9%, but the economy will need to slow towards the trend rate during 2000 if the inflation target is not to be overshot in 2001. To achieve this, official interest rates may still need to rise a little further.

    An audit of the public finances

    We expect Public Sector Net Borrowing to be -£6.8bn (i.e. a surplus) in 1999-00, £3.3 billion better than the November 1999 Pre-Budget Report forecast. The improvement is due to lower levels of total spending, as unemployment has continued to fall and there has been no need to call on the £3.5 billion reserve. The government's fiscal rules will easily be met in 1999-00, and we expect a further improvement in 2000-01. On unchanged policies our medium term borrowing forecasts are, on average, £7-8 billion a year lower than the Treasury's Pre-Budget Report forecasts. The Chancellor needs to aim for current budget surpluses if he is to be sure that his fiscal rules will continue to be met. Even so, the forecast surpluses in our central projection are large enough to allow some increases in public spending or reduction in taxation.

    The Chancellor must balance three concerns.

    • First, that fiscal policy should support monetary policy.
    • Second, he might want to prevent the tax burden from rising, which would require tax cuts in the Budget of around ó billion.
    • Third, he will not want to restrict his room for manoeuvre in the forthcoming Comprehensive Spending Review.

    Public spending

    As a result of the relatively low real increases in spending over the first two years of this parliament, public spending is likely to fall slightly as a share of GDP between 1996-97 and 2001-02. Over the whole parliament the real rate of growth in current spending, on present plans, will be lower than that seen under the last Conservative government, while capital spending will grow more quickly. NHS spending in this parliament will grow at the same real rate as achieved on average since 1953-54, but it is growing rather faster in the three years from April 1999, as shown in Table 1. If the second CSR were to deliver real growth in spending on the NHS averaging 5% per year, the period from 1999 would see an unusually sustained growth in health spending. This would still be likely to leave the UK some way below average EU health spending.

    Direct taxes on individuals

    The government has already announced substantial and welcome changes to the structure of national insurance contributions (NICs) for employees and employers, taking further the trend towards integration with income tax. The gap between the upper earnings limit for employee NICs, and the starting point for higher rate income tax is falling substantially, as shown in Table 2. Closing this gap completely would raise under £600 million. Those individuals losing from this change could be compensated by using this revenue to reduce the rate of employee NICs.

    Taxes on business and enterprise

    The Budget is likely to contain a range of measures intended to benefit smaller companies, including substantial tax reliefs for share options awarded to selected employees in small firms, reductions in capital gains tax on business assets, and a new R&D tax credit restricted to smaller firms. Tax-reliefs limited to the small firms' sector are unlikely to have a large impact on total levels of investment and R&D spending. The proposed new all-employee share ownership plan is the latest in a long line of tax-favoured schemes intended to encourage employees to hold shares in the firm that they work for. While greater employee involvement may be a good thing, the rationale for using the tax system to favour this arrangement has never been entirely clear.

    Other issues

    The Green Budget also considers excise duties, reforms to in-work benefits and the New Deal, Individual Savings Accounts, the taxation of charitable giving, the future of the 10p tax band and the impact of taxation on company location and mobile activities such as gambling.

    Table 1. Real increases in NHS spending in the United Kingdom: selected periods. Annualised average real increase (per cent)

    CSR Period: April 1999 to March 2001

    4.7

    This parliament: April 1997 to March 2001

    3.7

    Last parliament: April 1992 to March 1997

    2.6

    Conservative years: April 1979 to March 1997

    3.1

    Highest 3 year period of growth since 1979-80: 1989-90 to 1992-93

    5.4

    Last 45 years: 1953-54 to 1998-99

    3.7

    History of NHS: 1949-50 to 1998-99

    3.4

    Table 2. Higher rate tax threshold and National Insurance upper earnings limit (1999 prices).

    Higher tax
    rate threshold
    (per annum)

    Upper earnings
    limit (per annum)

    Difference between
    HRT and UEL

    1980-81

    £32,431

    £22,040

    £10,391

    1985-86

    £32,555

    £24,374

    £8,181

    1990-91

    £32,052

    £24,608

    £7,443

    1995-96

    £30,965

    £25,462

    £5,503

    1999-00

    £32,335

    £26,000

    £6,335

    2000-01

    £32,335

    £27,820

    £4,515

    2001-02

    £32,335

    £29,900

    £2,435

      Ends

    Notes to editors

    1. The IFS Green Budget: January 2000, edited by Lucy Chennells, Andrew Dilnot and Carl Emmerson is published on 26th January 2000 and is available from the IFS, 7 Ridgmount Street, London, WC1E 7AE, telephone 020 7291 4800 or e-mail mailbox@ifs.org.uk
    2. The Green Budget is also available from the IFS website after the conference.
    ]]>
    http://www.ifs.org.uk/publications/1994 Wed, 26 Jan 2000 00:00:00 +0000