Distributional effects

A central part of the IFS’s contribution to public debate is our analysis of the distributional effect of the tax and benefit system. Using large household datasets, IFS researchers evaluate the effect of changes to the tax and benefit system on households across the income distribution. Recent research has begun to consider the distributional effect of policies on the basis of lifetime income, rather than annual or monthly income.

A tighter benefit cap

| Observations

A lower cap on the total amount of benefits that households can receive comes into force tomorrow, affecting four times as many households as the previous benefit cap. Like the previous cap it will apply to out-of-work households of working age (with some exemptions, mainly due to disability). The cap will now be £23,000 a year in London and £20,000 elsewhere (there are lower caps for single adults without children set at £15,410 in London and £13,400 elsewhere). This compares to £26,000 nationwide under the previous cap, which has been in place since 2013. In this observation we look at the implications of a lower cap for government spending, the impact on the households affected, and how they might respond.

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Life-cycle consumption patterns at older ages in the US and the UK: can medical expenditures explain the difference?

| Working Paper

In this paper we document significantly steeper declines in nondurable expenditures in the UK compared to the US, in spite of income paths being similar. We explore several possible causes, including different employment paths, housing ownership and expenses, levels and paths of health status, number of household members, and out-of -pocket medical expenditures. Among all the potential explanations considered, we find that those to do with healthcare—differences in levels and age paths in medical expenses—can fully account for the steeper declines in nondurable consumption in the UK compared to the US.

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The effect of UK welfare reforms on the distribution of income and work incentives

| Book Chapters

Like many EU countries, the UK is implementing a fiscal consolidation package consisting chiefly of reductions in government expenditure in response to a large structural budget deficit. Reductions in welfare spending are a key component of this package. As well as reducing expenditure, the UK government hopes that its welfare reforms will encourage work. The largest structural reform planned is the introduction of a universal credit to combine six means-tested benefits for those of working age into a single payment. However, other benefit cuts and tax rises that form part of the fiscal consolidation package will also affect incomes and work incentives, and falling real wages over the period when these changes are being introduced will tend to make work less attractive as well as making workers worse off. In this paper we use micro-simulation techniques to investigate whether financial work incentives will be stronger in 2015–16 than they were in 2010–11 and to separate out the impact of tax changes, benefit cuts and the introduction of universal credit from the impact of wider economic changes.

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