Institute for Fiscal Studies | Briefing Notes We produce short briefing notes to outline our analysis of current policy issues. These are available online only. http://www.ifs.org.uk Thu, 21 Sep 2017 08:43:05 +0000 <![CDATA[Public sector pay: still time for restraint?]]> The government is considering easing the current restraint on the pay of public sector workers. It had previously announced in 2015 that public sector pay scales would only increase by an average of 1% per year up to and including 2019–20. This briefing note describes the trade-offs faced by the government when deciding how to set public sector pay.

Key findings

  • Public pay restraint means that average pre-tax weekly earnings in the public sector in 2016–17 were 4% (£22 per week) lower in real terms than in 2009–10 (and in 2007–08). Mean private sector weekly pay in 2016–17 was 5% lower than in 2007–08.
  • Public sector pay grew faster than private sector pay in the aftermath of the recession. Subsequent pay restraint in the public sector reversed that trend, meaning that by 2016–17 the difference between public and private sector pay had returned to its pre-crisis level. Controlling for workers’ characteristics such as education and experience, average pay is quite similar in the public and private sectors.
  • Continuing to increase public sector pay scales by only 1% per year in 2018–19 and 2019–20 would likely lead to growth in public pay falling significantly behind growth in private sector pay, exacerbating the emerging recruitment, retention and motivation problems in the public sector. Increasing public sector pay in line with prices or private sector earnings would likely mitigate these problems.
  • Workplace pension provision in the public sector remains far more generous, on average, than in the private sector. This is despite automatic enrolment boosting pension coverage among private sector workers. 83% of public sector workers receive an employer contribution to their pension worth 10% or more of their salary, compared with only 11% of private sector workers.
  • Compared with private sector pay, public sector pay is lower for highly educated workers than for low-educated workers. Indeed, the pay of lower-educated workers in the public sector is now higher relative to equivalent private sector workers than it was in 2007–08. However, graduates in the public sector have seen their pay fall relative to private sector comparators. Based on the performance of pay, it is among better-paid and higher-educated public sector workers that we might expect greater recruitment and retention issues and a more pressing need for pay increases, though there may well be cases where the converse is true. Public pay is also low relative to private pay in London and the South East and higher than private pay in most other regions.
  • The public sector paybill was £181 billion in 2016–17. Therefore even small percentage increases in average pay can lead to significant extra costs for public sector employers. Increasing average public sector pay in line with either prices or private sector earnings would increase the cost of employing the 5.1 million public sector workers by around £6 billion per year by 2019–20. If the Treasury were not to provide extra funds to pay for higher pay, public sector employers would need to make cuts elsewhere. The Treasury could increase spending on departments by increasing taxes, cutting other spending or borrowing more.
]]>
https://www.ifs.org.uk/publications/9805 Wed, 20 Sep 2017 00:00:00 +0000
<![CDATA[Under pressure? NHS maternity services in England]]> NHS Maternity Units are more likely to close towards the end of the week and during holiday periods, pointing to staff availability as a source of pressure. This is a key finding of new research by the Institute for Fiscal Studies (IFS), funded by the Economic and Social Research Council (ESRC), examining sources of short-run and long-run pressures on maternity units in England.

Admission to hospital to give birth is the single largest cause of admission to NHS hospitals in England. In common with many NHS services, providers of maternity care are reporting pressures from increased demand, staffing shortages and programmes to improve the quality of care. How units respond to these challenges carries important implications for the health of mothers and babies, and the finances of NHS Acute Trusts.

This briefing note reviews the evidence on the long-run pressures faced by maternity units (MUs) from changes in the number of maternity admissions and the case mix. While the number of maternity cases has remained largely constant since 2010, the case mix continues to change, with women giving birth later in life and with more complex health conditions. There are implications for MUs if this evolving case mix of mothers requires more care in terms of staffing or other resources.

In addition to long-run pressures, MUs also face pressure from daily variations in admissions to MUs and (presumably unexpected) peaks in demand. This work also focuses on one potential consequence: whether the MU decides to close temporarily for new admissions to ensure the safety of mothers and babies currently on the unit. Volumes of temporary closures and their distribution across hospitals have been published elsewhere. The authors provide evidence on what may cause these closures, and what action may be needed to avoid the need for closures, as well as addressing wider pressures on MUs.

As expected the research shows that closures are related to the volume of admissions, both on the day of closure and on the day before closure. However, patterns of closure by day of the week and by month highlight that some of the factors that cause closures are predictable and extend beyond the inevitability of occasionally busy days. Closures are more likely on a Thursday, Friday and Saturday, but spikes in admissions are spread evenly across the week. Closures are also more likely to occur in the summer months and in December, the principal holiday periods.

Given that the number of beds is fixed across the week, the most likely explanation for variation in closures by day of the week and by month is the availability of staff. However, using the data available, it is not possible to say whether these patterns are attributable to difficulty in filling planned rosters, as many staff balance other caring commitments, or to ineffective planning and management. It is therefore hard to propose actions that could be taken to eliminate the day-of-the-week or seasonal effects, to estimate how much those actions would cost and to assess whether the cost would be justified given the potential benefits to women.

Finally, the note shows that hospitals that close more often are also more likely to breach their four-hour waiting-time targets, suggesting that the pressures felt by Acute Trusts extend beyond the maternity unit.

Key findings

  • The number of maternity cases has stabilised since 2010 but the case mix has changed. The number of women giving birth has remained stable since 2010, after rapid increases in the 2000s. However, the trend towards older mothers with more complex health conditions has continued. This has implications for maternity units, as these mothers are on average more costly to care for.
  • The changing case mix explains all of the rise in the number of C-sections in England between 2006 and 2014. The number of C-sections performed by NHS hospitals in England each year increased by 23,000 between 2006 and 2014. We estimate that all of this growth can be explained by the changing case mix of mothers giving birth. There is no evidence of a change in medical practice leading to more C-sections.
  • Maternity units also face pressure from daily fluctuations in maternity admissions, and may have to close temporarily as a last resort. Daily maternity admissions to hospital fluctuate but the numbers of beds and on-duty staff are largely fixed. Maternity units may respond by calling in staff, delaying planned admissions or reducing length of stay. As a last resort, units may temporarily close. Such closures take place on fewer than 1 day in 200.
  • Temporary closures are more common on days with high admissions, but variation in closure rates by day of the week and month suggest that it is difficult or costly to staff certain shifts. Maternity units are more likely to close when there are a higher number of admissions. However, closures are also more likely between Thursday and Saturday, when admissions are no higher than during the rest of the week. Closures also happen more frequently during holiday periods over the summer and at Christmas, suggesting a role for the availability of staff. How the cost of preventing such closures, in terms of increasing capacity or staffing levels, compares with the benefits to women of doing so is unclear, given the data available.
  • Acute Trusts with higher numbers of maternity unit closures also more frequently breach the four-hour waiting-time target in A&E. There is almost no overlap between maternity and A&E patients, but Acute Trusts where maternity units close more often also breach the four-hour A&E waiting-time target with greater frequency. A&E patients in Acute Trusts that close more than 10 times in a year are 30% more likely to wait more than four hours than patients in Acute Trusts that do not close. This is the equivalent of an additional 2–3 patients in every 100 waiting more than four hours for treatment in A&E.
  • Acute Trusts with the highest number of maternity unit closures serve larger local populations. Acute Trusts with maternity units that close more than 10 times per year have the largest average local populations measured according to the number of people for whom that is the nearest Acute Trust.
  • Maternity unit closures are not associated with poorer-quality care at Acute Trust level. There is no evidence that Trusts that close, or close more often, have worse overall clinical quality across the Acute Trust. Indeed, the Standardised Hospital Mortality Indicator suggests that more maternity unit closures are associated with lower-than-expected death rates across all departments.
]]>
https://www.ifs.org.uk/publications/9715 Mon, 11 Sep 2017 00:00:00 +0000
<![CDATA[Estimating the responsiveness of top incomes to tax: a summary of three new papers]]> In 2010, an ‘additional’ 50% rate of income tax applying to incomes above £150,000 was introduced. Following HMRC analysis of the responses of high-income individuals to this new tax rate in the first year of its operation, the Chancellor announced in Budget 2012 that the tax rate would be reduced to 45% from April 2013. The IFS has now published three working papers that look at the behavioural responses to the 50% tax rate in more detail, including examining responses in the second year of the 50% tax rate (2011–12). As well as this historical episode being of interest in its own right, such analysis can help inform ongoing debates about taxation of high income individuals.

The introduction of the 50% income tax rate in April 2010 was well publicised in advance, having been announced in March 2009. This gave those affected the opportunity to avoid having to pay the 50% tax rate in the first year by bringing their income forward to the 2009–10 tax year. It seems clear from the data that many of these individuals took advantage of this opportunity, artificially increasing their incomes in the year prior to the tax rate being increased, leading to a big reduction below their normal levels the following year. We call this phenomenon ‘forestalling’. If the 50% tax rate had remained in place for the long term, this forestalling would have unwound, leading to the reported incomes of this group returning to more normal levels. Separating the impact of this forestalling from the underlying impact of the 50% tax rate – which weakens the incentives individuals face to earn more and increases the pay-off to income shifting to other tax bases (such as capital gains) and other forms of tax avoidance or even evasion – is one of the key challenges faced in this analysis.

 

 

]]>
https://www.ifs.org.uk/publications/9675 Tue, 22 Aug 2017 00:00:00 +0000
<![CDATA[The exposure of households’ food spending to tariff changes and exchange rate movements]]> Brexit has the potential to have a substantial impact on the prices households pay for food. Currently around 30% of the value of food purchased by households in the UK is imported, and the major source of food imports is the EU. In comparison, only 17% of overall consumer spending is on imported goods. This means that changes in the costs of imports – for example, through changes to tariffs or movements in exchange rates – are likely to have a particularly big impact on food prices.

This briefing note discusses how changes in prices of imported food – for example, as a result of changes to tariffs and movements in exchange rates – might affect the prices that different households pay for their overall food baskets.

 

Key findings

The UK imports a lot of food, with the majority coming from the European Union.

 

Around 30% of food purchased by households in the UK is imported. The major source of total food imports is the EU (which accounts for 70% of gross food imports). This means changes in the costs of imports – for example, through changes to tariffs or movements in exchange rates – are likely to have a big impact on the price consumers pay for food.

The UK currently benefits from tariff-free trade within the EU.

 

The UK and other EU members currently levy common tariffs on products imported into the EU from other countries. These tariffs are, on average, higher on agricultural products than on non-agricultural products and in some cases considerably higher. There is a lot of variation in tariffs both across and within broad food groups.

Brexit could potentially have a big impact on the UK’s trade arrangements, not only with the EU itself, but also with other countries with which it currently has trade deals through the EU.

 

If the UK leaves the EU customs union, it would be free to adjust the tariffs it charges on agricultural goods. Under World Trade Organisation (WTO) rules, the UK would not be able to set tariffs that discriminate between trading partners, unless as part of a free trade agreement or to give developing countries special access to its market.

If the UK and the post-Brexit EU fail to strike a free trade deal, it is likely tariffs would be imposed on EU imports into the UK. This is because the UK would be unable to impose zero tariffs on imports from the EU without also extending tariff-free access to all other WTO members.

 

Exchange rates also affect the price of food.

 

Imports are purchased in foreign currency: when these currencies become more expensive relative to sterling (‘sterling depreciation’), more sterling is needed to purchase the same quantity of foreign currency, and therefore the same quantity of foreign goods. In 2007–08, there was a 21% depreciation in the effective sterling exchange rate; over the same period, there was an 8.7% increase in the price of food relative to other goods.

It is still too early to tell whether the 13% depreciation in sterling between January 2016 and March 2017 will be associated with similarly sized and persistent effects on food prices.

 

There is, however, evidence that producer prices for food have increased since the referendum. The consumer price for food relative to the overall consumer price level initially declined after the referendum, but started to increase towards the end of 2016.

Tariff changes and movements in the exchange rate directly affect the cost of getting imported food products onto supermarket shelves. This will feed into the prices faced by consumers for imported goods. The extent to which tariff changes and exchange rate movements feed through to prices is uncertain and may vary across goods.

 

The prices of domestically produced products are also likely to change, for two reasons. First, many domestically produced products use imported inputs, and changes to firms’ costs will tend to feed through to the price they charge for their final product. Second, changes in the price of imported goods are likely to lead to changes in the price of similar domestically produced goods because of competitive effects: for example, if the price of imported goods rises then domestic producers who were competing in the same markets might take advantage of the opportunity to increase their prices too.

Lower-income households allocate a higher proportion of their spending to food than higher-income households.

 

The lowest-income tenth of households allocate 23% of their spending to food, compared with 10% for the highest-income tenth. Poor households will therefore be more affected by rises in the general level of food prices.

There is variation in the share of spending on imported products within different food groups.

 

For example, 39% of fruit products are imported, while only 20% of bread and cereal products are imported. However, an additional 12% of spending on bread and cereal products goes on buying products that use imported inputs.

Variation in the share of spending on different food groups means that different households buy more or less of their food from abroad.

 

There is little variation across income deciles, but considerable variation across households that is not correlated with income or other household characteristics that we observe in the data.

This variation increases when we look at differences in spending within food groups.

 

On average, households buy around 35% of their beef, lamb and pork from abroad, but some households buy all of it from overseas and others purchase none from abroad. These households are likely to experience different price increases if the costs of imports rise.

]]>
https://www.ifs.org.uk/publications/9563 Thu, 27 Jul 2017 00:00:00 +0000
<![CDATA[Redistribution, efficiency and the design of VAT: a review of the theory and literature]]> The simplest form of value added tax (VAT) – and the form often advocated by international organisations – is one with a broad base and a single (‘uniform’) rate. In practise, most countries exempt and/or apply lower VAT rates on certain categories of goods and services. In this note authors summarise the pros and cons of such ‘VAT rate differentiation’ that are highlighted in the economics and taxation literatures, paying particular attention to the applicability and relevance of each factor for low- and middle-income countries.

Considering first the case for applying different rates – including zero rates – to different goods and services, this briefing note highlights theoretical arguments based on economic efficiency and a more practical redistributive argument.

Considering the case for exempting particular goods and services from the VAT system entirely, the authors discuss a number of ‘special cases’ (such as small firms, public services and financial services) before focusing on the administrative and efficiency issues posed by exemptions more generally.

]]>
https://www.ifs.org.uk/publications/9350 Mon, 10 Jul 2017 00:00:00 +0000
<![CDATA[Higher Education funding in England: past, present and options for the future]]> Higher education (HE) in England has been subject to near-constant reform over the past two decades.  The most notable of these was the 2012 trebling of tuition fees to £9,000. HE is an area where England is a genuine world leader having long boasted several of the world’s finest universities, yet that position is increasingly under threat from increased global competition. Understanding the impact of various reforms on government, universities and students is therefore crucial.

Previous IFS research has evaluated the 2012 reform, finding that it increased overall graduate contributions considerably but actually reduced lifetime repayments for those in the bottom third of the graduate lifetime earnings distribution.

In this briefing note we use the IFS HE finance model to provide up-to-date estimates of the long-run cost of undergraduate loans to the government taking into account these recent changes. We consider the impact of the 2012 reform and the changes since 2012 separately by estimating the long-run government loan subsidy (the ‘RAB charge’) and the overall long-run cost to government for the 2017 cohort of students under three different HE finance systems (the ‘2011 system’, the ‘2012 system’ and the ‘2017 system’).

We also consider the system from the point of view of students, showing debt on graduation, ‘cash-in-pockets’ for students at university, and graduates’ lifetime loan repayments. We highlight the role of recent reforms, further freezes to the thresholds at which loan repayments are made, and the use of the positive real interest rates. To complete the picture for the changes since 2011, we focus on the status of university finances, highlighting the impact of recent reforms on the relative incentives to provide courses in different subjects. Finally, we consider some policy options, qualitatively outlining the potential impact of various reforms on the system of HE finance in England. 

Key findings

There has been a big shift in the way government funds higher education (HE) from up-front grants to student loans.    Tuition fees were introduced in 1998, and increased in 2006 and again in 2012. This has increased overall funding, but teaching grants have declined. Maintenance grants have also been scrapped. Consequently, 96% of up-front government support is now in the form of loans.
     
This has dramatically reduced deficit spending, while also reducing the expected long-run taxpayer contribution.  

A key factor is that loans do not count towards the deficit, while grants do. Since 2011, the contribution of HE spending to the deficit has declined by £5.7 billion (around 10% of the current deficit), while university funding has increased. The long-run taxpayer contribution has decreased by less – around £3.1 billion – because graduate contributions have increased, but by less than the increase in the loans provided.

     
The long-run taxpayer contribution has become considerably more uncertain.   The long-run contribution is now heavily dependent on graduate earnings, early repayment behaviour and the government cost of borrowing; for example, if graduate earnings are 2 percentage points lower than expected, the long-run government contribution increases by 50%.
     
Students now graduate with average debts of £50,000 – and even more for the poorest students.  

The combination of high fees and large maintenance loans contributes to English graduates having the highest student debts in the developed world. The 2015 policy that replaced maintenance grants with loans means students from the poorest backgrounds will accrue debts of £57,000 (including interest) from a three-year degree. Their ‘cash in pockets’ has been protected, but now it is almost entirely in loans rather than free cash.

     
Student loans differ from private loans, as repayments are proportionate to income.   Consequently, there is significant variation in graduate contributions, with the highest earners repaying considerably more than the lowest. However, changes since 2012 have increased the repayments of almost all graduates, increasing the burden of student loans the most for low and middle earners – driven largely by the freezing of the repayment threshold.
     
Positive real interest rates increase debt levels for everybody – but only the repayments of the highest earners.  

The use of RPI + 3% during study – currently 4.6% nominal, but rising to 6.1% in September – results in students accruing £5,800 in interest on average during study. Positive rates do not affect the loan repayments of those below the median, as they do not repay their principal. However, for high earners, the use of RPI + 0–3% rather than CPI + 0% increases lifetime repayments by almost £40,000 in today’s money. This is due to lengthening the period of repayment rather than increased payments in any given year.

     
The benefits from high interest rates appear to outweigh the costs.  

There is a risk that better-off parents will pay fees up front, especially if they think their offspring will be high earners. This would increase the cost to government in the long run, as high-earning graduates repay more than the value of their loans. However, even if all of the top 20% do not take out loans, the increased cost is outweighed by the significant revenue forecast to be generated by the positive real rates.

     
Recent reforms have considerably changed the landscape for UK universities.   The 2012 reform increased average university funding by 25%. It also considerably changed the relative per-student income of providing different courses; for example, funding for ‘Group A’ (high-cost) courses increased by only 6% between 2011 and 2017, while ‘Group D’ (low-cost) funding increased by 47%. This may affect universities’ incentives.
     
Cutting fees while protecting university funding would increase the deficit and the long-run taxpayer contribution, but would also increase flexibility.   Large fee cuts would reverse recent changes and increase both deficit spending and the long-run taxpayer contribution to HE. However, unlike the current system, under which the vast majority of the taxpayer contribution comes through the unpaid loans of low earners, replacing the lost fee income by teaching grants would allow government to target high-priority subjects (such as STEM-based courses) or students (such as those from low-income households).
]]>
https://www.ifs.org.uk/publications/9334 Wed, 05 Jul 2017 00:00:00 +0000
<![CDATA[Public sector pay in the next parliament]]> This briefing note analyses the Conservative, Labour and Liberal Democrat plans for public sector pay, and what the implications of their policies are for the public sector.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

Key findings

  • The current Conservative government’s policy is for public sector pay scales to rise on average by 1% each year up to and including 2019–20. Public sector pay scales have risen by 1% per year every year since 2013–14. There were also freezes for all but the lowest paid public sector workers in 2011–12 and 2012–13.
  • The Labour Party and Liberal Democrats have announced in their manifestos increases in public sector pay compared to current government policy. The Liberal Democrats would increase public sector pay in line with inflation. The Labour party would delegate public sector pay setting to Pay Review Bodies.
  • Increasing public sector pay would boost the earnings of the 5.1 million public sector workers, 1.6 million (31%) of whom work for the NHS, and 1.5 million (30%) who work in education in the public sector.
  • Public sector pay rose compared to private sector pay during and after the 2008 recession, as private sector earnings fell sharply in real terms. Public pay restraint since 2011 has led to the difference between public and private sector pay returning to its pre-crisis level. The latest reports from Pay Review Bodies, particularly those covering the NHS and school teachers, are reporting problems recruiting and retaining staff.
  • In the long run, public sector pay will need to rise in line with private sector pay for the public sector to attract the skilled individuals needed to administer and deliver public services. Under current government plans, and given current OBR forecasts, the difference between public and private wages would fall to a level not seen in (at least) the last 20 years. Under the Labour plans, the difference would stabilise around the level seen in the mid 2000s. The Liberal Democrat plans would be below the level seen in the early 2000s, when there were significant shortages of nurses.
  • Our analysis of the Labour plan implies that, compared to the current government’s plans, by 2021–22 a Labour government would need to provide departments and local government with an additional £9.2 billion per year to pay for the higher costs of employing public sector workers. Of this, £2.9 billion would be for the NHS. Comparing the Liberal Democrats’ plans to the current Conservative government’s plans, it would necessitate an extra £5.3 billion per year, of which £1.6 billion would be for the NHS.
  • This analysis shows there are tradeoffs in delivering public services. Increasing public sector pay involves large increases in costs for government departments. However, if public sector pay continues to fall compared to pay in the private sector, the public sector will struggle to recruit and retain the workers it needs to deliver public services, and the quality of those services will therefore be at risk.     

In the Summer Budget 2015, the Conservative government announced that annual pay awards in the public sector for the four years from 2016–17 to 2019–20 would average only 1% per year. This period of pay restraint came on top of 1% increases in each year from 2013–14 to 2015–16 and cash freezes for all but the lowest paid public sector workers in 2011–12 and 2012–13.

The Labour Party and the Liberal Democrat parties have in their respective manifestos pledged to raise public sector pay faster than is currently planned by the government. The Labour party manifesto pledges to “end the public sector pay cap”. Other statements from Shadow ministers imply that this means returning to increasing pay in line with the recommendations of Pay Review Bodies.[1] The Liberal Democrat manifesto says it would “lift the cap on public sector pay” by increasing wages in line with inflation instead of the 1% per year up to 2019–20.

Increasing public sector pay would directly raise the pay of just over 5.1 million people who work for central or local government. As Figure 1 shows, since early 2015 the public sector workforce has barely changed, although there has been a large decline of around 400,000 (8%) since 2010Q1. Most of this fall in public sector employment occurred between 2010 and mid 2012.

Figure 1. Public sector workforce headcount excluding nationalised corporations

Figure 1. Public sector workforce headcount excluding nationalised corporations

Note: Public sector headcount excluding nationalised corporations is also known as general government employment. Excludes the impact of reclassification of English FE and Sixth Form colleges to the private sector in 2012.  Source: Author’s calculations using the ONS Public sector employment statistics.

The largest single part of the public sector workforce, is the 1.6 million NHS employees, which makes up 31% of the workforce, as is shown in Figure 2. The next biggest is the 1.5 million workers in education in the public sector[2] (30% of the total), and the 1.0 million strong public administration (civil service and local government administration) workforce which makes up 20%. Smaller public sector workforces include police, HM Forces and those undertaking public sector health and social work outside the NHS. It is these three areas- along with public administration- that saw the largest falls in their workforces in the 2010-2012 period.[3] 

Figure 2. Proportion of public sector workforce working in each area of public sector 2016 Q4

Figure 2. Proportion of public sector workforce working in each area of public sector 2016 Q4 

Note: Public sector employment excludes nationalised corporations (also known as general government employment). Source: Author’s calculations using the ONS public sector employment statistics.

When determining how much to increase public sector pay, it is important compare the pay of public sector workers to the pay they could earn in the private sector. Ultimately, if public sector pay does not keep up with private sector pay, some will choose to work in the private sector rather than the public sector, causing recruitment and retention issues and making it harder to deliver high quality public services.

Figure 3 shows how the difference between public sector and private sector pay has changed since 1997. The dark green line compares average hourly pay in the public sector to that in the private sector. It shows that in 2016­–17, average public sector pay was 13% higher than private sector pay. The grey line makes some adjustments for the types of workers in each sector. Primarily because the public sector is mainly staffed by highly educated professionals, once adjusting for observed differences in a set of  workers’ characteristics, the estimated pay differential is much smaller.[4]

The Figure shows that public sector pay rose relative to private sector pay after the recession, as private sector pay fell sharply in real terms. The public sector pay restraint imposed since 2011 has returned the difference between public and private pay to around its pre-crisis level. However, after multiple years of pay restraint, a number of Pay review Bodies, particularly the NHS and School Teachers Pay Review Bodies have cited that pay restraint is leading to problems of recruiting and retaining the staff that are needed, and motivating the staff that are working there.[5]

Figure 3. Difference between average public and private sector pay, including projections under different parties’ policies

Figure 3. Difference between average public and private sector pay, including projections under different parties’ policies 

Notes: Data to 2016–17 estimated using Labour Force Survey data (2016–17 only includes up to 2016Q4).  Difference controlling for workers characteristics controls for differences in age, sex, education, experience and region. Projections based on author’s calculations using OBR Economic Fiscal Outlook March 2017, Labour Manifesto and Liberal Democrat manifesto. We assume that a Labour government delegating public sector pay to pay review bodies will lead to them increasing public sector pay at the same rate as private sector pay. We interpret Liberal Democrat policy to be to increase in public sector pay in line with expected CPI inflation in 2018–19 and 2019–20, and delegate decisions to Pay Review Bodies after that.    

Using the Office for Budget Responsibility’s latest forecast for earnings growth, and the plans set out in manifestos, we can project the difference between public and private sector pay in coming years. Under the Conservative plans, private sector pay would rise 6 percentage points faster than public sector pay between 2016–17 and 2020–21. This would reduce the average difference between public and private sector pay to a level not seen in (at least) the last 20 years; well below the level seen in the early 2000s when there were shortages of nurses. Given that Pay Review Bodies are currently reporting recruitment and retention problems, the Conservative plans are likely to exacerbate such problems, which could damage the quantity and quality of public services delivered.

The Liberal Democrats’ plans also imply that public sector pay will not rise as fast as private sector pay. Although, the fall in the relative level of public sector pay would not be as large as that under the Conservatives, it would still take the difference to below the level seen in the early 2000s. We assess that, if public pay setting is delegated to Pay Review Bodies by the Labour Party, the Pay Review Bodies would be likely to increase public sector pay in line with private sector pay, therefore stabilising the difference around its pre-crisis level. By not committing to specific rates of public sector pay growth over the next few years, one advantage of the Labour plan is that it allows public sector pay to respond flexibly to the state of the labour market. On the other hand, the Conservative plan of specifying 1% growth in pay scales in 2018­–19 and 2019–20 provides certainty to public sector employers regarding their costs.  

In 2016, the public sector paybill (excluding nationalised corporations) was £179 billion. This includes the wages and salaries of public sector workers, the employer National Insurance Contributions, and employers’ pension contributions towards public service pension schemes. With such a large paybill, even small percentage increases can lead to significant increases in the cost of employing public sector workers.

Table 1 shows the estimated increase in employment costs to central and local government as a result of the Labour and Liberal Democrats’ plans, compared to the current Conservative government’s policy of 1% increases until 2019–20. These costs include the amount that public sector employers would need to pay in terms of higher employer National Insurance and pension contributions. The figures therefore show the extra amount that departments and local government would need to receive in funding to pay for the higher wage bill, without having to make any offsetting cuts either to the size of the workforce or to non-wage costs.

It shows that by 2019–20, if public sector pay rose at the same rate as private sector pay under the Labour plan, a Labour government would need to provide departments and local government with an additional £6.3 billion per year compared to under the current Conservative government’s plans. That increases to £9.2 billion per year by 2021–22. Of this, roughly one-third of the increase would need to go to the NHS, or an increase in funding of £2.9 billion per year by 2021–22.  For the Liberal Democrats, the necessary funding increases are smaller, of £4.1 billion per year in 2019–20, rising to £5.3 billion per year in 2021–22. Again, roughly a third of this would need to go to the NHS, totalling £1.6 billion per year in 2021–22.

These Figures are highly sensitive to the forecasts of the economy. For the Liberal Democrats, the cost will be higher if inflation is higher in 2018–19 and 2019–20 than is expected by the OBR currently, or lower if inflation is lower. Under Labour’s policy if private sector earnings growth performs less well over the coming years than is forecast by the OBR (it has consistently underperformed OBR forecasts in recent years), then it would cost less than is implied by Table 1. Conversely, if private sector earnings growth performs better than forecast, and public pay is increased faster too, then the cost to departments and local government of Labour’s policy would be higher too.

Table 1. Estimated increase in funding needed for central and local governments to increase public sector pay under Labour and Liberal Democrat plans compared to current Conservative government policy

 

Increase in required funding per year for central and local government in:

 

2019–20

2021–22

Labour

6.3bn

9.2bn

Of which: NHS

2.0bn

2.9bn

Liberal Democrat

4.1bn

5.3bn

Of which: NHS

1.3bn

1.6bn

Source: Author’s calculations using ONS series NMXS (Total Compensation of general government employees), Office for Budget Responsibility Economic and Fiscal Outlook March 2017 and Labour and Liberal Democrat party manifestos.

Summary

Since 2011, there has been significant pay restraint in the public sector. For a number of years this was achieved without significant recruitment and retention issues, probably because public pay had done so much better than private sector pay during the recession. However, these pressures are emerging now, and could harm the quality of public services. There are significant trade offs in the future setting of public sector pay. Restraining public sector pay compared to the private sector, as proposed by the Conservatives, and – to a lesser extent by the Liberal Democrats –risks exacerbating recruitment, retention and motivation problems and ultimately the quantity and quality of public services provided.

On the other hand, increasing public sector pay results in significantly higher costs to public sector employers compared to the current Conservative government’s plans. The next government could decide to increase departmental spending to account for these higher costs of paying public sector workers. But if it did not provide extra funds, departments would need to make cuts elsewhere – for example by further reducing the number of public sector workers, cuts that may themselves reduce the quality of public services. 


Notes

[1] See the speech by Jon Ashworth, Shadow Secretary of State for Health to Unison conference on April 26th 2017: http://press.labour.org.uk/post/160008381504/jonathan-ashworth-shadow-health-secretary-speech 

[2] Note that the public sector education workforce  does not include universities, which are not public sector institutions

[3] For more information, see Figure 2b in Cribb, Disney and Sibieta (2013) “The public sector workforce, past, present and future” https://www.ifs.org.uk/bns/bn145.pdf

[4] These figures do not include non-pay remuneration, such as pensions, which are still much more generous on average in the public sector than the private sector, despite cuts in their value since 2010.

[5] See https://www.gov.uk/government/publications/school-teachers-review-body-26th-report-2016 and https://www.gov.uk/government/publications/national-health-service-pay-review-body-30th-report-2017

]]>
https://www.ifs.org.uk/publications/9241 Fri, 19 May 2017 00:00:00 +0000
<![CDATA[Labour’s proposed income tax rises for high-income individuals]]> IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org

Key findings

1. Labour proposes to increase income tax for the 1.3 million people with taxable income exceeding £80,000 per year: the highest-income 2% of adults, or 4% of income tax payers. Currently this small group receive more than 20% of all taxable income and pay more than 40% of all income tax.

2. The tax revenue that Labour’s proposal would raise is highly uncertain. If no one changed their behaviour in response, it would raise around £7 billion per year. But some of those affected would respond by reducing their taxable incomes, reducing the amount raised. The size of the response is highly uncertain and the revenue raised is highly sensitive to the size of the response. Labour expects the policy to raise in the region of £4.5 billion per year. Based on the available evidence this looks a little on the optimistic side, but it is entirely possible. However, it is also possible that the policy would raise nothing.

3. High-income individuals could respond to the policy in a number of ways. One straightforward response for many would be to increase their contributions to private pensions, which bring up-front income tax relief. They could also work less, make greater efforts to avoid or evade tax, emigrate, or not come to the UK in the first place.

4. Losses in cash terms would be highly concentrated on those with the highest incomes. If no one changed their behaviour then the 500,000 people with income between £80,000 and £100,000 would lose an average of £400 a year, while the 50,000 people with income over £500,000 would all lose at least £22,900 a year.

5. Labour’s proposal would be the latest in a series of income tax increases for this group. Since April 2010 the introduction of the 50% rate (later reduced to 45%), the withdrawal of the personal allowance from those with incomes above £100,000, and a succession of restrictions to tax relief on pension contributions have all increased the income tax paid by those with the highest incomes.

6. The proposals would miss an opportunity to rationalise the income tax system for those on higher incomes. The planned overhaul of the taxation of those on higher incomes would have been an obvious chance to remove the absurd and arbitrary marginal income tax band between £100,000 and £123,000, which arises from the policy described as withdrawing the personal allowance. Instead Labour’s proposals would leave this in place, and would increase the marginal income tax rate from 60% to 67.5% within that band - or from 66.6% to 73.2% once employer and employee National Insurance contributions, as well as income tax, are included.

Labour proposes substantial increases in income tax rates for those on higher incomes

Figure 1. Income tax schedule in 2017–18 with and without proposed Labour reforms

Figure 1. Income tax schedule in 2017–18 with and without proposed Labour reforms 

Source: Authors’ calculations using HMRC income tax statistics. See the appendix for details.

The Labour Party proposes to increase income tax for individuals with a taxable income exceeding £80,000 per year.  Throughout this briefing note we assume that the changes would apply immediately across the UK, though income tax on non-dividend and non-savings income is now devolved to the Scottish Parliament, which might choose a different policy.[1]

Labour’s proposal would affect 1.3 million people – a relatively small group but one that is already a very important source of revenue. Between them they have over 20% of all of the income of income tax payers, and they pay over 40% of all income tax.

Figure 1 illustrates the proposed tax increases. The green line shows the marginal rate of income tax (that is, the rate applied to the next £1 of income) currently levied at different levels of taxable income. The red line shows how this would change if Labour’s proposals were in place now.  

The current system works as follows:

  • The basic rate of income tax is 20% and it kicks in at £11,500 a year. Around 24 million people pay that marginal rate: around half of adults, or over 80% of income tax payers (since almost 45% of adults do not have income high enough to pay income tax).
  • The higher marginal rate of income tax is 40% and it kicks in at £45,000 per year. About 4 million people pay that marginal rate (8% of adults, or 15% of income tax payers).
  • There is effectively a marginal income tax rate of 60% on income between £100,000 and £123,000. This is the opaque consequence of a policy described as the withdrawal of the personal allowance from individuals on more than £100,000.[2] About 300,000 of the 4 million formally paying the ‘headline’ 40% marginal rate are in fact paying this effective 60% marginal rate.
  • An additional rate of 45% kicks in at £150,000 per year. A further 350,000 people pay that (0.6% of adults, or 1.1% of income tax payers).

What does Labour propose?

  • A new marginal income tax rate of 45%, starting from £80,000 per year. This means a tax rise for the 1.3 million people with an income above that level: the highest-income 2% of adults (or 4% of those who pay income tax)
  • A new marginal rate of 50% starting from £123,000 (the point at which the personal allowance has been fully withdrawn). About 500,000 people have income above this level so will pay this new marginal rate (1% of adults, or 2% of those paying income tax).
  • In addition to these changes in headline rates, Labour would retain the current policy of withdrawing the personal allowance from individuals on more than £100,000. In combination with the increase in the headline rate from 40% to 45% between £80,000 and £123,000, this increases the current bizarre 60% rate to an even higher 67.5%.

Figure 1 focuses on income tax to highlight the changes Labour is proposing. But it is important to bear in mind that the income tax system sits alongside National Insurance contributions (NICs) made by both employees and employers. For those on higher incomes, the marginal rate of employer NICs is 13.8% and the marginal rate of employee NICs is 2%. It is these taxes in combination with income tax which determine how much of what an employer pays out actually reaches the pockets of its workers. Using that more comprehensive measure of the marginal tax rate for earned income, Labour’s proposals would increase it from:

  • 49.0% to 53.4% for those with earnings between £80,000 and £100,000;
  • 66.6% to 73.2% for those between £100,000 and £123,000;
  • 49.0% to 57.8% for those between £123,000 and £150,000;
  • 53.4% to 57.8% for those on more than £150,000.[3]

The income tax system for higher-income people has become increasingly opaque and complex in recent years, due to the withdrawal of child benefit, tapering of annual pension contribution limits, cliff-edge withdrawal of the new transferable married couple’s allowance, and the ‘withdrawal of the personal allowance’ from £100,000. A restructuring of the income tax system for those on the highest incomes would have been an obvious opportunity to get rid of the bizarre and opaque 60% marginal income tax rate band that occurs because of the last policy. It is disappointing that Labour’s proposal does not take that opportunity.

Labour has not been explicit about whether the new £80,000 threshold would be uprated over time.  Income tax thresholds should relate to something economically meaningful such as prices, earnings or taxable incomes. But in recent years both main parties have displayed an increasing and worrying habit of proposing or implementing nominal freezes to important parts of the tax and benefit system, including the £100,000 point at which the current effective 60% rate (which would become 67.5% under Labour) kicks in and the £150,000 point where the current 45% rate kicks in. This means that the numbers affected by higher rates increase over time at an arbitrary rate that depends on the rate of inflation as well as the rate of real income growth.

If the new £80,000 threshold were frozen in nominal terms and all taxable incomes were to grow in line with the Office for Budget Responsibility’s forecasts for average earnings[4], about half a million more people would be affected by Labour’s changes (i.e. would have income above £80,000) by 2021–22. There is no economic rationale for keeping thresholds fixed in nominal terms in this way. It would be a good habit to kick.

Who would lose and by how much?

Figure 2. Annual losses from Labour’s proposed income tax rises

Figure 2. Annual losses from Labour’s proposed income tax rises

Source: Authors’ calculations using HMRC income tax statistics. See the appendix for details.

Figure 2 shows the consequences of these proposed changes for the income tax liabilities of higher-income individuals. There are many fewer people at the highest income levels shown in the figure than there are at a little above £80,000: the income distribution thins out very quickly at the top. To illustrate this, we overlay on the figure the estimated number of people with taxable income of different levels (in £5,000 bands). Remember also that about 98% of adults would see no change in income tax at all.

Because everyone above £80,000 would face a higher marginal income tax rate under Labour, the absolute sizes of the losses from this package of changes get indefinitely higher the further above £80,000 you look. Hence, although the 1.3 million affected individuals would see an average tax rise of £5,300 per person if they did not change their behaviour, these extra payments are heavily skewed. For example, the 500,000 people (about a third of the losers) between £80,000 and £100,000 would lose an average of £400 per year; the 150,000 people between £150,000 and £200,000 would lose an average of £6,400.

Table 1 picks out some key information about the magnitudes of the losses and how many people would experience such losses, and extends the analysis to even higher-income individuals than shown in Figure 2.

Table 1. Annual losses from Labour’s proposed income tax rises

Range of taxable income (£000s)

Number of people in range

Range of losses

80-100

500,000

£0-£1,000

100-123

300,000

£1,000-£2,725

123-150

150,000

£2,725-£5,425

150-200

150,000

£5,425-£7,925

200-500

150,000

£7,925-£22,925

500+

50,000

£22,925-

Source: Authors’ calculations using HMRC income tax statistics. See the appendix for details.

All the analysis above considers the impact of the proposals on individuals with different levels of taxable income. However, when considering the distributional impact of tax and benefit reforms, it is usually preferable to look at the effects on households with different levels of net (post-tax and benefit) income, after adjusting for the different needs that households of different sizes have, as this is a better proxy for living standards.

Measured this way, as you would expect, Labour’s proposals would mostly affect the highest-income 10% of households (the ‘top decile’). Over four-fifths of the households who would be affected are in the top decile, and over 97% of the revenue would come from the top decile. The 20% minority who are not in the top household income decile are largely households with children (placing them further down the distribution once we account for their higher needs). Indeed, 70% of those households have at least two dependent children (as opposed to 26% of all households affected).

This high-income group of households has already seen large income tax rises in the years since the financial crisis. Between January 2010 and May 2015, the top decile lost the most from tax and benefit changes as a percentage of their income, while the rest of the richer half of households were remarkably well protected from austerity. Tax and benefit changes since 2015 have had little impact on the incomes of the top decile on average.[5]

Revenue and behavioural effects

A key issue when changing tax rates, and a key area of uncertainty here, is the size of any effects on people’s behaviour.

These behavioural effects matter for the amount of revenue that tax rises bring in, which we discuss in some detail in this section. Most fundamentally from an economic point of view, they matter for the size of the economic inefficiency created per pound of revenue raised. The more people reduce their taxable incomes in response to a higher tax rate, the greater the economic inefficiency or ‘deadweight cost’ of the tax, i.e. the greater the amount by which the welfare loss to taxpayers exceeds the revenue generated for the exchequer.

Labour has indicated that it expects to raise around £4.5 billion per year from the changes.[6] As we stress below, there is a lot of uncertainty about how much the policy would actually raise. Below we discuss the sources of uncertainty and illustrate the sensitivity of the answer to different plausible assumptions.

If there were no change in taxpayers’ (pre-tax) incomes as a result of Labour’s proposed income tax rises, they would raise around £7 billion per year. That’s the easy bit of the calculation. However, in reality it is highly likely that the changes would raise less than this as some high-income individuals would respond to the higher tax rates by working less (e.g. retiring earlier), increasing the extent to which they (legally) avoid or (illegally) evade taxes, or even emigrating (or not moving here in the first place). These kinds of potential responses vary in their likely frequency, but some are relatively straightforward for many individuals to do. For example, someone with a taxable income of £100,000 a year could, under Labour’s proposals, get up-front income tax relief on any additional pension contributions at 45% (rather than 40% currently).

The question, then, is how much of the potential £7 billion the exchequer would lose to behavioural responses.

A sizeable international literature finds evidence of such responses to income tax changes, particularly among high income individuals.[7] In the UK, the official HMRC analysis of the introduction (in 2010–11) of the short-lived 50% tax rate on incomes above £150,000,[8] and ongoing work by IFS researchers using updated data and different methods,[9] find evidence of significant responses to that change. The magnitudes of the responses are highly uncertain, however, and even relatively small changes in the sizes of responses can have large impacts on the revenue raised. Hence, the most important thing to understand is the degree of uncertainty about impacts on revenue.

The relevant measure of responsiveness can be summarised by the ‘taxable income elasticity’ (TIE). This tells you by what percentage the income reported to the taxman changes when the marginal net-of-tax rate changes by 1% (the net-of-tax rate is just the percentage of the income that is not taxed away, i.e. 100% minus the marginal tax rate). The higher this TIE, the more responsive are taxpayers to changes in tax rates and the less revenue increases in tax rates would raise. And when the TIE is high enough, increases in the tax rate can actually reduce revenues, as the losses from taxpayers reducing the amount of income they declare can more than offset the money raised as a result of higher tax rates: the so-called ‘Laffer curve’ effect.

HMRC’s central estimate of the TIE for taxpayers with incomes above £150,000 (i.e. those affected by the introduction of the 50% tax rate in 2010) was 0.48. However, the statistical uncertainty surrounding this central estimate was very large; and in addition, relatively modest changes to HMRC’s methodology can lead to big changes in the ‘central’ estimate. One particular difficulty is distinguishing temporary shifts in the timing of income around the moment that tax rates change (in particular, bringing income forward so that it is taxed at the lower, pre-reform rate) from permanent effects on behaviour.

A TIE estimated for those with incomes above £150,000 also seems unlikely to be the best estimate of the level of responsiveness for the 950,000 people between £80,000 and £150,000, who would also be affected by Labour’s proposals. We have no recent estimates of the TIE for this latter group of taxpayers. But the evidence we do have suggests it is reasonable to assume that this group is less responsive than those with the very highest incomes. In Budget 2012, for instance, following a review of the evidence, HM Treasury assumed a TIE of just 0.03 for those individuals affected by cuts to the higher-rate tax threshold (affecting those with incomes of more than around £43,000). IFS analysis of responses to the 50% tax rate suggests that the TIE for those close to the £150,000 threshold was 0.1 to 0.2 – the much higher 0.48 figure being driven by the high level of responsiveness of those with the very highest incomes.[10]

To give a sense of how important the scale of these behavioural responses is to the revenues that would be raised from Labour’s plans, we can examine the sensitivity of revenue estimates to assumptions about the relevant TIEs, drawing on the evidence available.

Figure 3 shows our estimates of how much revenue Labour’s plans would raise in three different plausible scenarios for degrees of responsiveness, along with the revenue estimate in the – implausible – scenario of no behavioural responses at all.

  • In the first scenario (’low responsiveness’), we assume that the TIE for those between £80,000 and £150,000 is 0.03, and that the TIE for those above £150,000 is 0.28. These elasticities are below the central estimates in each case, but well within the bounds of possibility.
  • In the second scenario (’medium responsiveness’), we assume the TIEs are 0.13 and 0.48 respectively –approximately central estimates.
  • In the third scenario (‘high responsiveness’), we assume the TIEs are 0.23 and 0.68 – above the main central estimate in each case but again well within the bounds of possibility.

Figure 3. Uncertain revenues from Labour proposal

Figure 3. Uncertain revenues from Labour proposal

Source: Authors’ calculations using HMRC income tax statistics. See the appendix for details.

The figure shows quite how uncertain the revenues from this proposal are. While in the ‘medium responsiveness’ scenario the policy raises around £2½ billion per year, in the ‘low responsiveness’ scenario it raises around £4½ billion a year (as Labour expects) and in the ‘high responsiveness’ scenario it raises next to nothing. It is important to remember that these are illustrative scenarios, not upper and lower bounds on what is possible: the revenue yield could be greater than £4½ billion a year, or the policy could actually reduce the tax take. On the basis of the available evidence it does seem more likely than not that the proposal would raise money, but the amount is very uncertain.

The yellow  bars in the figure also illustrate that the revenue from raising the marginal tax rate above £150,000 is particularly uncertain – a gain of over £1½  billion in the ‘low responsiveness’ scenario  but a loss of around £1 billion in the ‘high responsiveness’ scenario. In fact, the greater responsiveness of this group means that in all three of our scenarios, the majority of the revenue is raised as a result of changing marginal rates between £80,000 and £150,000 (though most of the revenue would still be coming from those with incomes above £150,000: this group would lose most from higher marginal rates between £80,000 and £150,000 as well as facing the increase in their marginal rate from 45% to 50%).

Appendix

This appendix sets out the method we use in this briefing note to estimate the distribution of taxable income in 2017–18. It involves the following four steps:

1. Tables 2.4 and 2.5 of HMRC’s income tax statistics and distributions provide projections of percentiles of the total income distribution among taxpayers, along with the number of taxpayers above certain income thresholds, in 2016­–17.[11]

2. We then uprate these percentiles and thresholds to 2017–18 in line with the OBR’s March 2017 forecast for average earnings growth.[12]

3. We then scale down the proportion of individuals above each threshold in 2017–18 by around 10%. This is to adjust for the fact that the percentiles and thresholds provided by HMRC are for total income, rather than taxable income (e.g. individual pension contributions are not excluded). The adjustment is based on a comparison of the number of people with total income over £150,000 and the number of people paying the additional rate of income tax (the number of people with taxable income above £150,000).

4. Finally, we use a Pareto distribution (assuming a Pareto parameter of 2) to interpolate between the thresholds provided by HMRC to approximate the full distribution of taxable incomes above £80,000. This method provides a good approximation when used as a predictor of known thresholds provided by HMRC.


Notes

[1] Estimates of the revenue raised for the UK exchequer, based on the assumption that the policy applies across the whole of the UK, provide a very close approximation to the revenue that would accrue to the UK government even if the policy were not applied in Scotland. This is because the block grant paid to the Scottish Government would be adjusted based on the change in revenues in the rest of the UK. Hence the Scottish government's decision in this regard would affect its revenues, but not those of the UK exchequer.

[2] For each £1 above £100,000, individuals lose 50p of their tax-free allowance. In other words they are liable for income tax at 40% on an extra 50p of income, which equates to an extra 20p of tax. Adding that to the ’headline’ 40p marginal rate means a 60p marginal rate overall.

[3] This excludes the impact of Labour’s proposed ‘excessive pay levy’ on the employers of those on at least £330,000.

[4] See Office for Budget Responsibility (2017), Economic and Fiscal Outlook (http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/).

[5] See Figures 4 and 5 of A. Hood and T. Waters (2017), ‘The impact of tax and benefit reforms on household incomes’ (https://www.ifs.org.uk/publications/9164).

[6] http://www.express.co.uk/news/uk/804674/John-Humphrys-roasts-Labour-Jon-Ashworth-over-37bn-NHS-pledge-jeremy-corbyn-election.

[7] E. Saez, J. Slemrod and S. Giertz (2012, ‘The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review’, Journal of Economic Literature, 50(1), pp3-50.

[8] HMRC (2012), ‘The Exchequer effect of the 50% additional rate of income tax’, available online at the UK National Archives.

[9] https://www.ifs.org.uk/publications/7675.

[10] The 0.1 and 0.2 figures are based on analysis of statistical data from HMRC which are Crown Copyright. The research data sets used may not exactly reproduce HMRC aggregates. The use of HMRC statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis of the information. The analysis was cleared for publication in July 2015 in order for a work-in-progress presentation at the European Economic Association Annual Conference in Mannheim. Updated versions of this analysis are currently being finalised and will be published in due course.

[11]  See https://www.gov.uk/government/collections/income-tax-statistics-and-distributions.

[12] See http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/.

]]>
https://www.ifs.org.uk/publications/9229 Tue, 16 May 2017 00:00:00 +0000
<![CDATA[Police workforce and funding in England and Wales]]> IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

Executive Summary

This briefing note provides background information on the police service in England and Wales.  It details recent changes in police numbers and in police funding, and examines some indicators of police performance in the light of these changes. Finally, it considers briefly the Labour Party’s proposal to increase the number of police officers.

Key findings

  • —The number of full-time equivalent police officers in England and Wales fell by 14%, or almost 20,000 officers, between 2009 and 2016. This has undone the workforce expansion of the 2000s – there are now fewer police officers in England and Wales than there were in the late 1990s.
  • The Labour Party have pledged that, if elected, they would increase the number of police officers by 10,000 by 2021–22, which they have costed at £300 million. This could return officer employment to around the level it was in 2012.
  • Between 2009 and 2016 employment of non-officer staff has fallen faster than employment of officers – by 23%.  As a result, total employment in the police service has fallen by 17.4%, and officers’ share of police employment has risen.
  • Spending on the police fell by 14% in real-terms between 2010–11 and 2014–15. Central government grants for the police fell by more (20%) but some forces were able partially to offset the cut by raising more money through council tax.
  • At the autumn 2015 Spending Review the Government planned further cuts to central government grants for the police up to 2019–20. It was planned that if police forces each chose to increase the council tax precept by the maximum permitted then their budgets would remain constant in cash-terms between 2015–16 and 2019–20.
  • Current estimates of police force revenues in 2016–17 show that the government has done as they promised so far: Police budgets remained broadly flat in cash terms between 2015–16 and 2016–17. However, this does mean that in real-terms revenues have continued to fall.
  • Despite these cuts, both police recorded crime and crime reported in the Crime Survey of England and Wales have continued to fall until recently. In addition, clear-up rates by police forces have marginally increased through the period, although at a slower rate than during the period before cuts began.

The number of police officers in England and Wales fell by 14% between 2009 and 2016

Following a period of steadily rising police numbers the size of the police workforce in England and Wales has fallen steadily over recent years. In 2003, there were 132,500 police officers. This increased to a peak of 143,800 in 2009. By March 2016, numbers fell back to 124,100: 13.7% (or almost 20,000 officers) below the 2009 peak. The police officer workforce is now a smaller than it was in the 1990s, before the workforce expansion of the 2000s.

Figure 1. Number of police officers in England and Wales (full-time equivalent) 1996 – 2016

Figure 1. Number of police officers in England and Wales (full-time equivalent) 1996 – 2016

Source: Home Office, Police workforce England and Wales statistics, March 2016. Tables H3 and S1.

Notes: Consistent series for police workforce numbers which go back before 2003 are only available on a slightly different definition than the main definition of workforce used for Home Office police workforce statistics. The longer-run series excludes police workers on career breaks or maternity/paternity leave. The series beginning in 2003 includes these workers.

There is significant variation across English and Welsh police forces in the change in police officer numbers between 2009 and 2016. One in five police forces reduced their number of police officers by more than 22%, a further one-in-five made cuts of less than 9%. In one authority, Surrey, the number of police officers rose by 3.5%[1].

Cuts to the size of the police officer workforce have been larger on average in those areas which originally had more officers per local resident. Nonetheless, the number of police officers per capita still varies significantly around the country.

For the majority of police forces, the number of officers per 100,000 local residents is between 150 and 200[2]. The highest ratios are found in urban areas, including the Metropolitan Police (368), Merseyside (244) and West Midlands (236) – it’s interesting to note that Merseyside has the second highest ratio of police officers to local population in the country despite reducing officer employment by 21% since 2009. The lowest ratios are found in more rural parts of the country such as Wiltshire (137) and Hampshire (140).

The variation in both current staffing levels, and the changes over time reflect a combination of differences (across places and time) in local need, the availability of funding from central government (historically allocated on the basis of factors like socio-economic conditions and population density), willingness to raise the council tax precept, and organisational decisions (such as the mix of staff a force wishes to employ).

The number of non-officer police staff fell faster than the number of police officers

Police forces also employ non-officer staff in a variety of functions, often overlapping with those of police officers. The numbers of staff employed have changed over time roughly in line with police officer numbers. However, between 2009 and 2016 there has been a greater reduction in the number of non-officer staff than officers – 23% across England and Wales compared to 14% for officers. [3]  As a result, total employment in the police service has fallen by 17.4%, and officers’ share of police employment has risen from 59% in 2009 to 62% in 2016.[4]  Since increasing numbers of police staff were in part hired in order to release police officers from back office duties, this may mean that the proportion of police officer time allocated to frontline duties has been falling.

The cost-per-employee may have risen faster than earnings

Police officers are generally more expensive than other members of the police service – for example the median gross annual pay in 2016 of a police officer (sergeant and below) was £39,569 whereas the median gross annual pay of a Police Community Support Officer (PCSO) was £26,329.[5] As police officers now make up a larger proportion of employment in the police service, the average cost per person employed in the service is likely to have risen faster than earnings over the last few years.

Police spending fell by 14% in real-terms between 2010–11 and 2014–15

The police in England and Wales are funded through a mixture of central government grants, administered by the Home Office and the Department for Communities and Local Government (DCLG), and the ‘police precept’ a supplement levied on council tax bills by local authorities which has grown in importance over the last 20 years.

Crawford et al (2015)[6] looked in detail at police spending over the period 2000–01 to 2014–15. They found that police spending rose in the first decade of the century, as grants and council tax bills increased, but fell sharply between 2010–11 and 2014–15, largely as a consequence of reductions in public spending that took place under the Coalition Government.

Table 1 shows the ‘boom and bust’ in police spending between 2000-01 and 2014-15, taken from Crawford et al (2015).  Between 2010-11 and 2014-15, central government grants for the police fell in real terms by 20%, or an average of 5.4% each year.

Total spending on the police fell by 14%, or 3.7% per year. This is less than the fall in grants because police forces were able to offset the fall in part by a rise in the police precept.  However, while the fall in government grants was fairly even across police forces in this period, the offsetting rise in precept was very uneven across forces as described in Figure 2. Therefore, despite the almost uniform fall in grant across police forces, the net effect on police spending across police forces was uneven.

Police budgets have remained broadly flat in cash-terms since 2015–16

In the autumn 2015 Spending Review, the Conservative Government planned to make annual cuts to central government grants for the police for the duration of the spending review period (2015–16 to 2019–20).

However, the government promised that the magnitude of the planned reductions was such that if police forces increased the local police precept rate each year by the maximum permitted (2% for most authorities) then spending on the police would remain constant in cash-terms over the period. 

Current estimates of police force revenues in 2016–17 show that so far this has been the case: total financing provision for the police in England and Wales (including the main police grants and council tax revenues) remained broadly flat in cash terms between 2015–16 and 2016–17. However, this does mean that in real-terms revenues have continued to fall.

Table 1. Changes in police spending 2000-01 to 2014–15 (real terms in 2014–15 prices)

 

 

Police Spending   (£000)

Average annual percentage change

 

 

2000-01

2005-06

2010-11

2014-15

2000-01 to 2005-06

2005-06 to 2010-11

2010–11 to 2014–15

Total (£ million)

Spending

10,409

12,710

13,617

11,702

4.1%

1.4%

–3.7%

Grant

8,673

9,648

10,182

8,168

2.2%

1.1%

–5.4%

Precept

1,736

3,062

3,435

3,534

12.0%

2.3%

  0.7%

Per person (£)

Spending

196

238

249

205

3.9%

0.9%

–4.6%

Grant

164

181

186

143

2.0%

0.6%

–6.3%

Precept

33

57

63

62

11.9%

1.8%

–0.3%

Proportion of spending

Grant

83%

76%

75%

70%

 

 

 

Precept

17%

24%

25%

30%

 

 

 

Total (£ million)

Excluding Counter-Terrorism Grant

Spending

10,409

12,583

13,147

11,138

3.9%

0.9%

–4.1%

Grant

8,673

9,521

9,711

7,604

1.9%

0.4%

–5.9%

Source:  Crawford, R., Disney, R. and Innes, D. (2015) Funding the English and Welsh Police Service: from Boom to Bust? Briefing Note No. 179, Institute for Fiscal Studies, London. https://www.ifs.org.uk/publications/8049

Figure 2. Percentage change in real-terms revenues and spending 2010–11 to 2014–15 (2014–15 prices)

Figure 2. Percentage change in real-terms revenues and spending 2010–11 to 2014–15 (2014–15 prices)

Source:  Crawford, R., Disney, R. and Innes, D. (2015) Funding the English and Welsh Police Service: from Boom to Bust? Briefing Note No. 179, Institute for Fiscal Studies, London. https://www.ifs.org.uk/publications/8049

Despite cuts, both police recorded crime and self-reported crime have continued to fall until recently

How has police performance fared given this rise and fall in police workforce and funding?

There are well-known difficulties in utilising standard measures such as crime rates to measure police performance since the incidence of reported crime will in part depend on the public’s perception of the probability that the police service has the resources to deal with the problem. However, this can be supplemented with data from the Crime Survey for England and Wales (CSEW) which concerns crimes reported by respondents to interviewers, whether or not the incidents were reported to the police.

Figure 3 shows that, until the very end of the period when there was a change in recording practice, there has been a downward trend both in recorded crime and in crime reported to the CSEW. Falls in crime reported to the CSEW have been particularly large. This should not necessarily be taken to suggest that actual crime has been falling over the period, given the changing nature of crime – away from ‘traditional’ crimes such as car theft, robbery and burglary towards greater ‘white collar crime’, internet crime, sex crime and so on.

Figure 3 also describes average clear-up rates of recorded crime across police forces in England and Wales for the same period. There is some evidence that clear-up rates increased in the early part of the period, when police spending was increasing, but no evidence of a decline once the trend in funding was reversed. This may reflect greater efficiency in resource allocation by police forces in general, but alternatively it could be that clear-up rates would have continued to rise in the absence of spending cuts.  

Figure 3. Patterns of crime in England and Wales 2002 to 2016

Figure 3. Patterns of Crime in England and Wales 2002 to 2016

Source: Incident data from ONS Crime in England and Wales: Bulletin Tables, April 2017. Clear-up rates from CIPFA police statistics.

Another measure of police performance is the PEEL (Police Effectiveness, Efficiency, Legitimacy) metric developed by HM Inspectorate of Constabulary.[7]  This metric gives individual police forces in England and Wales scores based on the judgement of HMIC Inspectors of the performance of individual police forces, with 4 possible grades ranging from ‘outstanding’ to ‘inadequate’ for each of these 3 criteria. Full PEEL assessments have been carried out for 2015 and 2016.

It is possible to examine the correlation of these PEEL scores across police forces with changes in central government funding since 2010, when the ‘bust’ in police spending began.  On the basis of this raw correlation (shown in figure 4), we find no clear relationship between the magnitude of police funding cuts (in the form of central grant allocations) across police forces since 2009-10 and their average PEEL score (where higher is better) in the last two years. However the PEEL assessments are relatively new and it remains to be seen how well these measures capture ‘true’ police efficiency and effectiveness.

Figure 4. Correlation between budget cuts 2009-10 to 2016-17 and police force PEEL scores averaged across 2015 and 2016, for England and Wales

Figure 4. Correlation between budget cuts 2009-10 to 2016-17 and police force PEEL scores averaged across 2015 and 2016, for England and Wales

Note: Budget is defined as total grants (general and specific) from central government to police force authorities. Excludes precept revenues, draw down from reserves and other revenues. Average PEEL scores used are an aggregate measure which give equal weight to the 3 criteria used in PEEL assessment, and are an average of scores received in 2015-16 and 2016-17.A higher score indicates better performance. Graph does not include the Metropolitan police or City of London police force.

Source: HMIC website for PEEL scores. DCLG local government revenue expenditure and financing statistics for police force budgets in England. Statswales for equivalent figures for Welsh police forces.

Labour’s £300 million for 10,000 extra police

In early May, the Labour Party announced that, if elected, they would hire an additional 10,000 police officers by 2021–22. If the number of police officers in 2020 were 10,000 higher than in 2016, there would be around 134,000 (full-time equivalent) officers in England and Wales. As can be seen from Figure 1, this would be around same number of officers as in 2012. This would still be around 7% fewer officers than the peak in 2009, but above the level of employment in the 1990s.

The full cost of the proposed increase in numbers by 2021-22 was given as £298.8 million, based on 2016-17 police pay scales. However, although the proposal is accompanied by costings based on existing police scales, it abstracts from any hiring and training costs, and assumes that police officers will receive no pay increase other than through incremental scale increases during the period. The actual cost of this policy might therefore be very slightly higher.

No details are given as to how these extra police are to be allocated across police forces, other than that this will mean 10,000 extra ‘bobbies on the beat’. However, it should be noted that many foot patrols are carried out by PCSOs, and indeed many police forces regard patrolling, as opposed to incident-related activity, as an inferior way of dealing with crime and non-crime activities, the second of which take up an increasing proportion of police time. Using PCSOs, or financing a greater number of backroom staff in police forces, might be a cheaper and more effective form of intervention that would increase the time spent by police officers on ‘core’ police activities.  Furthermore, a proposal of this kind could be framed to give greater local discretion by police forces to choose whether they wish to increase their workforce and by what method.


Notes

[1] Calculated from House of Commons Library (2016), Table A1

[2] All numbers in this paragraph taken from House of Commons Library (2016), Table 1.

[3] See table H3 of Home Office Police workforce England and Wales statistics, 31 March 2016. Note that non-officer staff is defined here as the difference between total police employment and total officer staff, so includes some officer staff on secondment.

[4] See previous footnote.

[5] Source: Median gross annual pay (all jobs, full and part-time) for SOC codes 3312 and 3315 taken from the Annual Survey of Hours and Earnings, 2016. The gap in weekly and hourly pay is also large, see: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/datasets/occupation4digitsoc2010ashetable14

[6] Crawford, R., Disney, R. and Innes, D. (2015) Funding the English and Welsh Police Service: from Boom to Bust? Briefing Note No. 179, Institute for Fiscal Studies, London. https://www.ifs.org.uk/publications/8049

[7] Also paying homage to the founder of modern police forces: Sir Robert Peel.

]]>
https://www.ifs.org.uk/publications/9224 Mon, 15 May 2017 00:00:00 +0000
<![CDATA[Inevitable trade-offs ahead: long-run public spending pressures]]> IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

Key findings

1. The UK population is ageing rapidly. Over the five years 2016 to 2021 the total population is forecast to grow by 3%, but the population aged 65 and over is forecast to grow by 9%, and the population aged 85 and over by 15%. These figures are even starker in the longer term. By 2066 26% of the population is projected to be aged 65 and over, compared to 18% in 2016 (and 12% in 1966).

2. This ageing of the population puts pressure on public spending because older individuals receive state pensions and they are more likely to use relatively expensive health and social care. For example, average health spending on a 70 year old is three times that on a 30 year old, and average spending on 90 year old almost eight times that on a 30 year old.

3. Pressure on state pension spending from population ageing is being tempered by increases in the State Pension Age. Despite this, pensioner-specific benefit spending is still projected to rise, increasing by 1.8% of national income – equivalent to £37 billion in today’s terms – between 2016–17 and 2066–67. This pressure would be halved if the state pension was earnings-indexed rather than increases being “triple locked”.

4. Demographic pressures could increase health spending by 0.8% of national income between 2016–17 and 2066–67. However, other cost pressures (including increasing relative health care costs and technological advances) are potentially even more important. Taken together the Office for Budget Responsibility projects that health spending faces upwards spending pressures amounting to 5.3% of national income between 2016–17 and 2066–67. This is equivalent to £109 billion in today’s terms.

5. While large, the projected increases in health and pension spending are not out of line with recent history. Between 1949–50 and 2015–16 spending on these areas increased from 6.5% to 12.2% of national income. The same period saw sharp falls in spending as a share of national income on debt interest (a decline of 3.8% of national income since 1948–49) and defence (a decline of 7.3% of national income since 1953–54).

6. Official projections imply that if all of the demographic and other pressures were accommodated through increasing public spending health and pensions would increase as a share of non-debt interest spending from nearly a third in 2015–16 to 45% by 2066–67 (with non-debt interest spending increasing from 38.0% to 43.8% of national income). If the pressures were accommodated by cutting spending elsewhere, then spending on health and pensions would account for 55% of non-debt interest spending by 2066–67. Doing so would also require cutting other spending by around a quarter, and delivering this would clearly be very challenging.

7.We face an unavoidable choice: increase the size of the state; rein in spending on health, long-term care and state pensions; or continue to refocus existing public spending towards these areas at the expense of spending elsewhere. The demographic and cost pressures facing health care are not new, but successive governments have yet to consider seriously their implications over the long term. The next government would be wise to consider these long run trends carefully, and to start focusing on finding and implementing a long term solution to these funding pressures now, rather than just announcing further short term funding fixes.

Population ageing will continue to put pressure on public spending

The UK population is not just growing, but also ageing. Over the five years 2016 to 2021 the Office for National Statistics projects that the UK population will grow by 3%, but within that the population aged 65 and over is projected to grow by 9%, and the population aged 85 and over by 15%. Over the fifty years starting in 2016 the population as a whole is projected to grow by 24%, with the population aged 65 and over growing by 80% and the population aged 85 and over more than tripling. This is similar to the rate of growth in the population over the previous fifty years. Figure 1 shows the implications of projected population growth for the proportion of the population in different age bands.

Figure 1. Projected age composition of the UK population

Figure 1. Projected age composition of the UK population

Notes: Figures for 1966 relate to Great Britain. Projections are 2014-based.

This ageing of the population puts pressure on public spending because older individuals receive state pensions, and they are more likely to use relatively expensive health and social care. Figure 2 shows estimated age profiles for spending on health and long-term care. For example, average health spending on a 65 year old is estimated to be double that on a 30 year old. The ratio rises steeply at older ages, with average spending on a 70 year old three times, and spending on a 90 year old almost eight times, that on a 30 year old.

Figure 2. Age profiles of spending on health and long-term care

Figure 2. Age profiles of spending on health and long-term care 

The pressure on state pension spending from the ageing population is being tempered by increases in the State Pension Age (SPA). The proportion of the population that is projected to be of pensionable age in future is illustrated in Figure 3. Between 2016 and 2020 the proportion of the population that is of pensionable age is projected to fall to 18%, as the SPA for men and women rises to age 66 in October 2020. Thereafter the proportion of the population of pensionable age is forecast to rise, reaching 19% in 2026 and climbing further during the subsequent decade.

Figure 3. Projected proportion of the population of pensionable age

Figure 3. Projected proportion of the population of pensionable age

Notes: Legislated policy is that the SPA for both men and women will increase to 67 between 2026 and 2028 and to 68 between 2044 and 2046. The recent Independent Review of the State Pension Age led by John Cridland recommended that the increase in the SPA to 68 is brought forwards to between 2037 and 2039. The OBR Fiscal Sustainability Report 2017 assumed that the SPA increase to 68 would be brought forward to between 2039 and 2041, and that a further rise to 69 would take place between 2053 and 2055.

Half of pressure from spending on pensioner specific benefits driven by triple lock

The OBR’s projections for future spending on pensioner specific benefits (that is the state pension, pension credit and winter fuel payments), taking into account these demographic pressures, is shown in Figure 4. Spending on these benefits is projected to be fairly stable at just over 5% of national income until the start of the 2030s, after which point the increase in the proportion of the population of pensionable age, combined with the continued impact of triple lock indexation (see below), feeds through into an increase in pension spending. Spending on pensioner specific benefits as a share of national income is projected to reach 6.4% of national income by 2038­–39, and 7.1% of national income by 2066–67. This would be an increase of 1.8% of national income compared to the level of spending in 2016–17. This is equivalent to £37 billion in today’s terms.

Figure 4. Projected spending on state pension and other pensioner specific benefits

Figure 4. Projected spending on state pension and other pensioner specific benefits

If the government were to increase the level of the state pension over time in line with growth in average earnings, rather than the higher of the growth in average earnings, inflation or 2½% (the “triple lock”), then this would reduce the projected increase in spending on pensioner specific benefits such that it would be projected to rise to 6.2% of national income in 2066–67. This would imply an increase in spending relative to 2016–17 of 0.9% of national income (£18 billion in today’s terms) rather than 1.8% of national income. In other words the future pressure on the public finances from spending on the state pension and other pensioner specific benefits could at a stroke be halved by replacing the triple lock with a policy of earnings indexation.

Projected pressures on health and long-term care spending are considerable

Figure 5 shows the OBR projections for spending on health over the long term, taking into account the changing size and age structure of the population and assuming that health spending per person of a given age and sex grows in line with average earnings. These projections illustrate that demographic pressures alone could put upward pressure on health spending of 0.5% of national income between 2016–17 and 2041–42, and of 0.8% of national income between 2016–17 and 2066–67. These are equivalent to £11 billion and £17 billion, respectively, in today’s terms.

However, it is not just demographics that are putting upward pressure on spending. Other cost pressures, including increasing relative health care costs and technological advances, are potentially even more important. Figure 5 shows the OBR projection for long run health spending assuming that spending is increased to cover both demographics and an estimate of these other cost pressures. This would see health spending increasing by 2.4% of national income between 2016–17 and 2041–42, and by 5.3% of national income between 2016–17 and 2066–67. These are equivalent to £49 billion and £109 billion, respectively, in today’s terms. These numbers assume that the planned cut to spending on health as a share of national income to the end of the current decade can and will be delivered.

Long-term care spending also faces upward pressure from the ageing of the population. Furthermore, the planned cap on lifetime care costs that was announced by the Government in response to the Dilnot Commission will increase public spending on care. The OBR projection for public spending on long-term care in light of these pressures is shown in Figure 5. Long-term care spending is projected to increase by 0.7% of national income between 2016–17 and 2041–42, and by 1.1% of national income between 2016–17 and 2066–67. These are equivalent to £14 billion and £22 billion, respectively, in today’s terms. These estimates do not take account of any cost pressures on long-term care, and therefore likely underestimate the pressure on spending going forwards.

Figure 5. OBR projections for spending on health and long-term care

Figure 5. OBR projections for spending on health and long-term care

Projected future increases in spending on health and pensions are not out of line with recent history

The increases in spending on pensioner-specific benefits and health projected by the OBR for the next fifty years (shown in Figures 4 and 5 respectively) are large, but they would not be out of line with recent historical spending trends. Figure 6 illustrates how spending on health and state pensions has changed over the last few decades. In 1955–56 spending on each amounted to less than 3.0% of national income. By 2015–16 spending on health amounted to 7.4% of national income and spending on state pensions 4.8% of national income. Between 1978–79 and 2007–08 (i.e. just prior to the financial crisis) health spending increased by 2.6% of national income – an average increase of 0.1 percentage points of national income each year. This is a similar rate of increase to that projected on average after 2021–22.

Figure 6. Historical and projected health and pensions spending

Figure 6. Historical and projected health and pensions spending

Notes: Historical pension spending is for Great Britain only. State pension spending is pensioner specific benefit spending excluding pension credit – i.e. state pension plus winter fuel payments.

Past increases in spending on health and pensions funded by both increasing the size of the state and by cutting elsewhere

Since the mid 20th century the share of national income spent publicly on state pensions and health has increased significantly. These increases occurred over a period in which:

  • The overall size of the state increased slightly, from 39.0% of national income in 1948–49 to 40.0% of national income in 2015–16. This 1.0% of national income increase is equivalent to £20 billion in today’s terms.
  • Spending on debt interest fell substantially from 5.6% of national income in 1948–49 to 1.8% of national income in 2015–16. This 3.8% of national income fall is equivalent to £78 billion in today’s terms.
  • Spending on defence also fell substantially, from 9.2% of national income in 1953–54 to 1.9% of national income in 2015–16, due to demilitarisation after the Second World War and the subsequent end of the Cold War. This 7.3% of national income fall is equivalent to £148 billion in today’s terms.

This increase in the size of the state, and drop in spending on debt interest and defence as a share of national income, enabled spending in other areas to grow substantially. As shown in Table 1, in addition to spending on both health and state pensions growing as a share of national income, over the longer-term there has also been growth in the share of national income spent publicly on other benefits, education, social care and overseas aid.

The change in spending as share of national income between 1953–54 and 2015–16 spent publicly in different areas is illustrated in Figure 7, and the change between 1978–79 and 2015–16 is shown in Figure 8.

Figure 7. Public spending as a share of national income, 1953–54 and 2015–16 compared

Figure 7. Public spending as a share of national income, 1953–54 and 2015–16 compared

Figure 8. Public spending as a share of national income, 1978–79 and 2015–16 compared

Figure 8. Public spending as a share of national income, 1978–79 and 2015–16 compared 

Table 1. Long-run change in public spending as a share of national income across different areas

 

Start year

Start

% of GDP

2015–16

% of GDP

Change

% of GDP

Total public spending

1948–49

39.0

40.0

+1.0

Debt interest

1948–49

5.6

1.8

–3.8

Total spending less debt interest

1948–49

33.4

38.2

+4.8

 

 

 

 

 

Total benefits

1948–49

3.9

11.1

+7.3

Of which

 

 

 

 

State pension

1948–49

1.5

4.8

+3.3

Other benefits

1948–49

2.4

6.3

+3.9

 

 

 

 

 

Health

1949–50

4.4

7.4

+2.9

Education

1953–54

2.8

4.5

+1.6

Defence

1953–54

9.2

1.9

–7.3

Overseas Aid

1960–61

0.1

0.7

+0.5

Social care

1977–78

0.6

1.3

+0.6

Public order & safety

1978–79

1.4

1.6

+0.2

Transport

1978–79

1.4

1.5

+0.1

 

The government faces an important and undeniable choice: how to pay for future increases in health, care and pension spending

While the projected long run increases in health and pension spending going forwards are not unprecedented, paying for them will not be easy. The next government – and its successors – essentially have three options: rein in spending on these areas, or increase spending to meet these pressures by increasing the size of the state, or cut spending elsewhere.

The full OBR projections for non-interest public spending in future are shown in Figure 9. Demographic changes and implemented policy reforms do suggest falls in spending on some other areas, specifically education, public-service pensions and non-pensioner welfare. On the other hand, spending on non-age related benefits which are also received by pensioners is projected to increase slightly.

Taken together, public non-interest spending outside of pensioner specific benefits, health and long-term care is projected by the OBR to fall by 2.3% of national income between 2016–17 and 2066–67 under current government policy. This means that the 8.2% of national income increase in spending on pensioner specific benefits, health and long-term care projected between 2016–17 and 2066–67 would require an increase in total non-debt interest spending or further cuts to spending elsewhere of 5.9% of national income. This is equivalent to £121 billion in today’s terms.

Figure 9. OBR non-interest spending projections

Figure 9. OBR non-interest spending projections

It would certainly not be possible to fund such an increase in spending simply through higher government borrowing. The OBR projections in the 2017 Fiscal Sustainability Report illustrate that such additional borrowing would push debt onto an unsustainable trajectory, increasing remorselessly over time and surpassing 100% of national income before the start of the 2040s.

One option would be to increase taxes to cover the increase in non-debt interest spending as a share of national income. This would leave the long-run public finances in roughly the same position as implied by the most recent Budget. However an increase in the tax take of 5.9% of national income – equivalent to £121 billion in today’s terms – also feels unlikely, at least when looking at UK history. This would push total government receipts as a share of national income to around 44%, which would be higher than at any point since 1950.

If non-interest public spending were to be kept constant, then any increase in spending on pensions, health and long-term care would need to be paid for by reducing spending elsewhere. Such cuts would be harder to achieve than they were historically, since public spending outside of these areas is much lower than it used to be. A 5.9% of national income reduction in spending outside of health, pensions and long-term care would be a cut of a quarter to the current level of spending on these areas. Figure 10 shows the level and composition of spending in 2015–16 on the areas from which cuts would need to be sought.

Figure 10. Composition of "other" spending in 2015–16

Figure 10. Composition of

Notes: Composition of public spending excluding health, long-term care, pensioner-specific benefits, debt interest and accounting adjustments.

Figure 11 illustrates how the proportion of non-debt interest public spending going on health and state pensions has changed over time. Taken together it has almost doubled from around one-sixth in the mid-1950s to nearly a third in 2015­‒16. The figure also shows how this could change going forwards given the OBR projections for spending on health and pensions: the dashed line assumes that non-debt interest public spending is increased to cover the additional demographic and other pressures, while the dotted line assumes that total non-debt interest spending is held constant after 2021­–22 and that additional spending on health and pensions is accommodated by cutting spending elsewhere. Under the former scenario spending on health and pensions would account for 45% of the all non-interest spending by 2065­‒66, while under the latter it would account for 55%.

Figure 11. Share of non-interest spending on health and state pensions

Figure 11. Share of public spending on the NHS and benefits

Notes: Dashed lines assume that public spending is increased to pay for additional health and state pension spending. Dotted lines assume that non-debt interest spending is held constant after 2021-22 and that increased spending on health and pensions is accommodated by cutting spending elsewhere.

The government faces an important and undeniable choice

In summary, we face an unavoidable choice: increase the size of the state, continue refocusing existing public spending on health, long-term care and pensions, or rein in spending on these areas – in particular on health care. The demographic and cost pressures facing health care are not new, but successive governments have yet seriously to consider their implications over the long term. The next government would be wise to consider these long run trends carefully, and to start focusing on finding and implementing a long term solution to these funding pressures now, rather than just announcing further short term funding fixes.


Sources

Figure 1

Sources: Office for National Statistics, Population projections and population estimates.

Figure 2

Source: Office for Budget Responsibility, Fiscal Sustainability Report 2017, Chart 3.7.

Figure 3

Source: Authors’ calculations using Office for National Statistics population projections and Office for National Statistics factors to calculate the population of state pension age. 

Figure 4

Source: Office for Budget Responsibility, Fiscal Sustainability Report 2017, Chart 3.10.

Figure 5

Sources: Office for Budget Responsibility, Fiscal Sustainability Report 2017, Chart 3.8 and Supplementary Tables Table 1.1

Figure 6

Sources: DWP Benefit Expenditure Tables, OBR Fiscal Sustainability Report 2017, Office for Health Economics and HMT Public Expenditure Statistical Analyses.

Figures 7 and 8, Table 1

Sources: DWP Benefit Expenditure Tables, OBR Public Finances Databank (May 2017), Office for Health Economics, Office for National Statistics, OECD DAC database (http://stats.oecd.org/qwids/) and HMT Public Expenditure Statistical Analyses.

Figure 9

Source: Office for Budget Responsibility, Fiscal Sustainability Report 2017.

Figure 10

Sources: HM Treasury, Public Spending Statistics Release May 2017, OBR, Fiscal Sustainability Report 2017.

Figure 11

Source: As Figure 6.

 

]]>
https://www.ifs.org.uk/publications/9219 Fri, 12 May 2017 00:00:00 +0000
<![CDATA[Minimum wages in the next parliament]]> IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

Key findings

1. The Conservatives and the Labour Party both plan increases in the minimum wage by 2020 that would take it to an historic high. For those aged 25 and over, the Conservative plan would result in the minimum wage being £8.75 per hour in 2020. This is 5% higher than if it increased from its current level in line with average earnings. Under the Labour plan it would £10 per hour in 2020, which is 20% higher than under average earnings indexation.

2. A higher minimum wage may be effective at boosting the wages of low earners. However, a significantly increased wage for some workers must be paid for by other households via some combination of reduced profits, higher consumer prices, or lower earnings for higher-paid workers. Crucially, there must also be a point beyond which higher minimum wages have substantial negative impacts on employment. That point is not known, which makes any large and sudden increase inherently risky.

3. 4% of employees aged 25 and older were paid the National Minimum Wage in 2015. The Conservatives’ “National Living Wage” currently covers 8% of employees aged 25 and over. This is forecast to rise to 12% under current Conservative plans by 2020 and to 22% in 2020 under Labour plans. In other words, over just five years we are looking at either a three-fold increase or a more-than-five-fold increase in the proportion of employees aged 25 and over paid the minimum wage.

4. The minimum wages proposed by both parties are also high relative to other comparable countries. Labour’s plans would result in a minimum wage level (relative to average earnings) similar to that in France which is the highest among comparable countries.

5. Part-time, female and private sector employees and those in the North of England, the Midlands and Wales are most likely to be affected by the proposed increases. For employees aged 25+, under Labour’s plans, the government would effectively set the wage of around one quarter of female employees, of private sector employees, and of employees in the Midlands, North of England and Wales. It would be setting the wages of almost half of part-time employees aged 25 and over.

6. The benefit from minimum wage increases is concentrated among middle-income households, not the lowest-income households. A few factors explain this. Many individuals on low wages are in middle- or high-income households as a result of the earnings of their partner; many of the lowest-income households have no-one in work at all; and low-income households that do gain are likely to see significant reductions in means-tested benefits as a result of higher wages, offsetting some of the gains.

7. Labour’s plan to extend their proposed £10 minimum wage to all employees aged 18 and over amounts to a 62% increase in the minimum wage for 18-20 year olds and a 29% increase for 21-24 year olds, relative to earnings indexation . This would mean that 60% of 18-24 year old employees would be paid the minimum, including 77% of 18-20 year olds. Given that unemployment can have severe and long lasting effects on young people, even a modest negative employment impact resulting from such large increases in their minimum wages would be a cause for considerable concern.

8. Both parties’ plans imply big increases in the costs of employing workers. The Conservative plan raises the cost of employing at least 2.8 million workers by 4% on average, the Labour plan raises the cost of employing 7.1 million workers by almost 15% on average. If employers did not cut employment (or hours of work), total employer costs from wages and employer National Insurance would – in the absence of any offsetting compensatory measure – rise by £1 billion per year under the Conservatives, and by £14 billion per year under Labour. In addition, there are possible substantial knock-on effects on those with earnings just above the proposed minima, which may be considerable.

9. The Conservative and Labour parties are both moving away from the previous model of minimum wage setting in which the independent Low Pay Commission recommended minimum wage levels while carefully considering the consequences for employment. There may well be a case for higher minimum wages than we have had up to now. But we do not know at precisely what point a higher minimum wage will start having serious negative employment effects. Therefore large and sudden increases create considerable risk that those who are supposed to be the beneficiaries of the policy end up paying the cost in higher unemployment or lower hours of work.                                                                                                       

Conservatives plan increases in the minimum wage; Labour’s planned increases are much larger and also affect 18-24 year olds

Figure 1. Scenarios for minimum wage rates in 2020–21, by age [download the data]

Note: Conservative policy is for the National Living Wage (minimum wage for those aged 25 and over) to reach 60% of median earnings in 2020–21, which is currently forecast to be £8.75 in 2020–21 by the Office for Budget Responsibility (OBR). Given no statements on the rates for younger people, we assume than under Conservative policy, the rates for 18-20 and 21-24 year olds would grow in line with average earnings, as forecast by the OBR.

Source: Authors’ calculations using OBR Economic Fiscal Outlook March 2017, Summer Budget 2015 and Labour Party statements.

In 2017–18, minimum wages are £7.50 an hour for those aged 25 and over, £7.05 for 21-24 year olds, £5.60 for 18-20 year olds and £4.05 for 16-17 year olds. There is a separate apprentice rate of £3.50. Both the Conservative Party and Labour Party have plans to increase minimum wages in the next parliament. Upon the announcement of the National Living Wage (the NLW- the minimum wage for those aged 25 and over) in 2015, the Conservative government announced that the NLW would rise to reach 60% of median (middle) hourly earnings in 2020. This level is currently forecast to be £8.75 in 2020–21: 40p (5%) higher than if the NLW was instead increased in line with average earnings and £1.10 (14%) more than it would have been had the national minimum wage (NMW) increased with average earnings from 2015. The setting of the minimum wages for younger employees aged 16-17, 18-20 and 21-24 remains with the Low Pay Commission, who are meant to set these rates as high as is possible “without damaging their employment prospects”.

In contrast, the Labour Party has announced that, in government, it would increase the minimum wage to reach £10 per hour for all employees (excluding those eligible for the apprentice rate) aged at least 18 in 2020.[1] This would imply especially large rises in the minimum wage for those aged under 25, who currently are subject to lower rates. Compared to increasing all minimum wage rates in line with average earnings, this amounts to an increase of 20% (£1.65 per hour) for those aged 25 and over, 29% (£2.25 per hour) for 21-24 year olds and 62% (£3.85 per hour) for 18-20 year olds.

Higher minimum wages are not costless and, beyond some (unknown) level, must substantially increase unemployment

Minimum wages do not come for free. First, even where the higher wages are simply paid by employers, those wage increases must be paid for by other people to at least some extent. This is because they will either lead to lower profits, affecting business owners and shareholders (including large numbers of people with pensions invested in listed companies), or higher prices faced by consumers, or pay cuts for other workers (or some combination).

Another potential effect of a higher minimum wage is for workers to be offered fewer hours of work or to lose their jobs – or for unemployed workers not to find one – as it is no longer profitable for employers to employ them. To date, studies of the effect of the minimum wages in the UK (and elsewhere) have not found significant negative effects on employment.[2] Contrary to popular perception this does not contradict modern economic theory. It contradicts a simple model of a perfectly competitive labour market in which all workers are just paid according to their productivity (or more precisely their “marginal product”). But it is perfectly possible to explain why a carefully set minimum wage may not have negative impacts on employment. For an overview of the theory and evidence see Manning (2016).[3]

However, there will be a level beyond which a higher minimum wage will start to reduce employment. This is not in doubt and is implied by any reasonable description of how a labour market might work. It should be clear from an extreme example: if wage contracts of less than £100 per hour were outlawed, it would be unprofitable to employ vast swathes of the population and fewer would be employed. What is not clear is at precisely what point substantial job losses would materialise from further increases in the minimum wage.

Minimum wage increases will always, therefore, create both winners and losers. These losers could include shareholders, consumers or higher paid workers, but they could also be lower paid workers if the higher minimum wage leads to reduced employment. Hence, whilst a carefully applied minimum wage may well be a useful policy lever to boost the earnings of low-wage workers, it is a policy lever that could harm those it intends to help. Even if politicians accept the risk of lower employment, they should be clear about the potential consequences of their actions: if there are winners then there will be losers too.

It is possible that a higher minimum wage could boost productivity, perhaps through increases in motivation or morale, or by reducing employee turnover (therefore reducing the costs spent by employers on hiring new employees), or – in the long run – because employers invest more in productivity-enhancing capital. Higher productivity could partially offset reductions to national income caused by lower employment. However, upon the introduction of the NLW, the Office for Budget Responsibility (OBR) assessed that it would decrease national income by 0.1% (about £2.3 billion per year in 2020) overall: implying that the wage gains for those benefitting were more than offset by losses for other households.

Unfortunately, the evidence on the impacts of minimum wages provides very little guidance as to the effect of considerably higher minimum wages than the UK currently has, as proposed by both Conservative and Labour parties. It is therefore very hard to predict how employers and individuals will respond to a minimum wage that is increased as sharply as the main parties are planning.

This report examines how the proposed minimum wages compare to the minimum wages set since 1999, and to minimum wages in other countries. It also looks at which groups of employees will be particularly affected by the proposed policies.

Both parties’ plans would see the minimum wage rising to historic highs...

Figure 2. Real minimum wage for employees aged 25 and over, 1999–2017 and under Conservative and Labour plans for 2020 

[download the data]

Note: Minimum wage measured in April of each year. National Minimum Wage for 1999 to 2015, National Living Wage 2016 to 2020. Adjusted for inflation using the Consumer Prices Index (OBR forecasts from 2017–18 to 2020–21). Source: Authors’ calculations using Low Pay Commissio

 

Figure 3. Minimum wage as a proportion of median hourly wages for employees aged 25 and over, 1999–2017 and under Conservative and Labour plans for 2020 

[download the data]

 

 

Note: Measured in April of each year. National Minimum Wage for 1999 to 2015, National Living Wage 2016 to 2020. Excludes apprentices in the first year of their apprenticeship.  Source: Low Pay Commission Autumn Report 2016 (Figure 2.4) and authors’ calculations using the Annual Survey of Hours and Earnings.

Both Labour’s proposals and the Conservatives’ plans for the minimum wage represent sizeable increases in the minimum wage received by employees aged 25 and older. Figure 2 shows the Conservatives’ NLW is forecast to grow by 10% between 2017 and 2020 (after accounting for inflation), whereas Labour’s policy would lead to a 25% increase over the same period.[4] These rises would come on top of growth of 11% just seen in the two years between 2015 and 2017 due to the introduction of the NLW in April 2016.

These substantial increases would result in the level of the minimum wage relative to average earnings reaching historic highs. While Figure 3 shows the minimum wage has tended to grow faster than median earnings since its introduction – rising from 46% of median earnings in 1999 to 53% in 2015 – both parties’ policies would cause a step change in this trend. The introduction of the NLW has already boosted the share to 57% in 2017. Further rises under a re-elected Conservative government would see the NLW hit 60% of median earnings by 2020 – the official objective of the policy – whereas the minimum wage under a Labour government would be equivalent to 68% of median earnings by 2020.

...and, especially under Labour, high relative to other comparable countries.

Figure 4. Minimum wage as a proportion of full-time median hourly wage 

[download the data]

Note: All non-UK figures are for 2015. Source: OECD Employment and Labour Market Statistics, (http://www.oecd-ilibrary.org/employment/data/earnings/minimum-wages-relative-to-median-wages_data-00313-en) and authors’ calculations using the Annual Survey of Hours and Earnings.

To place the Conservative and Labour plans in an international context, Figure 4 ranks developed countries by their national minimum wages as a share of average full-time earnings.[5] It shows the UK was roughly in the middle of the international ranking in 2015 and had moved slightly higher by 2017 as a result of the introduction of the NLW. Further increases in the NLW proposed by the Conservatives would see the UK’s minimum wage rise to a level similar to Australia’s by 2020. Labour’s plans, by contrast, would result in a minimum wage similar to that of France, which currently has the highest minimum wage among comparable countries. In this context it is unfortunate that we have little robust evidence on the impact that France’s minimum wage has had on employment.[6]

Under Conservative plans, and to an even greater extent under Labour, the minimum wage would rise well above levels seen before in the UK, and to amongst the highest levels in comparable countries. To implement these policies would be to take a risk. We do not know what the impact on employment and hours worked would be.

Share of employees aged 25+ paid the minimum wage would rise from 8% now to 12% under Conservative plan or 22% under Labour.

Figure 5. Proportion of employees aged 25+ paid the minimum wage, 1999–2017 and under Conservative and Labour plans for 2020 [download the data]

Note: Measured in April of each year. National Minimum Wage for 1999 to 2015, National Living Wage 2016 to 2020. “Paid minimum wage” also includes workers with observed pay less than their minimum wage rate. Excludes apprentices in the first year of their apprenticeship. Source: Low Pay Commission Autumn Report 2016 (Figure 2.9), and authors’ calculations using the Labour Force Survey and Annual Survey of Hours and Earnings.

Figure 5 shows that the minimum wage rises planned by both the Conservatives and Labour are expected to increase substantially the proportion of employees aged 25 or above who are paid at the national wage floor. Whereas only 4% of employees aged 25 and over in 2015 were paid the NMW, and 8% are now (in 2017), this is forecast to rise to 12% in 2020 under Conservative plans and 22% under Labour plans. In other words, over just 5 years we are looking at either a three-fold increase or a more-than-five-fold increase in the proportion of employees aged 25 and over paid the minimum wage.

One might wonder why the difference here between the two parties sounds so large, when Labour’s £10 minimum wage in 2020 (in nominal terms) would be only £1.25 per hour higher than the Conservatives’. This reflects the fact that a lot of employees are paid slightly more than the current NLW. As a result, even small changes can substantially increase the number of employees paid at the minimum. For example, the relatively small increase of 5% (compared to indexation in line with average earnings) proposed by the Conservatives between 2017 and 2020 still leads to an extra 4% of employees aged 25 and over  (940,000 people) paid the minimum wage.

Higher minimum wages could also have important impact on those who earn more than the new minimum wage. Many of those people will be in jobs that are more skilled or come with more responsibility than minimum wage jobs, and employers may feel it necessary to increase their pay too to preserve at least some of the differential between their pay and that of lower paid (and lower skilled) jobs. This kind of “spillover” effect has been observed before after the introduction of the NMW in 1999 and also the NLW in 2015.[7] These wage increases increase employers’ costs further, and – just as with the pay increases of those on the minimum wage – must ultimately be paid for by other households.

Part-time, female and private sector employees and those in the North, Midlands and Wales most likely to be affected by minimum wage rises

Minimum wage and other low-paying jobs are more prevalent among certain types of employees. This means the proportion of employees paid at or below the minimum wage under Conservative and Labour plans would vary considerably between different groups. This can be seen in Figure 6, which shows that minimum wage jobs are most prevalent among part-time (working less than 30 hours per week), female and private-sector employees and in the North of England, Midlands and Wales.

By 2020, these groups would see the greatest rises in the proportion of employees paid at the minimum wage under both Conservative and Labour’s plans. Hence these groups face both the greatest potential gain from higher minimum wages, but also probably the greatest risk of substantial job losses.

The Labour plans would see the following fractions of employees aged 25 and over paid the minimum wage in 2020 (assuming, of course, that these people all continue to be employed, which would be by no means assured):

  • More than a quarter of women;
  • More than a quarter of the private sector employees;
  • Almost half of part-timers;
  • More than a quarter of those in the North of England, Midlands and Wales.

The Conservatives’ NLW, by contrast, would directly affect almost 1 in 6 female, private-sector employees, and those working in the North of England, Midlands and Wales and about 1 in 4 of those working part time. While these are lower than the figures under Labour, they would represent substantial increases relative to the current situation, as the Figure makes clear.

Figure 6. Proportion of employees aged 25 and over paid the minimum wage in 2017 and under Conservative and Labour plans [download the data]

 

Note: “Paid minimum wage” also includes workers with observed pay less than their minimum wage rate. Excludes apprentices in the first year of their apprenticeship. Source: Authors’ calculations using the Annual Survey of Hours and Earnings (ASHE). Northern Ireland not included as ASHE does not include Northern Ireland.

Share of employees aged 18-24 paid at the minimum would rise five-fold, from 12% to 60%, under Labour plans

Figure 7. Proportion of employees aged 18-24 paid the minimum wage in 2017 and under Labour plans for 2020 [download the data]

 

Notes and sources: See Figure 6.

A major part of Labour’s (but the not the Conservatives’) minimum wage plans is to extend the proposed £10 minimum wage to all employees aged 18 and over. This means the minimum wage for 21-24 year olds (currently £7.05) would be 29% higher in 2020 than if it increased in line with average earnings, and for 18-20 year olds (currently £5.60) it would be 62% higher. Figures 7 and 8 show this would lead to a massive rise in the proportion of young employees paid at the legal minimum. A Labour government would effectively be directly setting the wages of 60% of 18-24 year-old employees by 2020, and 77% of those aged 18-20 (compared to 12% now in both cases).

Figure 8. Proportion of employees aged 18-20 paid the minimum wage in 2017, and under Labour plans for 2020 [download the data]

Notes and sources: See Figure 6.

We have had lower minimum wage rates for younger employees since the introduction of the minimum wage almost two decades ago. There are good reasons for setting lower minimum wages for younger people. Younger employees, on average, have considerably lower wages than older workers. There is no question that much of this reflects productivity differences, due to the benefits of experience, training and expertise (and, many younger workers are receiving training and have low wages in light of the costs of providing that training). Setting the same minimum wage for all risks making it unprofitable for employers to hire younger workers and hence putting them at a disadvantage in terms of employment prospects. Unless there are proposals also to raise the Apprentice Rate of the minimum wage substantially (currently £3.50 per hour), it would give employers a large incentive to employ young people only as apprentices. Moreover, there is good evidence that unemployment at a young age can have a particularly damaging impact on their later lives. Therefore such a rapid and large increase in the minimum wage for younger employees is particularly dangerous. It could not only have an immediate negative impact on their employment, but on their labour market prospects for years to come.

Those who do benefit from minimum wage increases tend to be in middle-income households

Figure 9. Estimated share of mechanical increase in net household income accruing to different parts of income distribution from increases in minimum wage [download the data]

Note: Income is measured as total net household income (before housing costs) equivalised using the McClements equivalence scale. Conservative and Labour policies are measured relative to a baseline scenario in which all current (2017–18) minimum wage rates and the NLW are uprated in line with average earnings. Source: Authors’ calculations using the IFS tax and benefit model, TAXBEN, run on the 2015–16 Family Resources Survey and the 2015–16 Labour Force Survey.

Politicians may claim that increasing minimum wages help those on low incomes. However, although the direct impact of an increase in minimum wages is to boost the earnings of employees with the lowest hourly wages, this does not mean low-income households gain the most from such policies. This can be seen in Figure 9, which shows the share of the total increase in net household income under Conservative and Labour proposals received by each income decile. It is extremely important to realise that this is simply looking at the direct, mechanical gains: as we emphasised earlier, in reality, the money used to pay higher wages must be coming from somewhere (ultimately other households) and there may be knock-on effects on employment, neither of which are incorporated in the analysis in Figure 9.

The chart shows that middle-income households are the largest direct beneficiaries from a higher minimum wage. A key reason for this is that many individuals with low hourly wages are not in especially low-income households. In particular, many have a working partner and two-earner families do not tend to have the lowest household incomes; of course many of the very lowest-income households have no one in paid work at all. In addition, employees who do have relatively low household incomes will often find that increases in wages are partially offset by resulting reductions in entitlements to means-tested benefits, an effect which is much less important for employees in middle- (or high-) income households.

In absence of responses by employers, Conservative plans would increase employers’ costs in 2020-21 by at least £1 billion; Labour by £14 billion

Table 1. Increases in employer cost in 2020-21 (from combination of wages and employer National Insurance contributions) [download the data]

 

Conservative plans in 2020

Labour plans in 2020

Average increase in cost to employer, per employee brought on to minimum wage

£480 per year

(4.0%)

£2,000 per year

         (14.7%)

Proportion of all employees directly affected by higher minimum wages

10%

26%

Number of employees directly affected by higher minimum wages in 2020–21

2.8 million

7.1 million

Average increase in cost to employer per employee

 

£50 per year

(0.1%)

£530 per year

(1.5%)

Total directly increase in employer costs:

£1.3bn per year

(0.1%)

£14.1bn per year

(1.5%)

Of which:

 

 

Increased cost of employees aged 18-24

£0bn per year

£4.5bn per year

Increased cost of employees aged 25 and over

£1.3bn per year

£9.5bn per year

Note: Conservative and Labour policies are measured relative to a baseline scenario in which all current (2017–18) minimum wage rates and the NLW are uprated in line with average earnings. Employer cost includes both wages and salaries paid to employees and employer National Insurance contributions. It does not include any mandatory employer pension contribution if employees do not choose to leave a workplace pension into which they will have been automatically enrolled. Source: Authors’ calculations using the Annual Survey of Hours and Earnings.

One way to understand why there could be significant responses from employers to the proposed increases in minimum wages is to examine the direct increase in cost of employing workers that they face as a result of higher minimum wages. Table 1 sets out the extra cost to employers under the Conservative and Labour proposals, accounting for the impacts on wages as well as employer National Insurance contributions. It only looks at the effect on employers’ costs from increasing the pay of those paid under the new minimum wage, not any potential effect on the earnings of those paid above that level. This latter effect could in practice be very substantial.

The Conservative plans would result in increased employer costs for 10% of employees – totalling 2.8 million in 2020–21, averaging £480 per year, or 4.0%, for each employee brought on to the minimum wage, or £50 per year per employee when spread across all employees. This is equivalent to 0.1% of the total cost of employing workers or a total of £1.3 billion per year. As stated above, this extra cost would have to borne by someone – be it shareholders, consumers or employees.

Table 1 highlights the scale of the impact of Labour’s proposed £10 per hour minimum wage. The cost of employing one in four employees would rise as a direct result, averaging £2,000 per affected employee per year – a 14.7% rise in the employer cost of employing those affected employees. The fact that so many employees are affected (7.1 million in 2020–21) and with such a large increase in their cost means that the increase in employer cost is £530 per employee per year even when spread across all employees (not just those directly affected). This amounts to a total of £14 billion per year (1.5% of the total cost of employing workers).

Of course, the increase in employer cost will be concentrated in firms and sectors that tend to hire low skilled employees: for example cleaning, hospitality, hairdressing, retail, food processing, childcare and social care. Faced with an increase of such magnitude, it is easy to imagine why employers – particularly in the most affected sectors – would seek to reduce their labour costs, most obviously through reducing employment (perhaps in some cases substituting through contracting self-employed individuals, who do not qualify for the minimum wage, to carry out specific tasks), but also by reducing non-wage benefits, such as pensions, overtime, or maternity or sick pay.

It is also worth noting that these extra costs would come on top of increased costs of providing pensions to employees due to the roll-out of automatic enrolment, as the minimum employer contribution to workplace pensions increases from 1% of (qualifying) earnings now to 3% by 2019.

The next government could seek to mitigate some of the extra costs to employers: for example, through some form of tax break for employers deemed particularly financially vulnerable to large increases in the minimum wage.[8] This is an option, but it would of course come at a cost to the taxpayer – under Labour in particular, compensating employers for a significant fraction of the increase in cost would clearly be expensive.

A key challenge would be to target any such support effectively at the parts of the economy most in need of it. But there would be other tricky issues. Any taxpayer support that simply transferred certain sums of money to certain employers, without making that amount dependent on their future decisions about how many people to employ, would not actually affect the cost of employing any individual worker. Hence it would not incentivise firms to employ more workers (or make fewer redundant, given the increases in wages). To be most effective at mitigating employment effects, any support would need to be targeted at increasing the incentive to hire the (low skilled) workers that a higher minimum wage makes less desirable to hire. That is likely to be complicated. It also starts to look rather like the state trying to make transfers to low-paid workers through rather convoluted means when more straightforward methods, such as restoring the generosity of work allowances in universal credit, are available.

There may well be a case for raising minimum wages above their current levels. But large and sudden increases in minimum wages are extremely risky: we do not know what their effects will be. If they do not result in increased unemployment, it will be more by luck than judgement.

Until the Summer Budget in 2015, the minimum wage was set by the government after careful consideration of the evidence of its likely impact, and based on a recommendation by the independent Low Pay Commission. The minimum wage was meant to be set at the highest level that was deemed to be possible without damaging employment prospects. The introduction of the NLW marked a departure from this careful process.

There are reasons for being somewhat more radical than the Low Pay Commission has been. A somewhat higher minimum wage might not damage employment prospects very much, and might boost pay and push employers towards greater investment in skills and in capital. But the worry must be that the minimum wage becomes a political bidding tool, with competing parties pledging higher minimum wages as an offer to voters, without explaining the potential risks and dangers of their proposed policies, and by picking juicy-sounding round numbers without careful analysis of the implications. Would politicians be willing and able to lower minimum wages if they are found to have deleterious effects on the labour market and people’s employment prospects?

There are also specific concerns with the way that minimum wages would be set under the Conservatives’ and Labour Party’s proposals. For the Conservatives, by introducing the National Living Wage and pledging to increase it significantly each year until 2020, they have given themselves no chance to assess its impact before introducing further rises. However, the “60% of median earnings target” does at least reduce the growth of the minimum wage if earnings growth in general turns out to be weak.

On the Labour side, there are a number of other concerns. First, their promise to deliver a £10 hourly rate by 2020 is independent of the path of the economy over the next few years. Indeed the OBR now expects average earnings will be 3% lower in 2020–21 than when Labour first stated the £10 pledge in September 2016. Such an inflexible target increases the risk that the minimum wage affects an even greater share of the workforce than is currently expected or than the Labour party themselves originally intended.

Second, the Labour Party has said that it would set a minimum wage policy in consultation with a “Living Wage Review Body”. As the concept of a living wage is based on the cost of achieving a certain standard of living, this would fundamentally divorce the setting of the minimum wage from any consideration of its impact on employment. Put another way, a “living wage” is calculated as the wage that should guarantee a certain standard of living for people who work full time. It does not take account of the number of people who would actually be able to obtain employment at such a wage in the first place. Setting a key economic policy without regard to its most potentially harmful outcome is not sensible.

Finally, setting a minimum which is the same for an 18 year old as a 30 year old is particularly risky. Few 18 year olds are highly skilled and few can command high wages (as evidenced by how few earn more than the equivalent of £10 per hour). If in work, what they need more than anything is often experience and high quality training. If any group is likely to be priced out of paid work by this policy it looks likely to be the young. The long term costs to them of being priced out could be very large indeed.

Ultimately, the most difficult thing about the setting of minimum wage policy is that we do not know the point at which the minimum wage significantly hits employment. But this should lead to a very simple conclusion: politicians should be particularly careful when setting its level. There is a good case for a minimum wage. But large and sudden increases create considerable risk that those who are supposed to be the beneficiaries of the policy end up paying the cost of ill thought out proposals in higher unemployment or lower hours of work.


Notes

[1] See Jeremy Corbyn’s speech on April 10th 2017: “That’s why Labour will raise the legal minimum wage for all to at least £10 an hour by 2020”.

[2] However, while the studies do not find short run negative effects on employment, they do not consider long run negative impacts as employers slowly switch to using technology instead of labour as a result of the higher minimum wage (see Aaronson, French, Sorkin and To (2017)  Industry Dynamics and the Minimum Wage: A Putty-Clay Approach International Economic Review)

[3] Manning, A. (2016) The Elusive Employment Effect of the Minimum Wage, CEP Discussion Paper No. 1428

[4] Note that Labour’s minimum wage is not equal to £10 here as we express future cash amounts in current (2017–18) prices (i.e. taking into account the effect of forecast inflation).

[5] We do not include countries such as Italy, Norway and Sweden where pay floors are set using collective bargaining. The shares for the UK shown in Figure 3 differ slightly from those shown in Figure 2 to allow for comparison with available international statistics.  

[6] See Manning (2016). Comparisons between countries are further complicated by substantial differences in other labour market institutions.  

[7] See Low Pay Commission Report (Autumn 2016) and Butcher, Dickens and Manning (2012) Minimum Wages and Wage Inequality: Some Theory and an Application to the UK. CEP Discussion Paper. No. 1177

[8] For example, the Shadow Chancellor of the Exchequer, John McDonnell, said in his Labour Party Conference Speech in September 2016, “But we know that small businesses need to be a part of the bargain. That’s why we will also be publishing proposals to help businesses implement the Living Wage, particularly small and medium-sized companies. We will be examining a number of ideas, including the expansion and reform of Employment Allowance, to make sure that this historic step forward in improving the living standards of the poorest paid does not impact on hours or employment”

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9205 Thu, 11 May 2017 00:00:00 +0000
<![CDATA[What’s been happening to corporation tax?]]> This briefing note provides background material for the 2017 General Election. IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

Cuts to corporation tax rates announced between 2010 and 2016 are estimated to reduce revenues by at least £16.5 billion a year in the short to medium run. Accounting for measures that raise revenue, including anti-avoidance measures, onshore corporate tax policies over this period reduce revenues by an estimated £12.4 billion a year. Changes to corporate tax have represented some of the largest giveaways in both parliaments since 2010.

Onshore corporate tax receipts as a share of national income are set to be at the same level in 2021–22 as they were in 2010–11. This is not evidence that cuts to corporation tax rates have not reduced revenues. Instead, it reflects the effect of other factors, including the ongoing recovery of financial sector (and other) profits following the Great Recession. Corporation tax receipts are forecast to be 2.3% of national income by 2021–22, substantially below the pre-recession high of 3.2%.

North Sea revenues have collapsed in recent years (the North Sea tax regime is actually forecast to cost the exchequer money in 2016–17) and look unlikely to form a substantial part of the UK tax base in future.  

Onshore receipts set to fall and offshore receipts non-existent

In 2017–18 we are forecast to raise £53.2 billion from corporation tax. This represents 7.8% of total tax receipts and 2.6% of national income. This has fallen from the pre-recession high of 3.2% of national income and is forecast to fall to 2.3% by 2021–22.

Onshore receipts, while volatile over the economic cycle, displayed no strong downward trend in the 30 or so years up to the great recession despite the main corporation tax rate being cut from 52% in 1981 to 28% in 2008. This was due to an increase in the size and profitability of the corporate sector, and to some extent to a broadening of the tax base. Receipts are forecast to be lower in future as a result of recent rate cuts.

Forecasts for North Sea revenues have been regularly revised down in recent years with the fall in the oil price. In 2016–17 the North Sea tax regime is forecast to cost the exchequer money as a result of weak profitability combined with relief for decommissioning costs.[1] Offshore receipts are forecast to be negligible (i.e. near zero) until at least the end of the forecast horizon. Given the underlying decline in resources, North Sea revenues look unlikely to form a substantial part of the UK tax base in future.

Figure 1: Corporation tax receipts as a share of national income

Figure 1: Corporation tax receipts as a share of national income

Notes: Dashed lines show forecasts. Onshore receipts include revenues from the Diverted Profits Tax and the Windfall Tax (1997-98). Offshore receipts include revenues from the Petroleum Revenue Tax and the Supplementary Petroleum Duty (1981-83). Total revenues include all of the above. Measures are based on cash receipts (not accruals), which are available on a consistent basis for a longer period.

Source: Author’s calculations using IFS revenue composition spreadsheet, cash measures: https://www.ifs.org.uk/uploads/publications/ff/revenue_composition.xlsx.

Onshore receipts to return to 2010 levels despite rate cuts

Onshore corporation tax receipts are set to fall by 0.3% of national income between 2017–18 and 2021–22. At that point, they would, if the forecast proves correct, be at the same share of national income as in 2010–11. This may be surprising given that the main corporation tax rate has been cut from 28% in 2010 to 20% in 2015, 19% this year and, on current plans, is set to fall to 17% in 2020. However, the lack of a decline in revenues cannot be interpreted as evidence that cuts to corporation tax have not reduced them. There have been a number of offsetting factors (listed below).

Two new taxes on banks – the bank levy and an 8% surcharge on banks’ profits – have been used to boost receipts from the financial sector, which were much higher pre-recession than currently.[2] 

Figure 2: Onshore corporation tax receipts set to fall to around 2010 levels

Figure 2: Onshore corporation tax receipts set to fall to around 2010 levels

Notes: Dashed lines show forecasts. Onshore receipts include revenues from the Diverted Profits Tax. Bank taxes are the bank levy and bank surcharge. Total includes corporation tax (onshore and offshore) and bank taxes. Measures are based on accruals and include the recent change to a ‘time-shifted accruals’ method.

Source: Author’s calculations using Office for Budget Responsibility, ‘Public finances databank’, March 2017 (http://budgetresponsibility.org.uk/data/) and Table 4.6, Economic and Fiscal Outlook, March 2017 (http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/). 

Factors affecting corporation tax receipts since 2010–11[3]:

  • Underlying profits have been growing. This was always expected as the UK and, in particular, the financial sector continued to recover from the recession. Absent rate cuts, revenues would have been expected to increase between 2010 and 2020. Forecast receipts for 2016–17 were revised up substantially in March 2017 as a result of recorded profits in 2016 being higher than previously expected.
  • There have been policy changes that increase revenues, including measures to reduce avoidance. More on this below.
  • There have been restrictions on losses that bring revenues forward. A 50% cap was placed on the share of banks’ profits that could be offset using carried forward losses from April 2015. In April 2016, this was tightened to 25% and a 50% cap added for all non-bank companies. These measures – for which there is no good economic rationale – acted to boost revenues over the near-term from 2015–16 but to reduce them slightly over the longer-term.
  • Growth in incorporation has boosted corporation tax receipts but reduced receipts overall (because incomes generated by individuals working for their own business are taxed more lightly than employment income).
  • Weak investment post Brexit is forecast to boost receipts in the short run because it is expected that firms will make less use of tax-deductible capital allowances. There has also been a boost to the profits (and therefore tax payments) of life assurance companies, which have seen a post-referendum increase in bond prices. However, the Office for Budget Responsibility (OBR) expects receipts to be depressed going forward as a result of financial company profits growing more slowly, in part due to post-referendum uncertainty.

Corporation tax rate cuts cost at least £16.5 billion a year in the near term

Based on official policy costings, cutting the main rate from 28% to 20%, the small profits rate from 21% to 20%, and the (newly) combined rate from 20% to 17%, costs £16.5 billion each year in 2017–18 terms.

Figure 3: Rates of UK corporation tax and revenue cost of rate cuts in 2017–18 terms

Figure 3: Rates of UK corporation tax and revenue cost of rate cuts in 2017–18 terms

Source: Author’s calculations. See Appendix I.

Caution is required with these figures. Official policy costings reflect the best estimate of the policy cost when the policy was announced. They do not necessarily reflect the actual realised cost of a policy, or even the latest best estimate of its cost. There are three main reasons for this:

  1. If profits turn out to be higher/lower than expected, cutting corporation tax will be more/less expensive than forecast. For example, the cost of cutting the rate from 28% to 24% was higher when estimated in 2011 than when originally costed in 2010. This suggests that £16.5 billion is likely to be an underestimate of the current annual cost.
  2. The cost of policies may not be fully realised within the forecast horizon. For example, the cut to 24% in 2014 was announced and costed in Budget 2010. The full cost would not have fully materialised by the end of the forecast horizon (at that point 2014–15).
  3. Official policy costings consider the direct effect of cutting corporation tax and account for some behavioural responses. They do not account for any wider long run effects on the economy. With corporation tax cuts these are likely to be beneficial: we expect some of the cost of lower corporation tax rates to be recouped through higher investment and economic growth (see below). This suggests £16.5 billion is likely to be an overestimate of the long run cost.

Tax increases and anti-avoidance bring net giveaway down to £12.4 billion

Table 1 shows the cost of all corporation tax policies since 2010; the same caveats about original policy costings highlighted above apply here. In both parliaments, cuts to corporation tax rates have been the biggest giveaway. There are two reasons why rate cuts are more expensive per percentage point since 2015. Most importantly, cuts now apply to all companies (there is no longer a small profits rate). In addition, profits’ forecasts are higher in recent years, which increases the estimated cost of cuts.

Anti-avoidance measures have been the main way revenues have been raised. Since 2015, this includes measures announced following the OECD Base Erosion and Profit Shifting (BEPS) project – an international effort to foster consensus on how to reduce avoidance.[4] The most significant measure is a restriction on interest deductibility. The revenue gain from these policies is especially difficult to estimate. A 2016 OBR evaluation of a number of anti-avoidance measures concluded that there were “more under-performing measures than over-performing ones“ and that the “costings have, on average, underestimated the amount of time that it would take before a measure becomes fully effective”.[5]

Table 1: Cost of onshore corporation tax policy

Policy

£ billion, 2017–18 terms

Measures announced since 2015

–3.9

Reduction in corporation tax rate from 20% to 17%

–6.8

8% corporation tax surcharge on banks & reduced Bank Levy

+0.1

Annual Investment Allowance set at new permanent level of £200,000

–0.7

Anti-avoidance measures

+3.1

of which: restriction on relief for interest

+0.9

Other measures*

+0.4

Measures announced 2010–2015

–8.5

Main rate cut from 28% to 20% & small profits rate cut 21% to 20%

–9.7

Increase in Annual Investment Allowance & cut in capital allowances

+0.8

Avoidance measures

+1.2

Other measures

–0.8

Note: * Includes restriction on deductibility of banks’ pre-2015 losses and extension of capital allowance for lower emission business cars. Includes Patent Box, CFC rules and R&D tax credit changes, among other policies. Source: see Appendix I. 

Reversing recent rate cuts would raise up to £19.7 billion a year in the near term

HMRC’s most recent estimates (April 2017) suggest that a 1 percentage point increase in corporation tax for all companies would raise £2.6 billion in 2020–21, which is equivalent to £2.3 billion in 2017–18 terms.[6] A two percentage point increase would be expected to raise twice this (£4.6 billion in 2017–18 terms).

If this figure (i.e. £2.3 billion per percentage point) is used to cost all rate cuts made since 2010, a simple ‘back of the envelope’ calculation is that policy changes have reduced revenues in the near-term by roughly £19.7 billion per year in 2017–18 terms.[7]  

This calculation suggests that the cost of rate cuts (or, conversely, the amount that could be raised by reversing them) is higher than the £16.5 billion cited above. This illustrates that the exact cost of corporation tax changes is sensitive to when the calculation is carried out, not least because it is heavily dependent on forecast profits: corporation tax cuts are cheaper when profits are depressed.

However, £19.7 billion should also be seen as an upper bound on how much revenue will be foregone from rate cuts (or on how much could be raised by reversing them). This is because HMRC’s forecast cost of how much would be raised from a 1 percentage point rate rise embeds assumptions about how firms would respond to a tax increase. It is reasonable to expect that at higher tax rates an increase in the rate would lead to a larger reduction in investment and make it more likely that firms would move their activities offshore. These factors would mean that revenue gains would be lower as the tax rate increased.

It is also important to remember that, as highlighted above, official policy costings do not take account of the long run effect of tax rate changes. In the same way that we would expect rate cuts to be less costly in the medium to long run because lower rates boost investment, we would expect rate increases to be more expensive because they reduce investment which, over time, would translate into the UK having a smaller capital stock. 

Long run cost of rate cuts may be substantially less depending on how the economy responds

Cutting corporation tax rates can cost less than official policy costings suggest if they lead to higher level of economic activity, including higher investment. Similarly, rate increases can raise less revenue in the long run if they depress economic activity. It is not possible to provide accurate estimates of how large these effects are likely to be. However, there is some evidence that the effects may be substantial.

In 2013, HMRC published a so-called ‘dynamic costing’ of cuts to the main rate and small profits rate announced up until at that point (not including changes to the tax base).[8] This aimed to capture more of the potential behavioural responses, including through changes in investment, and to consider the general equilibrium effects – that is, the effects on the rest of the economy, including through higher employment and consumption (and therefore higher income and indirect taxes) - when the distortions created by corporation tax are reduced. The resulting estimates suggest that within 20 years 45%–60% of lost corporation tax receipts would be recouped through higher receipts resulting from increased economic activity. If correct, then the actual cost of cuts to the corporation tax rate would be substantially below £16.5 billion in the medium to long run.

The HMRC analysis followed techniques developed in the academic literature and attempted to make reasonable assumptions. There is, however, necessarily a high degree of uncertainty around the precise estimates. This is because creating a policy cost that accounts for all effects, on all agents in the economy, is impossible and estimating an approximation to the full effects requires a number of modelling simplifications and assumptions (e.g. how responsive investment is to tax and the extent to which firms substitute between capital and labour). In practice, this is a difficult exercise and the models will be a very long way from being perfect.[9]

In addition, in any estimate of long run effects it will matter how the government makes up for the revenue short fall from rate cuts (or spends the revenue from rate increases). The decisions over whether to increase borrowing, or cut spending (and, if so, which spending to cut), or increase other taxes will also have dynamic effects that affect the size of the economy over the long run. The HMRC estimate makes no allowance for this.

In summary, we would expect that some of the revenue costs of rate cuts will be recaptured through higher investment, but we cannot say whether 45%-60% of receipts will be recouped or even how much confidence we should have around the figures. This could be an overestimate (underestimate) if, for example, investment is less (more) responsive to tax than assumed or if wages rise by less (more) than expected.

UK now has a competitive rate...

The UK now has the lowest headline corporation tax rate in the G7, and the second lowest rate in the EU15. Cuts to the main rate have made the UK corporation tax regime more competitive (Figure 4).

Figure 4: In 2017 the UK has an internationally low corporation tax rate

Figure 4: In 2017 the UK has an internationally low corporation tax rate

Note: Measure refers to the 2017 combined corporation income tax rate, including local taxes where relevant.

Source: OECD Tax Database, http://www.oecd.org/tax/tax-policy/tax-database.htm

... but still has an uncompetitive base

Compared with other countries, the UK has a much less competitive tax base, largely due to a particularly ungenerous set of capital allowances. That is, the UK allows a smaller share of capital expenditure to be deducted from revenues each year. The Annual Investment Allowance (AIA) is an exception to this – it allows 100% of most plant and machinery costs up to £200,000 to be deducted from revenues in year 1. Therefore, the UK base is uncompetitive for investments not covered by the AIA. This can be seen by comparing the Effective Marginal Tax Rate (EMTR) across countries (Figure 5). This measure shows the tax rate for an investment that just breaks even (meaning it just covers its investment costs) and incorporates the effect of capital allowances.  The UK EMTR will fall when the rate is cut to 17% but remain above a number of EU countries.

Figure 5: In 2017 the UK has less competitive EMTR due to a less generous tax base

Figure 5: In 2017 the UK has less competitive EMTR due to a less generous tax base

Note: Measure refers to the 2017 Effective Marginal Tax Rate. A negative EMTR for Italy – which arises from an Allowance for Corporate Equity that gives relief for the opportunity cost of equity finance – implies that marginal investments are subsidised by the Italian tax.

Source: CBT tax database http://www.sbs.ox.ac.uk/faculty-research/tax/publications/data. For discussion of method see http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Reports/cbt-tax-ranking-2012.pdf

Corporation tax is ultimately paid by people

Under current plans, corporation tax receipts are set to form a smaller, and possibly decreasing, proportion of receipts in the future. This is not necessarily a concern. It has long been recognised that corporate income taxes can distort incentives in a number of harmful ways, and they are thought to have a particularly damaging effect on economic growth.[10] Corporate tax is top of an OECD ranking of the most damaging types of tax.[11]

One concern may be over the distributional consequences of lower corporation taxes. Corporation tax can reduce the return to company shareholders (for example through lower dividends). This will affect not only individuals with direct holdings but also those with private pensions since most pension funds will be at least somewhat invested in UK corporate equities (i.e. shares). However, an important feature of corporation tax is that the ultimate burden is not necessarily entirely borne by company shareholders. It can be borne by workers. In short, if firms decide to respond to higher corporation tax rates by doing less investment in the UK, that leaves UK employees with fewer job opportunities and lower average wages. Evidence suggests that, because capital tends to be much more mobile than workers, a significant share of the burden of corporation tax tends to get shifted to labour.[12] Corporation tax can also be borne by consumers if firms respond by increasing the prices they charge. Overall, because of these factors, the distributional impact of a cut to corporation tax is not clear. In addition, what matters for welfare is the distributional consequences of the whole tax and benefit system, not any individual part of it.


Notes

[1] For discussion receipts post recession see H. Miller and T. Pope, "The changing composition of UK tax revenues", IFS Briefing note 182, 2016, www.ifs.org.uk/uploads/publications/bns/BN_182.pdf.

[2] For a discussion of financial sector receipts see H. Miller and T. Pope, ‘The changing composition of UK tax revenues’, IFS Briefing Note BN182, 2016, https://www.ifs.org.uk/uploads/publications/bns/BN_182.pdf.

[3] For a discussion of receipts in recent years see paragraphs 4.34 and 4.57 of Office for Budget Responsibility, Economic and Fiscal Outlook, March 2017 (http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/) and paragraphs 4.56- 4.60 of Office for Budget Responsibility, Economic and Fiscal Outlook, November 2016http://budgetresponsibility.org.uk/efo/economic-and-fiscal-outlook-november-2016/.

[4] See H. Miller and T. Pope, ‘Corporate tax avoidance: tackling Base Erosion and Profit Shifting’ , in C. Emmerson, P. Johnson and R. Joyce (eds), The IFS Green Budget: February 2016, https://www.ifs.org.uk/uploads/gb/gb2016/gb2016ch8.pdf.

[5] See S. Johal and J. Sousa, ‘Anti-avoidance costings: an evaluation’, Office for Budget Responsibility, http://budgetresponsibility.org.uk/docs/dlm_uploads/Working-paper-No8-Anti_avoidance.pdf

[6] See www.gov.uk/government/statistics/direct-effects-of-illustrative-tax-changes.

[7] We assume that: the rate is increased from 17% to 20% for all companies (revenue: 3*£2.348bn= £7.0bn); a small profits rate is reintroduced at 21% (0.3712*£2.348bn*1= £0.95bn); the main rate is increased to 28% (0.6288*£2.348bn *8= £11.8bn). The share of revenue raised from the main rate (63%) vs the small profits rate (37%) is an estimate based on policy costs in the last two years in which both rates were in operation.

[8] HM Revenue & Customs and HM Treasury, ‘Analysis of the dynamic effects of corporation tax reductions’, 2013, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/263560/4069_CT_Dynamic_effects_paper_20130312_IW_v2.pdf. The analysis is based on a computable general equilibrium model that embeds a number of assumptions. The analysis does not represent an official costing.

[9] A full discussion of the issues is provided by S. Adam and A. Bozio, ‘Dynamic scoring’, OECD Journal on Budgeting, 2009/2, http://www.ifs.org.uk/docs/dynamic_scoring.pdf.

[10] For discussions, see Y. Lee and R. H. Gordon, ‘Tax structure and economic growth’, Journal of Public Economics, 2005, 89, 1027–43 and A. Auerbach, M. Devereux and H. Simpson, ‘Taxing corporate income’, in J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles and J. Poterba (eds), Dimensions of Tax Design: The Mirrlees Review, OUP for IFS, Oxford, 2010, http://www.ifs.org.uk/publications/7184.

[11] Å. Johansson, C. Heady, J. Arnold, B. Brys and L. Vartia, Tax and Economic Growth, OECD ECO/WKP(2008) https://www.oecd.org/tax/tax-policy/41000592.pdf.

[12] For a review of work on incidence, A. Auerbach, ‘Who bears the corporate tax? A review of what we know’, in J. Poterba (ed.), Tax Policy and the Economy, Volume 20, National Bureau of Economic Research, Washington DC, 2006. Recent work suggests that capital may also bear a significant share of the burden; see K. Clausing, ‘Who pays the corporate tax in a global economy?’, National Tax Journal, 2013, 66(6), 151–84.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9207 Wed, 10 May 2017 00:00:00 +0000
<![CDATA[The changing landscape of UK aid]]> Key findings

1. In line with the pledge made at the 2005 G8 Summit in Gleneagles, the UK reached the target for official development assistance (ODA) spending of 0.7% of gross national income (GNI) in 2013 and has since maintained it. To achieve this, UK ODA spending has nearly doubled between 2005 and 2016, from £7.4 billion to £13.6 billion (in today’s terms). Given current growth forecasts, continued commitment to the 0.7% target would mean an increase in ODA spending by another £1 billion between 2017 and 2021.

2. UK adherence to the ODA target is all the more notable in the context of cuts to many other budgets. Spending by the Department for International Development (DFID, which does the majority but not all of ODA spending) rose by 24% (£2 billion) between 2010–11 and 2016–17. The average for other government departments, outside of the health, education and defence, was a cut of 28% (£48.8 billion).

3. Globally, the UK was one of just eight countries that met the ODA target in 2016. Of the 15 EU countries that made the pledge in 2005, only the UK and Germany have risen to the challenge since then. In fact, the majority (eight) of these 15 countries have reduced their ODA spending as a proportion of GNI since 2005.

4. Bilateral aid makes up almost two-thirds of UK ODA. In 2015, the top five recipients of UK bilateral ODA were Pakistan, Ethiopia, Afghanistan, Nigeria and Syria. A sixth of all bilateral ODA was spent on humanitarian aid. A significant proportion of this money went on provision of aid to Sierra Leone for dealing with the Ebola crisis, as well as Syria, Yemen and South Sudan.

5. Internationally, the UK is seen as a leader in shaping the global development agenda. DFID scores highly on the international Aid Transparency Index and, within the UK, ODA spending is among the most scrutinised parts of UK government spending.

6. There has been a recent shift in the strategic focus of the UK aid strategy. Growing importance is now attached to promotion of the UK’s national interest. A key mechanism for achieving this, as set out in the 2015 aid strategy, has been to direct the aid budget away from DFID to other government departments and cross-government initiatives. Between 2014 and 2016, there was a 12 percentage point drop in the proportion of the ODA budget received by DFID, so that by 2016 more than a quarter of the aid budget (£3.5 billion) was being spent outside DFID, up from 14% two years earlier.

7. Within the UK and internationally, this direction of travel has raised some concerns: first, that it will reduce focus on global poverty alleviation, identified as a necessary target of UK ODA in UK law; and second, that the current statutory framework is not sufficient to ensure that poverty alleviation remains an objective of all UK ODA spending – not just DFID’s.

UK expenditure on official development assistance has almost doubled over the last decade

Figure 1. Historical and forecast total real UK spend on official development assistance (ODA)

In line with the pledge made at the 2005 G8 Summit in Gleneagles, Scotland, the UK reached the target for official development assistance (ODA) spending of 0.7% of gross national income (GNI) in 2013 and has since maintained it. The target was agreed and set out in a 1970 UN resolution. Specific pledges to meet it, however, were only made by EU15 countries in 2005. Having met the target, the UK put it into law under the coalition government, with cross-party support, in the International Development (Official Development Assistance Target) Act 2015.

Figure 1 shows the evolution of UK ODA since 1960 in terms of total amounts (in 2017–18 prices) and as a percentage of GNI. Real ODA spending remained mostly flat between 1960 and 2000, falling as a proportion of GNI. Since then, there has been a steady steep rise in both. In order to reach the 2005 G8 Summit pledge, UK ODA spending has nearly doubled between 2005 and 2016, from £7.4 billion to £13.6 billion.

Theresa May has recently committed to continue honouring the 0.7% pledge. This would mean an increase of ODA spending by £1 billion between 2017 and 2021 (given current growth forecasts), as shown in Figure 1.

While less than two pence in every pound spent by government goes on ODA, the Department for International Development is among a minority of government departments to see increases in real spending

Figure 2. Planned real change to departmental expenditure limits, by department

a) Per cent increase

b) £ billion increase

UK adherence to the ODA target is all the more notable in the context of cuts to departmental spending that have taken place since 2010–11 and are planned by 2019–20. Figure 2a shows that the Department for International Development (DFID), which receives most of the ODA budget,[1] is among a minority of government departments that have seen a real increase in spending between 2010–11 and 2016–17; the majority have seen substantial cuts. By 2019–20, the DFID budget is planned to be nearly 50% bigger than it was in 2010–11, while departmental spending on average is set to be 9% lower in real terms. Since DFID’s spending makes up less than 2% of total public spending, however, the increases it has seen since 2010–11 make up just over a sixth of those seen by the Department of Health and are just over half the size of increases for the Department for Education (Figure 2b).

The UK is one of only six OECD DAC countries to meet the UN target of 0.7% of GNI to be spent on ODA in 2016

Figure 3. ODA as a percentage of GNI in OECD DAC countries in 2016

The 1970 UN resolution is endorsed by all but two[2] of the 30 countries that are members of the OECD Development Assistance Committee (DAC) – a forum for promotion of policies that contribute to sustainable development. A country-specific commitment to meet the target by 2015 was made by the EU15 countries at the 2005 G8 summit. Yet by 2016 the UK was one of only six DAC countries and five EU15[3] countries that were meeting this aim (in Figure 3, note that the Netherlands had also met this level of spending in every year but two from 1974 to 2015).[4] Furthermore, among the five EU countries meeting the target in 2016, two (Denmark and Sweden) have done so since 1975 and Luxembourg has done so since 2000; the UK was joined by Germany in 2016 as the only countries to rise to the challenge since the 2005 pledge. By 2016, average ODA spending by individual DAC countries reached less than half of the 0.7% target, at 0.32%, though it was above this average for the majority of the EU15 countries.

UK increase in ODA spending over the last decade is highest among DAC countries

Figure 4. Increase in ODA as a percentage of GNI in OECD DAC countries between 2006 and 2016

Furthermore, the majority (eight) of the EU15 countries have, in fact, reduced their ODA spending as a proportion of GNI since 2005. Figure 4 shows that out of the 11 DAC countries that are in this category, EU15 countries (dark green bars) occupy the top seven places in terms of the size of cuts. For example, not only does Portugal spend relatively little but it has also reduced its spending considerably over the last decade. In contrast, at 0.25 percentage points, the UK has increased its ODA spending as a proportion of GNI by more than any other DAC country in the time since 2006.

The UK’s success in honouring its ODA commitments despite difficult economic conditions is widely recognised. The most recent OECD DAC peer review of UK international development policy acknowledges this and identifies the UK as leading in shaping the global development agenda.[5]

Most UK aid continues to be disbursed bilaterally. Over the last decade, the amount going to humanitarian aid has more than doubled

UK ODA is delivered through bilateral and multilateral channels. Bilateral aid goes to specific countries, regions or programmes (sometimes through multilateral agencies). Spending of bilateral aid is controlled entirely by the donor, while multilateral aid is channelled through organisations engaged in development work, with little condition on exactly how the funds are to be spent.

Based on provisional figures for 2016, nearly two-thirds (64%) of UK ODA was delivered as bilateral aid. Just over half of this bilateral aid was region specific, with Africa receiving the largest proportion (57%) among the regions. The top five recipients of UK bilateral ODA were Pakistan, Ethiopia, Afghanistan, Nigeria and Syria.

Figure 5. Sectoral breakdown of UK bilateral ODA spend in 2015

Figure 5 shows a sectoral breakdown of bilateral aid spending for 2015. Humanitarian aid is the single biggest category, accounting for one-sixth (16.5%) of total bilateral aid. A significant proportion of this money was spent on provision of aid to Sierra Leone (for dealing with the Ebola crisis), as well as Syria, Yemen and South Sudan.

Most of UK multilateral aid (57%) went through two partners in 2015 – the World Bank and the European Commission. More than a quarter was disbursed by the International Development Association (IDA), which is part of the World Bank Group; a further third was allocated to the European Commission. In a recent DFID review of its multilateral aid programme, IDA was one of three (out of 38) partners to receive the highest possible score in terms of matching with UK development objectives as well as organisational strength.[6]

DFID spending has been highly scrutinised and highly rated

According to DFID, key principles underlying its aid allocation decisions include: present need (levels of extreme poverty); aid effectiveness (the degree to which aid can translate into poverty reduction in a particular context); future need; and countries’ own ability to finance their poverty needs.

While aid effectiveness is difficult to measure, recent reports from the parliamentary International Development Committee (IDC) point out that foreign aid is the most scrutinised part of UK government spending, monitored by the IDC, the National Audit Office and the Independent Commission for Aid Impact (ICAI). As the department disbursing most of UK ODA, DFID scores highly on the international Aid Transparency Index. The most recent 2014 peer review of UK aid strategy by the OECD was also largely positive about the country’s performance, highlighting the UK’s leadership of the global development agenda, DFID as a forward-looking mission-driven department well positioned to manage efficiently and effectively, and the UK’s strengths in its approach to corruption and its political drive to achieve results.[7]

A number of directions for improvement were also identified, emphasising the need for better systems to ensure coherence in aid spending across the whole of the government, to minimise spending targets and to streamline the management process. A further challenge, flagged in the recent IDC report, is for the nature of the UK’s aid spending to be better communicated to the public.

In line with the 2015 aid strategy, a growing proportion of the aid budget is allocated away from DFID to other departments and cross-government initiatives

Table 1. Changes in the allocation of total UK ODA budget from 2014 to 2016

 

2014

2016

Change

 

£m

Share

£m

Share

% points

DFID, of which:

10,501

86.2%

10,051

74.0%

–12.2%

    EU attribution

389

3.2%

507

3.7%

0.5%

Total non-DFID, of which:

1,683

13.8%

3,536

26.0%

12.2%

    BEIS

281

2.3%

700

5.2%

2.9%

    CSSF

188

1.5%

585

4.3%

2.8%

    Foreign & Commonwealth Office

381

3.1%

521

3.8%

0.7%

    Home Office

142

1.2%

368

2.7%

1.6%

    HM Treasury

0

0.0%

73

0.5%

0.5%

    DEFRA

60

0.5%

68

0.5%

0.0%

    Department of Health

12

0.1%

46

0.3%

0.2%

    Department for Education

0

0.0%

39

0.3%

0.3%

    Prosperity Fund

0

0.0%

38

0.3%

0.3%

    Other

14

0.1%

28

0.2%

0.1%

    Other contributors, of which:

607

5.0%

1,071

7.9%

2.9%

        EU attribution (non-DFID)

436

3.6%

486

3.6%

0.0%

        IMF PRGT

0

0.0%

454

3.3%

3.3%

        Other

171

1.4%

130

1.0%

–0.3%

Total

12,184

100.0%

13,587

100.0%

-

 

In addition to the large increase in UK ODA spending over the last decade, there have been some significant shifts in ODA strategy within the UK. These are set out in a 2015 Treasury policy paper, ‘UK aid: tackling global challenges in the national interest’.[8] As the title makes clear, the new strategy places serving the national interest at the heart of the government’s approach to how the ODA budget is spent.

A key mechanism for achieving this is directing less of the aid budget through DFID and instead spending it through other government department and cross-government initiatives. Since its inception in 1997, DFID has received most of the ODA budget. Over the five years prior to the publication of the new strategy in 2015, the proportion of the ODA budget received by DFID fluctuated from year to year but overall went down by less than 1 percentage point. Between 2014 and 2016, however, there was a 12 percentage point drop, so that by 2016 more than a quarter of the aid budget (£3.5 billion) was being spent outside DFID, up from 14% two years earlier (Table 1).

Table 1 shows that most of this change has been driven by increases in ODA allocations to other government departments and cross-government funds. Among the departments, the Department for Business, Energy & Industrial Strategy (BEIS), the Home Office, the Foreign & Commonwealth Office and the Treasury have seen the largest increases. In addition, significant allocations were made to cross-government funds, including the Prosperity Fund and the Conflict, Security & Stabilisation Fund (CSSF). In 2016, the latter disbursed the second-largest proportion of the non-DFID UK ODA budget (4.3%) after BEIS.

According to the strategy document, broadly these changes aim to ensure that ‘Britain ... not only meets its responsibilities to the world’s poorest, but in doing so best serves and protects its own security and interests’. For example, through goals such as improving the business climate, competitiveness and the operation of markets, reforming the energy and financial sectors, and increasing the ability of governments to tackle corruption, the Prosperity Fund is intended to contribute to poverty reduction while creating international business opportunities, including for UK companies.

Within the UK and internationally, this direction of travel has raised some concerns. According to international criteria, spending counts as ODA if it is ‘administered with the promotion of the economic development and welfare of developing countries as its main objective’.[9] UK law further stipulates that ‘provision of the assistance [should be] likely to contribute to a reduction in poverty’.[10]

A review of the Prosperity Fund by ICAI flagged a number of concerns, emphasising difficulties in developing programmes that are effective at reconciling poverty reduction with the need to strengthen opportunities for UK firms.[11] More generally, the most recent 2014 OECD DAC peer review of UK aid strategy, as well as a 2016 report to the House of Commons by the IDC, flag the risk that it will reduce focus on global poverty alleviation given the likely challenges of aligning this target with national interest.[12] The IDC further highlights a need for a stronger statutory framework within the UK for ensuring that poverty alleviation is the primary objective of all UK ODA spending – not just DFID’s – as well as a concern about transparency and accountability of aid spending outside DFID.

So far, Theresa May has made it clear that if she wins the election, she will uphold the UK’s commitment to spending 0.7% of GNI on ODA. However, across the main parties, there has been little indication of how this money will be spent and what balance they will aim to strike between national interest and global poverty alleviation goals in UK aid spending going forward.

Notes and sources

Figure 1

Note: Figure is in 2017–18 prices. Forecasts are based on the assumption that GNI will grow at the same rate as GDP and that the 0.7% pledge is maintained, and use Office for Budget Responsibility (OBR) forecasts for GDP and deflators. Spike in ODA spending in 2005 and 2006 reflects provision of debt relief to Iraq and Nigeria.

Source: Authors’ calculations based on data from the OECD DAC database (http://stats.oecd.org/qwids/).

Figure 2

Source: Figure 9 in C. Emmerson, ‘Two parliaments of pain: the UK public finances 2010 to 2017’, IFS Briefing Note 199, May 2017, https://www.ifs.org.uk/publications/9180.

Figure 3

Source: Authors’ calculations based on data from the OECD DAC database (http://stats.oecd.org/qwids/).

Figure 4

Note: Figure shows the difference in the three-year average of the ODA/GNI ratio between 2006 and 2016.

Source: Authors’ calculations based on data from the OECD DAC database (http://stats.oecd.org/qwids/).

Figure 5

Source: DFID, ‘Statistics on international development 2016’, https://www.gov.uk/government/statistics/statistics-on-international-development-2016.

Table 1

Note: Table in 2017 prices using OBR GDP deflators. BEIS – Department for Business, Energy & Industrial Strategy; CSSF – Conflict, Security & Stabilisation Fund; DEFRA – Department for Environment, Food & Rural Affairs; PRGT – Poverty Reduction & Growth Trust.

Source: Authors’ calculations using table 3 of DFID, ‘Statistics on international development 2016’, https://www.gov.uk/government/statistics/statistics-on-international-development-2016 and GDP deflators from the Office for Budget Responsibility.

 

[1]    Note that Figures 2a and 2b do not reflect the full scale of changes to ODA spending. The international development category includes the ODA allocation to DFID. As shown in Table 1 later, based on preliminary figures, more than a quarter of ODA was allocated to other government departments and cross-government funds in 2016. Figures 2a and 2b include the non-DFID ODA budget in departmental expenditure limits for the departments that it was allocated to.

[2]    Switzerland and the US are exceptions.

[3]    The EU15 countries are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom. These were the member countries prior to the accession of 10 additional candidate countries in 2004.

[4]    Additionally, two non-DAC countries met this target in 2016 – Turkey and United Arab Emirates.

[5]    OECD, OECD Development Co-operation Peer Reviews: United Kingdom 2014, http://www.oecd.org/dac/oecd-development-co-operation-peer-reviews-united-kingdom-2014-9789264226579-en.htm.

[6]    Department for International Development, Raising the Standard: The Multilateral Development Review 2016, https://www.gov.uk/government/publications/raising-the-standard-the-multilateral-development-review-2016.

[7]    OECD, OECD Development Co-operation Peer Reviews: United Kingdom 2014, http://www.oecd.org/dac/oecd-development-co-operation-peer-reviews-united-kingdom-2014-9789264226579-en.htm.
International Development Committee, UK Aid: Allocation of Resources: Interim Report, Third Report of Session 2015–16, HC 927, https://www.publications.parliament.uk/pa/cm201516/cmselect/cmintdev/927/927.pdf.
International Development Committee, UK Aid: Allocation of Resources, Seventh Report of Session 2016–17, HC 100, https://www.publications.parliament.uk/pa/cm201617/cmselect/cmintdev/100/100.pdf.

[8]    HM Treasury, UK Aid: Tackling Global Challenges in the National Interest, Cm 9163, 2015, https://www.gov.uk/government/publications/uk-aid-tackling-global-challenges-in-the-national-interest.

[9]    http://www.oecd.org/dac/stats/officialdevelopmentassistancedefinitionandcoverage.htm.

[10] International Development Act, 2002.

[11] Independent Commission for Aid Impact, The cross-government Prosperity Fund (February, 2017).

[12] OECD, OECD Development Co-operation Peer Reviews: United Kingdom 2014, http://www.oecd.org/dac/oecd-development-co-operation-peer-reviews-united-kingdom-2014-9789264226579-en.htm.
International Development Committee, UK Aid: Allocation of Resources: Interim Report, Third Report of Session 2015–16, HC 927, https://www.publications.parliament.uk/pa/cm201516/cmselect/cmintdev/927/927.pdf.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9201 Mon, 08 May 2017 00:00:00 +0000
<![CDATA[Incomes and inequality: the last decade and the next parliament]]> IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to www.nuffieldfoundation.org. The Joseph Rowntree Foundation has also supported this research as part of its programme of research and innovative development projects, which it hopes will be of value to policymakers, practitioners and service users. All views are those of the authors.

Key findings

1. Real average (median) income is only around 5% higher now than it was in 2007–08. This is more than 10% lower than might have been expected before the recession, based upon the historical growth rate.

2. This masks substantial differences across age groups: average income among 22 to 30 year-olds is only now recovering its 2007–08 level, having been hit hard by the recession. By contrast, pensioners have seen sustained increases in their incomes, with their average income growing by nearly 15% over the same period.

3. The weakness in income growth has been seen across the income distribution. Growth in incomes has been slightly slower for high-income households (reducing income inequality), though they benefited most from falls in mortgage interest payments. But the slow growth in income among lower-income households has led to overall and child absolute poverty rates (on the official government definition) falling by just 2 and 3 percentage points respectively – in contrast to 13 and 15 percentage point falls over the previous decade.

4. Our projections suggest that, if the Office for Budget Responsibility (OBR) are correct about the outlook for employment, earnings and inflation, there will be no real growth in median income over the next two years, and only modest growth thereafter. This would leave incomes in 2021-22 more than 15% below where we might have expected before the financial crisis hit, based on historical growth rates – equivalent to over £5,000 per household per year on average.

5. We also project increases in inequality: both because forecast growth in average real earnings would benefit higher income households more than lower income ones, and because cuts in the real value of benefits will reduce incomes among poorer working age households. Real incomes are projected to fall among the poorest 20% of households over the next five years, with households with children being particularly affected.

A deep recession and slow recovery means average incomes are currently more than 10% below their long run trend...

Figure 1. Real median income, 2007-08 to 2016-17 [download the data]

Figure 1. Real median income, 2007-08 to 2016-17 

Note: Outturn data are used up to 2015-16, and then growth rates from Hood and Waters (2017a). See Appendix A for further details.

Source: Authors’ calculations using Family Resource Survey and projections from Hood and Waters (2017a).

Figure 1 shows the path of real median equivalised household incomes between 2007–08 and 2015–16 (the latest year for which data are available), together with our projection for 2016–17. It also shows how median income would have evolved had it grown at the average growth rate seen between 1961 and 2007–08.

Average incomes rose slightly in the immediate wake of the recession, but declined sharply between 2009–10 and 2011–12 thanks to a large fall in real earnings. Continued weakness in real earnings led to only slow growth in real incomes in the following two years. Between 2013–14 and 2016–17 employment continued to rise and lower inflation boosted real earnings, leading to real income growing by a total of around 6% – roughly in line with the historical trend rate of growth.

Despite that modest recovery over the last 3 years, average income in 2016–17 is projected to be just 5% above its 2007–08 level. This means it is more than 10% below where we might have reasonably expected back in 2007–08, based on the long run pre-recession trend growth rate.  This slow growth has been seen across the regions and nations of the UK (see Appendix B).

...with the young faring much worse than the old

Figure 2. Changes in real median income by age group before and after housing costs have been deducted (BHC and AHC), 2007-08 to 2016-17 [download the data]

Figure 2. Changes in real median income by age group before and after housing costs have been deducted (BHC and AHC), 2007-08 to 2016-17 

Note and sources: See Figure 1. Pensioners are defined as those aged 65 or above; other working aged are defined as those aged between 31 and 64; and young adults are defined as those aged 22 to 30.

Figure 2 shows how real median incomes have grown for young adults (aged 22-30), other working age adults (aged 31-64), and pensioners (defined here as those aged 65 and over), both before and after deducting housing costs (BHC and AHC).[1] The recession had relatively little impact on median pensioner income, which is projected to have been nearly 15% higher in 2016–17 than in 2007–08. This increase is both the result of some individual pensioners experiencing growth in incomes from one year to the next (for example as a result of the ‘triple lock’ on the state pension) and, importantly, the fact that those newly retiring tend to have larger pension entitlements than previous waves of retirees.

By contrast, young adults were hit hard by the recession, with median income for that group falling by more than 10% between 2007–08 and 2012–13. Their incomes have since bounced back relatively strongly, but their median income is only now recovering the level it was at in 2007–08.

Those aged between 31 and 64 were less affected by the recession than young adults, but slow growth since means their average incomes are only slightly higher than in 2007–08.

High- and low- income households have both shared in this decade of slow income growth

Figure 3. Change in income between 2007–08 and 2016–17 at selected percentiles, before and after housing costs have been deducted [download the data]

Figure 3. Change in income between 2007–08 and 2016–17 at selected percentiles, before and after housing costs have been deducted 

Note and sources: See Figure 1.

The weakness in average income growth has been mirrored across the income distribution. The 10th and 20th percentiles (lower-income households) have seen income growth before housing costs (BHC) of 7-8% since 2007–08 – equivalent to just 0.8% per year. But higher-income households have seen even slower growth (with 0.4% annual growth at the 80th percentile and almost no growth at the 90th), leading to a fall in inequality measured BHC. This pattern is driven by rising benefit income between 2007–08 and 2009–10 (boosting the incomes of low-income households) and falling real earnings between 2009–10 and 2011–12 (hitting high-income households). Since then, weak earnings growth and strong employment growth have combined to stop inequality bouncing back.

If measured on an after-housing-cost (AHC) basis – which there is a strong case for – inequality is little changed, with similar growth across most of the distribution. This is driven by the falls in mortgage interest rates during the recession benefiting higher income households by more than low income ones, which mostly offset the reduction in inequality seen in BHC incomes.[2]

These changes leave inequality around the same level as it was in the early 1990s, following the big increases in the 1980s. Note however that the share of income going to the top 1% of households rose significantly between the early 1990s and the onset of the recession (it has since fallen back slightly).

Little growth in real incomes among poorer households has led to almost no change in absolute poverty 

Figure 4. Absolute poverty rates measured after housing costs have been deducted, overall and children, 1997-98 to 2016-17 [download the data]

Figure 4. Absolute poverty rates measured after housing costs have been deducted, overall and children, 1997-98 to 2016-17 

Note and sources: See Figure 1.

Figure 4 shows the path of overall and child absolute after-housing-cost (AHC) poverty since 1997–98, measured using the government’s official absolute poverty line (fixed at 60% of 2010–11 median income in real terms).

Since the real incomes of poorer households (after you account for housing costs) have grown little since the recession, absolute poverty - which compares incomes to a fixed real-terms poverty line - has not fallen much over the past decade: 2 percentage points across the population as a whole, and 3 percentage points among children. There is little difference in poverty trends among pensioners, working-age parents and working-age adults without children.

This comes in stark contrast to the previous decade: between 1997–98 and 2007–08 , absolute poverty fell by 13 percentage points overall, mainly thanks to sharp falls in absolute pensioner poverty and a 15 percentage point fall in absolute child poverty. Note, though, that the end of the period of steep declines in absolute poverty was a few years before the financial crisis hit, from around 2004-05.

No growth in median income expected for next 2 years, and not much after that either...

Figure 5. Projected annual change in real median income, 2012-13 to 2021-22 [download the data]

Figure 5. Projected annual change in real median income, 2012-13 to 2021-22 

Note and sources: See Figure 1. The vertical black bars indicate projections for incomes if earnings grew one percentage point per year faster or slower than the OBR forecast.

Looking forward, Figure 5 shows historical and projected growth rates for real median income based upon forecasts from the Office for Budget Responsibility (OBR) and the government’s current policy plans.[3] The vertical black bars indicate our projections for income growth if earnings grew one percentage point per year faster or slower than the OBR forecast. The figure shows that – if the OBR’s forecasts turn out to be right and the government follows through on its plans – we would expect no growth in real median income at all over the next two years.

Beyond that, our projections suggest that while income growth will be somewhat stronger, it will be still be well below the long-run trend of 2% a year, leaving median income less than 5% higher in 2021–22 than it was in 2016-17. This weak projected growth is largely explained by the OBR’s expectations that real earnings will grow slowly over the next five years. Indeed, even if earnings grow one percentage point faster than the OBR forecast – which would imply stronger growth than almost all forecasters expect – we still project annual income growth would be below its historical average of 2%.

...leaving real median income in 2021-22 substantially below its long run trend

Figure 6. Real median income, 1961 to 2021–22 [download the data]

Figure 6. Real median income, 1961 to 2021–22 

Note and sources: See Figure 1.

Figure 6 shows real median equivalised household income between 1961 and 2015-16, together with our projection up to 2021-22 and the pre-recession trend. As with the previous figure, we also illustrate ‘high’ and ‘low’ earnings scenarios, under which earnings grow one percentage point per year faster or slower than the OBR expect. The figure shows that five years from now real median income is likely to be more than 15% below where we might have expected before the recession given the long run trend – even if earnings grow one percentage point faster each year than the OBR expect (the ‘high earnings’ scenario). This gap is equivalent to over £5,000 per household. There is no point over the last 60 years at which average income has been so far below the level implied by its historical trend growth rate.

Despite this spectacularly poor period of income growth, it is worth remembering that even in our low earnings scenario the level of real median income in 2021-22 is likely to be around double what it was in the early 1980s.

Inequality is projected to rise over the next five years...

Figure 7. Projected change in income between 2016-17 and 2021-22 at selected percentiles, before and after housing costs have been deducted [download the data]

Figure 7. Projected change in income between 2016-17 and 2021-22 at selected percentiles, before and after housing costs have been deducted

Note and sources: See Figure 1.

While income inequality has fallen slightly since the recession, Figure 7 shows a projected increase in inequality over the next five years. We project real income falls at the 10th and 20th percentile, particularly when measured on an AHC basis, and modest rises in the top half of the income distribution.

The reason for this pattern is twofold. First, the OBR expect real earnings to rise over the period, but employment to be little changed. Since earnings make up a larger share of income for higher income households, rising real earnings tend to benefit higher income household more than lower income ones. Conversely, rising employment tends to benefit lower income households more than earnings growth for those already in work. Hence if OBR forecasts turn out to have been over-optimistic on earnings growth and under-optimistic on employment growth, inequality would likely increase by less than projected (and may not increase at all). In fact this is essentially what has happened over the past five years.

The second reason for the projected rise in inequality is cuts to working-age benefits. Since the vast majority of working-age benefit spending is targeted at lower income households, real cuts in these benefits tend to reduce incomes among those households the most. Of particular importance here is the freeze in working-age benefit rates until March 2020, the limiting of entitlement to two children in tax credits, and the roll-out of universal credit.[4]

... with the incomes of low-income households with children projected to fall in real terms

Figure 8. Absolute poverty rates measured after housing costs have been deducted, overall and children, 1997-98 to 2021-22 [download the data]

Figure 8. Absolute poverty rates measured after housing costs have been deducted, overall and children, 1997-98 to 2021-22

Note and sources: See Figure 1.

Figure 8 shows our projection for overall and child absolute poverty, measured on an AHC basis. We project a rise in absolute child poverty (implying a real fall in the incomes of low-income families with children), taking it back to around the rate it was at in the early 2000s. This increase is explained by planned cuts to working-age benefits, which are a major source of income for these households.

Our projection suggests little change in overall absolute poverty rates in the coming years, extending the pattern seen since 2004-05. This stability might seem somewhat surprising since we project real AHC income falls at the 10th and 20th percentiles of the distribution. The explanation is that our projections suggest falls in income only in the bottom 20% or so of the income distribution. Since the poverty rate is around 20%, incomes are projected to fall primarily for the part of the distribution already below the poverty line.


Notes

[1] Note that these averages do not say anything about the prospects of particular young or old people, as the individuals included in the groups change over time as people age. This is particularly important for those over 65, where part of the reason for strong growth is the higher pension entitlements of the newly retiring.

[2] See Chapter 3 of Belfield et al. (2016).

[3] These projections use the OBR’s November 2016 forecast, rather than the March 2017 forecast. However, for the variables we use (primarily earnings, inflation, and employment) there was little change between the two, and so our projections are little affected. This is discussed in further detail in Appendix A.

[4] See Hood and Waters (2017b).

Please see pdf version of this briefing note for appendices.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9192 Fri, 05 May 2017 00:00:00 +0000
<![CDATA[Public spending on adult social care in England]]> This briefing note describes how local authority spending on adult social care has evolved since 2000-01, what could happen to spending under current plans, and the challenges faced by social care in the long run.

Key findings

  • Local authorities are responsible for co-funding care services for adults who cannot afford to meet their care needs. In 2015–16 they spent £16.8 billion in England on these services.
  • Local authority spending on adult social care in England fell 8% in real-terms between 2009–10 and 2016–17, but was protected relative to spending on other local authority services.
  • The population has been growing, so spending on adult social services per adult fell by 13.5% in England. This doesn’t take into account that the population is ageing, which will have put additional pressure on adult social care services.
  • Cuts have been greatest where spending, and needs, were previously highest because of how the allocation of grants from central to local government has worked in the last few years.
  • — Under current plans, councils are set to receive a growing pot of funding intended for social care, which could be worth £5.4 billion in 2019–20 if councils make maximum use of powers to raise council tax.
  • — These new funds potentially give councils enough money to reverse by 2019–20 all the cuts that have been made to social care since 2009–10: spending in 2019–20 could be 3.2% higher than it was in 2009–10 (but still 4.8% lower per adult). This is conditional on local authorities choosing to raise the funds and using them for social care.
  • The current government has delayed the implementation of reforms to social care funding proposed in 2011 by the Dilnot Commission, and instead provided short-term injections of funding for the current system. The problems identified by the commission remain. Even if an incoming government does not attempt wider reform, planned reforms to local government funding mean that it is crucial to consider whether our expectations of the social care system are consistent with funding these services through local taxation.

Public spending outside the NHS on adults with care needs and disabilities is around £50 billion annually

Figure 1. Public (non-health) spending on individuals with disabilities or care needs in England in 2015–16 (2017–18 prices)

Figure 1. Public (non-health) spending on individuals with disabilities or care needs in England in 2015–16 (2017–18 prices) 

Note: Definitions and data sources for all figures are in Appendix A

In England, it is the responsibility of local authorities to co-fund care services for individuals who have care needs and insufficient financial means to pay for them fully themselves.[1] Minimum eligibility criteria are set nationally, but the amount spent on social care is at local authorities’ discretion. In 2015–16 they spent £16.8 billion (2017–18 prices) on these services.

Local authorities are not the only part of government to contribute to individuals’ care costs. The benefits system provides cash payments to individuals with disabilities to help with their care costs and to compensate them for their inability to work. In addition, though not shown in the figure, if an individual’s care needs are sufficiently severe and strongly related to their healthcare needs, then the entirety of their social care is funded by the NHS under a programme called continuing healthcare.[2]

All three forms of support are important to a full understanding of government assistance for those in need of care, but this note will focus on local authority organised adult social care in England, as this is where the main responsibility for providing access to care lies.

Local authority spending on adult social care in England fell 8% in real-terms between 2009–10 and 2016–17

Figure 2. Spending on local authority-organised adult social care, 2000–01 to 2016–17

Figure 2. Spending on local authority-organised adult social care, 2000–01 to 2016–17 

Local authority spending on adult social care grew by 54% (or 5% per year) between 2000–01 and 2009–10, peaking at £18.0 billion. Outturn data show that since then spending fell to £16.8 billion in 2015–16. The latest budget data indicate that the (broadly) downwards trend has continued, with spending falling to £16.5 billion in 2016–17, almost back to its 2004–05 level and 8% down on its peak in 2009–10.

The fall in spending on adult social care occurred despite increases in transfer payments from the NHS to local authorities contributing to the cost of social care. In 2016–17 the NHS contribution to local authority organised adult social care (through the Better Care Fund) was worth around £1.9 billion, 11% of what local authorities spent.

Also over the period 2009–10 to 2016–17, central government grants for local authorities were cut significantly, and as a result their total spending on services fell by 19%. Local authorities protected the social care budget relative to those of other services so spending on social care increased as a share of their service spending from 34% to 39%.

The population has been growing, so spending per adult fell by 13.5%

This is a fall of £59 per adult, from £439 in 2009–10 to £379 in 2016–17. These figures don’t take account of the fact that the population is ageing, which will have put additional pressure on adult social care services. Between 2009 and 2016, the number of people in England aged 65 and over is estimated to have grown by 18% (or 1.5 million people). Over the same period the number of adults aged 85 and over has increased by 17% (or just under 200,000 people).

Cuts have been greatest where spending, and needs, were previously highest

For the period 2009–10 to 2015–16 we can look at changes in spending at the local level. Cuts averaged 11% in real-terms per adult over this period, but varied from real-terms increases in spending per adult for one-in-seven authorities to cuts of more than a quarter to spending per adult for one-in-ten authorities.

There are clear geographic patterns in the distribution of cuts around the country, as shown in Figure 3. London and the North East made cuts of 18% per adult on average, whilst in the South West cuts averaged just 2%.

Figure 3. Average cut to LA-organised adult social care spending per adult by region, 2009–10 to 2015–16

Figure 3. Average cut to LA-organised adult social care spending per adult by region, 2009–10 to 2015–16 

Source: Table 4.1. of Phillips and Simpson (2017) National Standards, Local Risks: the geography of local authority funded social care, 2009–10 to 2015–16

Cuts have also been larger on average in areas with higher social care spending needs, as a result of changes to local government funding over this period. High needs areas typically got more of their funding from central government grants (as opposed to council tax), so faced larger cuts to their total budget over this period. Because social care spending is such a big part of local authority spending, it could not be fully insulated by local authorities, so cuts to these services have followed the same pattern.

Under current plans, councils will have enough money to reverse all social care cuts by 2019-20 if they choose to do so

For the next 3 years, we forecast that councils’ revenues from council tax, business rates and grants (excluding ring-fenced funding for social care) will continue to fall, down a total of 7.2% between 2016–17 and 2019–20 as illustrated in Figure 4 by the lighter green bars. However, on top of this, local authorities will also receive a growing pot of ring-fenced funding for social care, shown as dark green in the same figure. This funding is a mixture of grants (including the Improved Better Care Fund) and potential increases in council tax revenues (called the social care precept, which councils may levy if they wish). Taking into account ring-fenced grants for adult social care, and if all authorities raise the maximum possible from the council tax precept, their total revenues would decrease by just 0.4%.

Figure 4. Local authority revenues, 2016–17 to 2019–20

Figure 4. Local authority revenues, 2016–17 to 2019–20 

This means that local authorities could have ring-fenced social care funding equal to £5.4 billion in 2019–20. That would be 11% of their overall budget, and 32% of what they spent on adult social care in 2016–17. Figure 5 shows that if local authorities use all of the ring-fenced funding for adult social care services in 2019–20, they would spend a total of £18.6 billion on such services (43% of local authorities’ service spending), 3.2% more than they did in 2009–10.

However, there are two caveats to this statement. First, the funds are not sufficient to keep up with the growing population – social care spending per adult would still be 4.8% lower than in 2009–10. This is shown by the darker green line in Figure 5.

Figure 5. Spending on local authority-organised adult social care, 2009–10 to 2016–17

Figure 5. Spending on local authority-organised adult social care, 2009–10 to 2016–17 

Second, although this funding is ring-fenced for social care, local authorities may have some flexibility to use it for other services. To satisfy the ring-fence they must demonstrate that they are spending more than they otherwise would on adult social care, but it is difficult to prove that they are not. If some of this funding is used for other services then social care spending will not increase by as much as shown in the figure.

Beyond 2020, the future of adult social care spending is uncertain

For the next three years, we know central government plans but not local authority plans. After 2019–20, we know neither. For any government thinking about the long-term future of social care funding, three questions will be particularly important.

How does social care fit into the overall system of local government finance?

Under current plans, from 2020 local government in England will be funded entirely from council tax and business rates. Every few years, a series of tariffs and top-ups will be set that redistribute revenues across the country (from areas with big tax bases to areas with smaller tax bases) on the basis of their relative spending needs. But for a few years at a time, the transfers across the country will be fixed. For areas with growing revenues, this is good, and will strengthen the incentive for councils to try and stimulate local economic growth. But in areas where needs are going up faster than revenues, there is a risk councils won’t be able to meet growing demand for spending.

This means that in the years between ‘resets’, access to social care could become more unequal across the country. Just how unequal depends on the extent of divergence in revenues and needs around the country, the exact parameters that are set for the local government finance system, and whether social care continues to receive special ring-fenced funding outside of the main system of local government finance.

What would it mean to ensure common standards of social care around the country?

Social care spending per adult varies considerably across the country, and only a quarter of the differences can be explained by observed indicators of local need.[3] This has partly been caused by the distribution of cuts to local government funding over the last few years, and planned additional funding (which is to be allocated on the basis of need) would go some way to matching spending with needs.

Nonetheless, a government that wished to guarantee that people with equal need in different parts of the country receive equal care would find it difficult to do so without taking away local authority discretion over spending (and making eligibility assessment more consistent in practice as well as in principle). From the current position, this would entail both a big redistribution of spending around the country, creating both winners and losers, and would mean a huge reduction in the budgets under local authority control and the discretion available to councils in setting local priorities.

What happened to Dilnot?

Under the coalition government, considerable groundwork was laid for radical social care funding reform. The Dilnot Commission, which reported in July 2011, identified that under the current system individuals faced uninsured risk of very large social care expenditures, and that the means test for publicly funded care was a ‘cliff-edge’. The commission’s proposals for a life-time cap on care costs, and higher means test threshold were accepted by the then government, and the Care Act 2014 created the legislative framework for their implementation. However, the outgoing government has delayed the implementation of the bulk of the reforms and instead provided short-term injections of funding for the current system. The problems identified by Dilnot remain, and the next government will have to decide whether it will finally take the step of implementing these reforms.

There has not been a lack of reviews of social care funding in recent years. It is time to see what the political parties actually want to do, and for some real action from whoever forms the next government.


Notes

[1] For an overview of the eligibility criteria for adult social care, see section 2 of Phillips and Simpson (2017) National Standards, Local Risks: The geography of local authority funded social care, 2009-10 to 2015–16.

[2] For a brief overview of the NHS continuing healthcare programme, see Annex B of the report in footnote 1.

[3] D. Phillips and P. Simpson, National Standards, Local Risks: The Geography of Local Authority Funded Social Care, 2009-10 to 2015–16, 2017, https://www.ifs.org.uk/publications/9122

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9185 Wed, 03 May 2017 00:00:00 +0000
<![CDATA[UK health spending]]> Key findings
  • UK public health spending grew in real terms by an average of 1.3% per year between 2009–10 and 2015–16. This is substantially below average growth of 4.1% per year between 1955–56 and 2015–16. Spending growth under the coalition government was the lowest five-year average since records began (though generous compared with the cuts to spending in other government departments over the same period).
  • Total UK health spending, including both public and private expenditure, was in line with the unweighted EU-15 average (9.8% of national income) in 2015. However, it was substantially below the levels of the US (16.9%), Japan (11.2%), Germany (11.1%) and France (11.0%).
  • Department of Health (DH) spending is set to increase by £8.2 billion (7.0%) between 2014–15 and 2020–21. Within the DH budget, spending on NHS England will increase by £11.6 billion (11.3%) over the same period. This includes a £9.0 billion increase between 2015–16 and 2020–21, and is consistent with the 2015 pre-election pledge to increase NHS funding by £8 billion. Other DH spending will fall by £3.4 billion (21.1%). Even so, in 2019–20, DH spending will be slightly below the amount needed just to maintain spending per person at 2009–10 levels once the growth and ageing of the population are taken into account.
  • Public sector pay restraint has helped NHS inflation to stay below economy-wide inflation since 2011–12. However, pay restraint may be hard to continue going forward.
  • Recent projections from the Office for Budget Responsibility (OBR) indicate that health spending is likely to increase considerably over the next 50 years. Regardless of short-term funding decisions, the next government faces a challenge to design and implement a long-run solution to these spending pressures.

UK public spending on health has increased considerably over time

Figure 1 shows how UK public spending on health has increased in real terms (after accounting for economy-wide inflation), and as a share of national income, between 1955–56 and 2015–16. Real spending increased from £12.8 billion in 1955–56 to £143.7 billion in 2015–16 (2017–18 prices). This growth in spending is larger than the increase in national income over this period. As a result, health spending increased from 2.8% of national income in 1955–56 to 7.4% in 2015–16. Health spending also increased at a quicker rate than other government spending. Health spending therefore grew from 7.7% of public spending in 1955–56 (or 11.2% of public service spending) to 18.4% of public spending in 2015–16 (29.9% of public service spending).

Figure 1. Annual UK public spending on health in real terms (2017–18 prices) and as a percentage of national income, 1955–56 to 2015–16

Growth in spending has varied over time, with large increases usually followed by smaller ones.[1] Over the whole period, spending grew by 4.1% per year on average. Spending since 2009–10 has grown at a much slower pace. Between 2009–10 and 2015–16, health spending has grown by 1.3% per year on average, with spending under the coalition government (2009–10 to 2014–15) growing at only 1.1%. This was the smallest five-year growth rate since records began. However, it is worth noting the context in which these more modest increases have taken place, with health one of only three main areas of public service spending (along with overseas aid and schools) that were protected from large cuts.

Real per-capita spending has increased over the long run, despite strong population growth

While health spending has considerably increased over time, so has demand for health services. One major driver of this increase in demand is population growth. Between 1955 and 2015, the UK population grew by 14.2 million people, or by 0.4% per year. This means that while health spending has grown by an average of 4.1% per year over this period, real per-capita spending has increased by 3.7%.

Figure 2 shows real per-capita UK public spending on health between 1955–56 and 2015–16. Per-capita spending experienced particularly rapid growth during the 2000s. Recent years have been characterised by strong population growth and weaker growth in health spending. As a result, real per-capita health spending increased by an average of 0.6% per year between 2009–10 and 2015–16. This compares with average increases of 4.0% between 1955–56 and 2009–10 and of 5.4% between 1996–97 and 2009–10.

Figure 2. Per-capita public spending on health in real terms (2017–18 prices), 1955–56 to 2015–16


 

Total health spending in the UK is in line with the EU-15 average, but is still lower than in many countries, including the US, France and Germany

Figure 3 shows how total health spending in the UK (as a share of national income) compared with that in other countries in the EU-15 and G7 countries in 2015. This measure includes both public and private expenditure on health. UK spending was 9.8% of national income, 79% of which was accounted for by public spending.[2] UK spending was the same as the unweighted EU-15 average, but was substantially below the US (16.9%), Japan (11.2%), Germany (11.1%) and France (11.0%). Public spending accounted for a larger share of health spending in the UK than in most other EU-15 and G7 countries (79.0% compared with an unweighted average across all these countries of 75.0%).

Figure 3. Public and private health spending as a percentage of national income across the EU-15 and G7 countries, 2015

Health spending in England has increased since 2009–10, but at a historically slow rate and with sizeable cuts to non-frontline spending

Health spending in England is mostly the responsibility of the Department of Health (DH).[3] In 2015–16, DH spending was £121.5 billion (2017–18 prices). Real DH spending increased by £9.8 billion between 2009–10 and 2015–16. This is equivalent to an increase of 8.8%, or an average annual increase of 1.4%. This is far below the average increase in UK health spending over the previous 60 years (4.1% per year) but is considerably more generous than the large cuts to other departmental spending during this period.

Figure 4 shows how DH spending is set to change between 2014–15 and 2020–21 (under the 2015 Spending Review plans).[4] The black line shows additional DH spending in each financial year over this period relative to its 2014–15 level. Over the whole period, DH spending is set to increase from £118.3 billion to £126.5 billion, an increase of 7.0% (or an average increase of 1.1% per year).

Figure 4. Cumulative real changes to Department of Health spending set out by the 2015 Spending Review, 2014–15 to 2020–21, £ billion (2017–18 prices)

The majority of DH spending is on frontline health services, as delivered by the NHS. In 2014–15, NHS England accounted for 87.0% of the DH budget. The rest of the DH budget is spent on administration, funding public health initiatives and medical research, and training medical staff. Since 2014–15, funding for NHS England has increased at a quicker rate than overall DH spending. As a result, other DH spending has fallen over this period. Figure 4 also shows these changes. Between 2014–15 and 2020–21, NHS England spending is set to increase by £11.6 billion, or 11.3%. The planned increase of £9.0 billion on NHS funding between 2015–16 and 2020–21 would be sufficient to meet the pledge made before the 2015 election by then Prime Minister David Cameron to increase real funding by £8 billion (the pledge referred specifically to NHS funding rather than wider health spending). Over the same period, non-NHS-England spending will fall by £3.4 billion, or 21.1%. This is likely to have consequences for the non-health-service activities carried out by DH, and may also have spillover effects on the NHS if public health deteriorates (and therefore more NHS services are required) or if hospitals find it harder to recruit staff. 

English DH spending in 2019–20 will be slightly below 2009–10 levels after taking into account the growth and ageing of the population

Demand for care has also increased since 2009–10. Two important factors are the size and age profile of the population. Between 2009–10 and 2015–16, the English population grew by 2.6 million people. This was an average increase of 0.8% per year, and the population is expected to continue growing at this rate until the end of the decade. Spending would therefore be required to increase at this pace between 2009–10 and 2019–20 to keep up with population growth alone.

Older individuals also tend to use more health care than younger individuals. For example, average public health spending was five times greater for an 85-year-old than for a 30-year-old in 2015. Between 2009 and 2019, the number of 85-year-olds in England is expected to increase by 16.1%. Health spending would need to increase by 1.3% per year (13.5% in total) to keep pace with both population growth and the changing age structure of the population between 2009­–10 and 2019–20.

Figure 5 shows how changes to DH spending between 2009–10 and 2019–20 compare with these demographic pressures (solid lines show out-turns, dotted lines show planned spending). It shows that real DH spending is set to increase by 12.0% (1.1% per year) between 2009–10 and 2019–20. This is stronger than population growth over the same period (0.8% per year) and therefore real per-capita spending will increase by 3.5%. However, after accounting for changes to the age structure of the population, real age-adjusted per-capita spending will be slightly below 2009–10 levels in 2019–20 (a fall of 1.3%).

Figure 5. Real-terms Department of Health spending (2009–10 = 100), 2009–10 to 2019–20

The NHS faces a number of other demand and cost pressures, including pay pressure

Estimates from NHS England in 2013 indicate that non-demographic demand pressures – including a rise in the prevalence of chronic conditions and improvements in medical technology – could amount to 1.6% per year between 2013–14 and 2020–21.[5] Combined with the demographic pressures above, this suggests that demand for health care in England is likely to increase by around 3% per year. It should be noted, however, that these estimates are based upon historical trends, and estimating future pressures is a difficult exercise. NHS activity increased by an annual average of 4.9% between 1997 and 2014, with some of this increased activity occurring because of the increases in funding. If large funding increases do not occur in the coming years, then future growth in demand for care may actually be smaller than that estimated here.

Because the cost of employing people makes up a large part of health-care costs, the real cost of providing a given level of care is likely to increase over time. Figure 6 shows how the price of NHS Hospital and Community Health Services changed between 1985–86 and 2010–11, compared with economy-wide inflation (as measured by the GDP deflator). It shows that costs for the NHS increased at a higher rate (4.7% per year) over this period than economy-wide inflation (3.1% per year). However, the cost of non-labour goods and services (as measured by the health service cost index) was below general inflation (2.5% per year). The rapid increase in costs is instead explained by the much sharper rise in staffing costs (pay cost index), with an average increase of 5.7% per year over this period.[6] This represents an average increase in labour costs, relative to economy-wide inflation, of 2.5% per year.

This pattern has reversed in recent years, as shown in Figure 7. Between 2011–12 and 2014–15, the overall health cost index grew by 1.2% per year, below economy-wide inflation of 1.7% per year. Non-labour goods and services have grown at a quicker pace (2.2% per year) while labour has increased at a much slower pace (0.6%). This represents an average annual fall of 1.1%, relative to economy-wide inflation, in NHS labour costs over this three-year period.


Figure 6. NHS Hospital and Community Health Services (HCHS) pay cost index and health service cost index, 1985–86 to 2010–11

Figure 7. NHS Hospital and Community Health Services (HCHS) pay cost index and health service cost index, 2011–12 to 2014–15

 

The reduction in labour costs can in part be explained by pay restraint in the NHS. Public sector pay increases – including for NHS staff – have been capped at 1% since 2013–14 (with two years of nominal freezes before this for most staff) and are planned to continue until 2019. Increasing pay for NHS staff going forward would lead to increased cost pressures on the DH budget. In 2015–16, DH spent £48.7 billion on NHS provider staffing costs. This suggests that an across-the-board 1% increase in staff pay would add approximately £0.5 billion of cost pressures each year. Increasing NHS pay in line with inflation in 2017–18, 2018–19 and 2019–20 (the Consumer Prices Index is forecast to be 2.6%, 2.2% and 2.0% in these years respectively) would cost around £2 billion more in 2019–20 relative to increasing pay by 1% each year in cash terms (in line with the wider public sector pay cap to 2019). This funding would require either additional funding for the NHS or reductions in other (non-staffing) parts of the NHS or DH budget.

Regardless of short-term funding decisions, health spending is likely to increase substantially over the long run

Figure 8 shows the latest projections from the Office for Budget Responsibility (OBR) of spending on health, across the UK, as a proportion of national income between 2016–17 and 2066–67. These projections indicate that current spending plans, if kept to, would mean health spending falling from 7.3% of national income in 2016–17 to 6.9% of national income in 2021–22. The OBR then projects that health spending would rise considerably, reflecting continuing demographic pressures and other cost and demand pressures in health. On the OBR projections, public spending on health reaches 12.6% of national income in 2066–67. This would represent a rise of 5.7% of national income over 45 years – an increase of £115 billion in current terms. Note that while this looks huge, and potentially unrealistic, health spending has risen by more than 4% of national income in the last 50 years, and increases on this scale are consistent with historical and international experience. The OBR also projects that spending on long-term care could also add spending pressures of 2.0% of national income in 2066–67 (up from just 1.0% in 2016–17).

Figure 8. OBR central forecasts of public spending on health, as a percentage of national income, 2016–17 to 2066–67

Demographic pressures add to the cost, with a larger and older population expected in 2066–67. Non-demographic factors, including the failure of productivity in health care to match that in the rest of the economy, and advances in medical technologies increasing costs, are even more important.

Of course, projections of spending over a 50-year period are very sensitive to the assumptions used, and it is therefore difficult to forecast the exact level of spending in future. However, these projections do indicate that future governments will likely be faced with the challenge of funding a huge rise in health care spending. This challenge will exist regardless of decisions about short-term health funding. It will therefore be important for the next government to consider very carefully the size and shape of future health spending, and focus on finding and implementing a long-term solution to funding these plans.

Notes and sources

Figure 1

Source: Nominal health spending data from Office of Health Economics (1955–56 to 1990–91) and HM Treasury, Public Expenditure Statistical Analyses (1991–92 to 2015–16). Real spending refers to 2017–18 prices, using the GDP deflator from the OBR in March 2017.

Figure 2

Source: Nominal health spending data from Office of Health Economics (1955–56 to 1990–91) and HM Treasury, Public Expenditure Statistical Analyses (1991–92 to 2015–16). Real spending refers to 2017–18 prices, using the GDP deflator from the OBR in March 2017. UK population data available on an annual basis (but not financial year) from Office for National Statistics (ONS), ‘UK population estimates 1851 to 2014’ (https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/adhocs/004356ukpopulationestimates1851to2014) and ONS, ‘UK population mid-year estimate’, June 2016 release (https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/timeseries/ukpop/pop).

Figure 3

Source: OECD Health Statistics (database available at http://www.oecd.org/els/health-systems/health-data.htm). Figures for the UK differ from those in Figure 1 as health spending (as reported by the OECD) is measured on an internationally comparable basis.

Figure 4

Source: Spending Review 2015. NHS England figures are not published as part of Public Expenditure Statistical Analyses (PESA) and therefore cannot be updated since the Spending Review (SR). As a result, SR 2015 figures are used to ensure consistency in comparisons between NHS England and DH spending over time. Real-terms changes are calculated using the March 2017 OBR GDP deflator.

Figure 5

Source: Author’s calculations using DH spending from HM Treasury, Public Expenditure Statistical Analyses 2016 (https://www.gov.uk/government/statistics/public-expenditure-statistical-analyses-2016) for all years between 2009–10 and 2019–20, ONS population projections (June 2014), ONS mid-year population estimates (2009 to 2015) and age spending weights from the Office for Budget Responsibility, Fiscal Sustainability Report – January 2017 (http://budgetresponsibility.org.uk/fsr/fiscal-sustainability-report-january-2017/) – see figure 5.8 of the 2017 IFS Green Budget for more details.

Figure 6

Note: The pay cost index is a weighted average of increases in unit staff costs for each of the staff groups within the Hospital and Community Health Services sector. Pay cost inflation tends to be higher than pay settlement inflation because of an element of pay drift within each staff group (i.e. there is a tendency for there to be a gradual shift up the incremental pay scales). The health service cost index measures the price change for 41 sub-indices of goods and services purchased by the NHS Hospital and Community Health Services, weighted according to the proportion of total expenditure that they represent. Pay index figures are not comparable before and after 2011–12 due to a change in methodology in that year.

Source: Department of Health, www.info.doh.gov.uk/doh/finman.../2015.16%20Pay%20&%20Price%20series.xlsx. The GDP deflator is from the OBR in March 2017.

Figure 7

Note and source: See Figure 6. Pay index figures are not comparable before and after 2015–16 due to a change in methodology in that year.

Figure 8

Source: Supplementary table 1.1 of the OBR’s Fiscal Sustainability Report, January 2017.

 

[1]    For more details on this topic, see figure 5.2 and table 5.1 of D. Luchinskaya, P. Simpson and G. Stoye, ‘UK health and social care spending’, in C. Emmerson, P. Johnson and R Joyce (eds), The IFS Green Budget: February 2017, https://www.ifs.org.uk/uploads/publications/budgets/gb2017/gb2017ch5.pdf.

[2]    Internationally comparable data on health spending are available from the OECD. These figures use a different definition of ‘health spending’ from those used in the UK public finances. As a result, the figures for public spending on health differ slightly from those used in Figure 1 (public spending is 7.7% of GDP, compared with 7.4% in Figure 1). This definition was changed in 2013, and so figures after this date are not comparable to those prior to 2013.

[3]    DH accounted for 99% of health spending in England in 2015–16. The Department for Culture, Media & Sport and the Department of Business, Innovation & Skills accounted for the rest.

[4]    Updated DH spending plans are available as part of HM Treasury, Public Expenditure Statistical Analyses 2016. However, there are no updated spending plans for NHS England funding. As a result, we use 2015 Spending Review plans. DH spending was £0.8 billion higher in 2015–16 relative to the 2015 Spending Review plans, and is set to be £0.2 billion higher in 2019–20 than set out at the time of the Spending Review.

[5]    This includes an estimate of demand growth due to the Integration Transformation Fund (which may effectively reallocate some NHS funds to activity not previously funded by the NHS) and an estimate of cost pressure from the revaluation of pensions. Without these, non-demographic demand pressures are estimated at around 1.2%. Source: NHS England, ‘The NHS belongs to the people: a call to action – the technical annex’, 2013.

[6]    The pay cost index is a weighted average of increases in unit staff costs for each of the HCHS staff groups (doctors, nurses etc.).

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9186 Wed, 03 May 2017 00:00:00 +0000
<![CDATA[Two parliaments of pain: the UK public finances 2010 to 2017]]> This briefing note provides background material for the 2017 General Election.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

Key findings

  • The financial crisis led to a sharp reduction in national income. Even more striking is the weakness of the subsequent recovery. Official forecasts suggest that GDP per adult in 2022 will be 18% lower than it would have been had it grown by 2% a year since 2008 – broadly the expected rate of growth at that time. This downgrade in expected income has adversely affected the finances of households and of the government.
  • The deficit has fallen considerably since its peak in 2009–10. It is now back to the level it was at prior to the crisis, although this is still above the UK’s pre-crisis average. Current forecasts imply the deficit falling in line with what was implied by Labour’s 2015 election manifesto. Eliminating the deficit before a May 2022 general election would require a combination of further net tax rises and spending cuts worth £15 billion on top of what is already planned.
  • Both tax revenues and spending are slightly above their pre-crisis shares of national income. Revenues are forecast to continue growing to their highest level since 1986–87. Non-investment spending is forecast to continue being cut as a share of national income, while investment spending – which was cut during the first half of the 2010s – is forecast to increase.
  • The UK’s public finances compare unfavourably with those of other advanced economies, although this is also the case for other very large economies such as France, Japan and the United States. In 2016, the UK had the fifth-largest deficit out of 35 advanced economies and the sixth-largest debt out of 26 advanced economies
  • The increase in revenues as a share of national income since 2009–10 has been driven by tax rises announced since May 2010. Fiscal events in the 2010–15 parliament contained measures that had the net effect of boosting revenues in 2017–18 by an estimated £10 billion. This figure arises from £60 billion of tax rises being offset by £50 billion of tax cuts. The net effect of measures announced since May 2015 has also been to increase tax. They are estimated to raise £15 billion (in today’s terms) in 2021–22. This figure arises from tax-raising measures worth £35 billion being offset by tax cuts worth £20 billion
  • On the spending side, the striking fact is that after seven years of austerity, public spending is only broadly back at pre-crisis levels as a fraction of national income. Cuts to large parts of government spending have only resulted in the size of the state being broadly unchanged for three reasons. First, the financial crisis pushed spending as a share of national income up sharply, and this increase has been undone. Second, continued weak economic growth in recent years has meant that a given real-terms cut to spending has delivered a smaller reduction in spending as a share of national income relative to both history and expectation. Third, some elements of spending have risen as a fraction of national income – most notably, spending on health, pensions and overseas aid – and so cuts have been required elsewhere.

A very weak recovery in GDP per adult, which is forecast to continue

Figure 1. GDP per adult since 2008Q1

The financial crisis led to a sharp reduction in national income. But even more striking is the weakness of the subsequent recovery. National income per adult only returned to its pre-crisis level around the end of 2015, as shown in Figure 1. This is a huge reduction in the size of the economy – and therefore the average living standards of UK households – relative to what we would reasonably have expected prior to the financial crisis. National income per adult is currently around 15% lower than what it would have been had output per adult instead grown by 2% a year.

The latest official forecasts – from the Spring 2017 Budget – are for this period of weak growth to continue. If correct, then by the start of 2022 the gap between actual national income per adult, and where it would have been had it grown by 2% a year throughout the period, will have risen to 18%.

This downgrade in expected income has adversely affected the finances of households and of the government.

Deficit has fallen from its 2009–10 peak; further reductions – on top of those forecast – required if a rarely achieved surplus is to be realised

Figure 2. Deficit as a share of national income since 1948

 

Government borrowing – that is, the difference between what the government spends and what it collects in receipts – is shown for each year since 1948 in Figure 2. The deficit peaked at almost 10% of national income in 2009–10 and fell to 2.6% of national income in 2016–17. This is the same level as it was in the last financial year prior to the crisis (2007–08) but is above the long-run UK average prior to that (1.8% of national income).

Last autumn, in his first fiscal statement, the new Chancellor Phillip Hammond chose to abandon the existing fiscal rules (which had only been put in place a year before) and instead committed the government to eliminating the deficit by the end of the next parliament. The UK has had short periods in which a budget surplus has been delivered, but these have been rare and short-lived, with the last ones occurring during the three financial years from 1998–99 to 2000–01 (inclusive).

The latest forecasts suggest the deficit will fall over the next five years. But even had the next parliament run from May 2020 to May 2025, eliminating the deficit would have been far from straightforward, with the forecasts implying a deficit in 2021–22 of 0.7% of national income, which is equivalent to £15 billion in current terms. Eliminating the deficit before a May 2022 general election would be even harder, requiring a combination of tax rises and spending cuts worth £15 billion on top of current plans.

Latest official forecast for borrowing in line with that implied by Labour’s 2015 general election manifesto

Figure 3. Deficit as a share of national income since 2009–10 peak

At the last general election, IFS researchers assessed the implications for the public finances of the plans set out in the main parties’ general election manifestos. The comparison between what the Conservatives and the Labour Party’s 2015 general election plans implied for government borrowing, alongside the latest official forecasts, is shown in Figure 3. At the time of the last general election, the Conservatives stated that they would eliminate the budget deficit by 2018–19, while our assessment was that under Labour’s plans borrowing would be on course to be 1.4% of national income in that year.

The latest official forecasts suggest that borrowing is on course to be roughly in line with our assessment of what it would have been under Labour’s plans, and significantly above that implied by the commitments made in the Conservative Party manifesto. There are two reasons for this increased level of borrowing relative to that implied by the 2015 Conservative manifesto. First, subsequent spending cuts have been lower than stated in the manifesto. The Conservative manifesto pledged to cut public spending in real terms by 1% a year in both 2016–17 and 2017–18, which would have implied spending being £15 billion lower in 2017–18 than in 2015–16. The latest forecast is for spending to grow by 1.3% a year over these two years, leaving it £21 billion higher in 2017–18 than it was in 2015–16. Second, there has been a significant downgrade in the outlook for the UK economy between the March 2016 Budget and the November 2016 Autumn Statement, in part due to the UK’s June 2016 vote to leave the European Union.

Deficit has been reduced by an increase in tax as a share of national income and, to a greater extent, a cut to public spending

Figure 4. Tax and spend as a share of national income since the turn of the century

The enormous deficit caused by the financial crisis was due to tax receipts falling and – to a much greater extent – spending increasing, as a share of national income. The subsequent reduction in the deficit has come from increases in tax and a more significant reduction in spending. While in 2016–17 the deficit was at a similar level to that recorded prior to the crisis in 2007–08, both spending and receipts are slightly above their levels of a decade ago.

The latest forecasts imply revenues continuing to rise as a share of national income so that they reach their highest level since 1986–87. Current spending – that is, public spending excluding investment spending – is forecast to continue to be reduced as a share of national income. If correct, this implies revenues slightly exceeding current spending in 2018–19 (implying a current budget surplus), which would be the first time this had been achieved since 2001–02.

Investment spending (which represents the difference between total spending and current spending in Figure 4) is forecast to increase as a share of national income over the next five years, having been cut significantly during the first half of the 2010s.

Debt is forecast to remain above twice pre-crisis levels throughout the next parliament

Figure 5. Debt as a share of national income since the turn of the century

The large deficits recorded over the last few financial years have added considerably to the stock of public sector debt. Prior to the crisis, this was running at below 40% of national income. But, as shown in Figure 5, it has since doubled and is forecast to peak in the current financial year at 88.8% of national income before falling back to 79.7% of national income in 2021–22. By recent UK historical standards, this is a high level of debt – the last time it was above 85% of national income was in 1965–66. But going further back, the UK had extended periods with debt at even more elevated levels.

The UK has the fifth-largest budget deficit out of 35 advanced economies

Figure 6. General government borrowing, 2016

The International Monetary Fund (IMF) provides cross-country data on the public finances. Figure 6 presents the data on government borrowing for 35 advanced economies. It should be noted that these data are constructed, as far as possible, on a comparable basis and therefore do not match exactly the measures of borrowing that are typically used in the UK. They suggest that in 2016 the UK had the fifth-largest government borrowing out of these 35 countries. However it should also be noted that it is not uncommon for large economies to run larger deficits – the United States, Japan and France all had deficits larger than the UK. The notable exception from this pattern is Germany, which had a much lower level of borrowing (in fact, a surplus of 0.8% of national income).

The UK’s relatively large deficit in 2016 is despite a relatively large reduction over recent years. At its peak, the UK’s cyclically-adjusted deficit – that is, the deficit that is not thought to be explained by the ups-and-downs of the economic cycle – was larger than all but six other advanced economies. Since then, the UK has delivered the sixth-largest reduction in the cyclically-adjusted deficit (which is one measure of austerity). The IMF forecasts that only three other economies (Australia, Italy and France) will deliver a larger reduction in the cyclically-adjusted deficit over the six years from 2016 to 2022.

The UK has the sixth-largest government debt out of 26 advanced economies

Figure 7. General government net debt, 2016

Compared with the other advanced economies, the UK also has a relatively high level of government debt. Of the 26 economies for which IMF data are available, only five had a higher level of debt in 2016, as shown in Figure 7. Similar to the picture for the deficit, there is a tendency for larger economies to have a weaker fiscal position: Japan, Italy, France and the United States all have a larger debt ratio than the UK. Again the outlier from this pattern is Germany, which has a significantly lower level of debt.

Increase in tax burden since 2009 driven by the net effect of a significant package of discretionary policy measures

Table 1. Change in tax revenues since 2009–10

 

2015–16

2017–18

2021–22

% of GDP

     

Increase in revenues

–0.2

+0.3

+0.8

Of which:

     

   Underlying increase in revenues

–0.5

–0.4

–0.4

   Discretionary measures announced since May 2010

+0.3

+0.7

+1.2

       

£ billion (2017–18 terms)

     

Increase in revenues

–3.8

+6.8

+16.0

Of which:

     

   Underlying increase in revenues

–10.7

–7.7

–7.8

    Discretionary measures announced since May 2010

+7.0

+14.5

+23.8

         Of which:

     

         Tax rises from 2010–15 parliament

+53.8

+60.2

+60.2

         Tax cuts from 2010–15 parliament

–48.3

–50.0

–51.3

         Total net tax rise from 2010–15 parliament

+5.6

+10.3

+8.9

       

         Tax rises from 2015–17 parliament

+1.5

+25.1

+34.7

         Tax cuts from 2015–17 parliament

–0.1

–20.9

–19.9

         Total net tax rise from 2015–17 parliament

+1.4

+4.3

+14.9

 

As shown in Figure 4, tax revenues as a share of national income are increasing. In principle, this can arise because of growth in the economy, and therefore underlying tax bases, pushing up revenues or because of discretionary changes to the tax system that boost revenues. Table 1 decomposes the change in revenues as a share of national income since 2009–10 into that which is estimated to arise from budget announcements made since May 2010 and the remainder.

In the current financial year, revenues are 0.3% of national income higher than they were in 2009–10. This is equivalent to £6.8 billion in today’s terms. Of this, £14.5 billion is the estimated net impact of policy measures announced since the May 2010 general election, implying that absent these changes revenues would have fallen as a share of national income by the equivalent of £7.7 billion in today’s terms.

This net increase in tax from discretionary measures can be further decomposed into those announced in fiscal events in the last parliament under the coalition government and those announced under the Conservative government since May 2015. The estimated impact of measures from the 2010–15 parliament has been to boost revenues in 2017–18 by £10.3 billion. This is the net effect of a very large set of tax cuts (totalling £50.0 billion) and an even larger set of tax rises (totalling £60.2 billion). The largest tax rises announced in that parliament were the increase in the main rate of VAT, the introduction of the bank levy and the abolition of contracting out into defined benefit pension arrangements. The most significant tax cuts were increases in the income tax personal allowance, cuts to the main rate of corporation tax and cuts to the rates of fuel duties.

Measures announced since May 2015 are estimated to have had the net effect of boosting revenues by a further £4.3 billion, with £25.1 billion of tax rises being offset by £20.9 billion of tax cuts. The long-run impact of measures announced in the 2015–17 parliament is estimated to be larger. By 2021–22, these measures are estimated to have the net impact of raising revenues by £14.9 billion (again in today’s terms), with this arising from £19.9 billion of tax cuts being more than offset by tax rises of £34.7 billion. The largest tax-raising measures announced in this parliament are the increase in the rate of tax on dividend income, the new apprenticeship levy and the increases in council tax (intended to boost social care funding). The largest tax cuts announced in this parliament are a further reduction to the rate of corporation tax and increases in the income tax personal allowance and higher-rate threshold.

Overall departmental spending no longer being cut in total, though per-capita spending forecast to continue falling

Figure 8. Departmental expenditure limits since 2007–08

Part of the cut to public spending as a share of national income seen since 2009–10 has been brought by about by real-terms cuts to central government spending on the delivery and administration of public services. Between 2009–10 and 2012–13, this was cut by £41 billion, or 10.1%. Since then, as shown in Figure 8, overall departmental spending has been more stable with a further £4 billion being cut between 2012–13 and 2016–17. The latest forecasts are for overall departmental spending to be broadly flat between 2016–17 and 2019–20, before increasing in 2020–21 and 2021–22.

But since the UK population is forecast to grow, these spending plans still imply departmental spending per person continuing to fall in real terms. In 2009–10, departmental spending was equivalent to £6,460 per person. This had fallen to £5,460 per person in 2016–17 and is forecast to fall to £5,370 per person in 2019–20.

Cuts to departmental budgets since 2010 not shared evenly and some departments face further cuts

Figure 9. Planned real change to departmental expenditure limits, by department

The cuts to departmental spending seen since 2009–10 have been far from equally shared across departments and, for some, further cuts are planned. Figure 9 shows the overall real increase in spending planned for the period from 2010–11 through to 2019–20 for a selection of departments, with the cuts that have already been delivered – and those planned for the next three years – being shown separately.

The Department for International Development, the Department of Health and the Ministry of Defence are all set to see their budgets rise in real terms over the period 2016–17 to 2019–20. In addition, while the Department for Transport is having its day-to-day budget cut, it has been allocated a significant increase in its capital budget, such that its overall budget is forecast to increase significantly over the next three years. In contrast, several other departments have spending allocations that imply deep cuts – for example, the Ministry of Justice and the Department for Environment, Food and Rural Affairs both have further deep cuts planned on top of those that they have already delivered since 2010–11.

Spending on working-age benefits forecast to fall to below pre-crisis levels as a fraction of national income

Figure 10. Outlook for spending on benefits and tax credits

Cuts to working-age benefits have also contributed to the fall in public spending as a share of national income since 2009–10. Figure 10 shows spending on both pensioner benefits and working-age benefits since 2000–01, as a share of national income, with the latest forecasts running through to 2021–22. Spending on pensioner benefits has fallen slightly as a share of national income since 2012–13. While existing pensioners have benefited from the ‘triple lock’ on the state pension and have largely been protected from other benefit cuts, the rise in the female state pension age since April 2010 has helped to reduce spending. Further increases in the state pension age up to age 66 for both men and women by October 2020 will help restrain spending on pensioner benefits for the next three years.

Spending on working-age benefits has fallen more sharply since 2012–13, in part due to falling unemployment, but also due to measures that have made the benefits system less generous than it would have been for many working-age families. The latest forecasts imply that by 2021–22 spending on these benefits will have fallen to its lowest level as a share of national income since 2000–01.

Reduction in spending since 2009–10 is unevenly spread, with increased spending on pensioner benefits, health and overseas aid

Figure 11. Public spending as a share of national income, 2007–08 and 2016–17 compared

One result of choices over spending priorities made over the last decade has been to alter not just the level but also the make-up of public spending. Figure 4 showed that in the financial year before the financial crisis struck, 2007–08, total public spending was equal to 39.0% of national income. In the last financial year, this stood at 39.3% of national income. A decomposition of the change in public spending as a share of national income between these two years is shown in Figure 11. This shows that the overall increase in spending was not split evenly: spending has risen as a share of national income in some areas, such as pensioner benefits, health and overseas aid, and fallen in others, such as schools, defence and public order & safety.

By the last year covered by the current spending period (2019–20), spending is forecast to be 38.2% of national income, which is 0.8% of national income (equivalent to £16 billion in today’s terms) below its level in 2007–08 and 1.1% of national income (equivalent to £23 billion in today’s terms) below its level in 2016–17. The forecast reduction in spending as a share of national income between 2016–17 and 2019–20 is across a range of areas, including both health and pensioner benefits and also other areas where spending has been cut in recent years.

The resulting overall change in spending between 2007–08 and 2019–20 is presented in Figure 12. This shows that spending on health, pensioner benefits and overseas aid will all have increased as a share of national income since 2007–08 (by a total of 1.3% of national income). Despite the large increase in public sector net debt (shown in Figure 5), the fall in government borrowing costs will mean that debt interest payments are forecast to be a smaller share of national income in 2019–20 than in 2007–08. Spending on defence (notwithstanding the protection from cuts in the 2015–17 parliament), schools and (in particular) public order & safety, alongside other elements of government spending that don’t fall within these categories, are also forecast to be lower as a fraction of national income in 2019–20 than they were in 2007–08. The sizeable cut to spending on public order & safety is in large part due to the fact that a large portion of this spending is from the Home Office and the Ministry of Justice (three-quarters of the total in 2015–16, with the remainder coming from DCLG and the devolved administrations) and the budgets of those two departments are planned to be cut by one-third in real terms over the period from 2010–11 to 2019–20 (see Figure 9).

Figure 12. Public spending as a share of national income, 2007–08 and 2019–20 compared

 

Notes and sources

Figure 1

Source: Office for Budget Responsibility, Economic and Fiscal Outlook Supplementary Economy Tables, 8 March 2017 (http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/).

Figure 2

Note: Official forecasts adjusted for the subsequent announcement that the planned increase in Class 4 National Insurance contributions would not go ahead.

Source: Office for Budget Responsibility, ‘Public finances databank’, 31 March 2017 (http://budgetresponsibility.org.uk/data/); Office for Budget Responsibility, ‘Policy measures database’, 8 March 2017 (http://budgetresponsibility.org.uk/data/); author’s calculations.

Figure 3

Note: Official forecasts adjusted for the subsequent announcement that the planned increase in Class 4 National Insurance contributions would not go ahead.

Source: Office for Budget Responsibility, ‘Public finances databank’, 31 March 2017 (http://budgetresponsibility.org.uk/data/); Office for Budget Responsibility, ‘Policy measures database’, 8 March 2017 (http://budgetresponsibility.org.uk/data/); R. Crawford, C. Emmerson, S. Keynes and G. Tetlow, ‘Post-election austerity: parties’ plans compared’, IFS Election Briefing Note 11, 23 April 2015 (http://election2015.ifs.org.uk/article/post-election-austerity-parties-plans-compared); author’s calculations.

Figure 4

Note: Official forecasts adjusted for the subsequent announcement that the planned increase in Class 4 National Insurance contributions would not go ahead.

Source: Office for Budget Responsibility, ‘Public finances databank’, 31 March 2017 (http://budgetresponsibility.org.uk/data/); Office for Budget Responsibility, ‘Policy measures database’, 8 March 2017 (http://budgetresponsibility.org.uk/data/); author’s calculations.

Figure 5

Note: Official forecasts adjusted for the subsequent announcement that the planned increase in Class 4 National Insurance contributions would not go ahead.

Source: Office for Budget Responsibility, ‘Public finances databank’, 31 March 2017 (http://budgetresponsibility.org.uk/data/); Office for Budget Responsibility, ‘Policy measures database’, 8 March 2017 (http://budgetresponsibility.org.uk/data/); author’s calculations.

Figure 6

Note: For Hong Kong and Iceland, 2015 figures are reported as the 2016 values are atypical and seem very likely to be the impact of one-off factors.

Source: Statistical annex table A1 of International Monetary Fund, IMF Fiscal Monitor: Achieving More with Less, April 2017 (https://www.imf.org/en/Publications/FM/Issues/2017/04/06/fiscal-monitor-april-2017).

Figure 7

Source: Statistical annex table A8 of International Monetary Fund, IMF Fiscal Monitor: Achieving More with Less, April 2017 (https://www.imf.org/en/Publications/FM/Issues/2017/04/06/fiscal-monitor-april-2017).

Table 1

Note: Official forecasts adjusted for the subsequent announcement that the planned increase in Class 4 National Insurance contributions would not go ahead.

Source: Office for Budget Responsibility, ‘Public finances databank’, 31 March 2017 (http://budgetresponsibility.org.uk/data/); Office for Budget Responsibility, ‘Policy measures database’, 8 March 2017 (http://budgetresponsibility.org.uk/data/); author’s calculations.

Figure 8

Source: Author’s calculations using data from table 2.17 of Office for Budget Responsibility, Economic and Fiscal Outlook Supplementary Fiscal Tables: Expenditure, 8 March 2017 (http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/).

Figure 9

Source: Author’s calculations using table 1.10 of HM Treasury, Public Expenditure Statistical Analyses, 2015 and 2016 editions (https://www.gov.uk/government/collections/public-expenditure-statistical-analyses-pesa), tables 1.6 and 1.7 of HM Treasury, Spring Budget 2017 (https://www.gov.uk/government/topical-events/spring-budget-2017) and GDP deflators from Office for Budget Responsibility, ‘Policy measures database’, 8 March 2017 (http://budgetresponsibility.org.uk/data/).

Figure 10

Note: Great Britain only.

Source: Table ‘GB welfare’ of Department for Work and Pensions, ‘Benefit expenditure and caseload tables 2017’, 27 March 2017 (https://www.gov.uk/government/publications/benefit-expenditure-and-caseload-tables-2017).

Figures 11 and 12

Note: Figures decompose the change in total managed expenditure. Working-age and pensioner benefits refer to Great Britain spending only. Overseas aid spending figure for 2007–08 actually refers to 2007, and the figures for 2016–17 and 2019–20 are estimated assuming the UK spends 0.7% of GDP. Figures for defence, schools and public order & safety all refer to spending by function. Estimates for 2016–17 and 2019–20 obtained by assuming: defence – growth in line with the Ministry of Defence budget; schools – real freeze to total spending; public order & safety – growth in line with the aggregate budget of the Home Office and the Ministry of Justice.

Source: Author’s calculations using data from the Office for Budget Responsibility, ‘Public finances databank’, 31 March 2017 (http://budgetresponsibility.org.uk/data/), Department for Work and Pensions, ‘Benefit expenditure and caseload tables 2017’, 27 March 2017 (https://www.gov.uk/government/publications/benefit-expenditure-and-caseload-tables-2017), Department for International Development, ‘Statistics on international development 2016’ (https://www.gov.uk/government/statistics/statistics-on-international-development-2016) and HM Treasury, Public Expenditure Statistical Analyses, various years (https://www.gov.uk/government/collections/public-expenditure-statistical-analyses-pesa).

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

 

]]>
https://www.ifs.org.uk/publications/9180 Tue, 02 May 2017 00:00:00 +0000
<![CDATA[Tax revenues: where does the money come from and what are the next government’s challenges?]]> This briefing note provides background material for the 2017 general election.

Under current plans, the share of national income raised in taxes is set to reach its highest level since the early 1980s by 2019–20. Almost two-thirds of revenues come from the three workhorse taxes: income tax, National Insurance contributions (NICs) and VAT. This was true in 2010 and is forecast to be true in five years’ time. But this relative stability masks important changes in the composition of revenues. For example, income tax is due to raise a lower share of total taxes and come more from the top 1% of income tax payers. The taxman is set to raise less from fuel duties. Revenues are now more reliant on smaller taxes. This, in part, results from the Conservatives’ 2015 manifesto pledge to introduce a ‘tax lock’ prohibiting any increase in the rates of income tax or NICs or the rates or scope of VAT. Regardless of whether one wants taxes overall to be cut, this is a bad policy and should not be repeated in any of the upcoming manifestos.

1. Tax revenues: where does the money come from?

Tax receipts to reach highest share of national income since 1980s

Total tax receipts in 2017–18 are forecast to be £690 billion. Receipts have recovered their pre-recession share of national income and, on current policy, are set to rise slightly as a share of national income between now and 2019–20 and then remain relatively flat until the end of the forecast horizon (Figure 1). By 2019–20, tax receipts are forecast to be at their highest share of national income (34.4%) since 1981–82. Total government receipts, which include interest, dividends and gross operating surplus, are forecast in 2019–20 to be at their highest level (37.2%) since 1986–87.

Figure 1: Tax receipts set to rise under current plans [download data]

Note: Dashed lines indicate forecasts.

Source: Authors’ calculations using Office for Budget Responsibility, ‘Public finances databank’, March 2017, http://budgetresponsibility.org.uk/data/. Series adjusted to remove revenues forecast to be raised from the proposed, but now scrapped, increase in Class 4 NICs.

The next government, whatever its colour, will face pressure to maintain this increase in tax revenues, and possibly to raise further revenues. Previous IFS research shows that it is also common practice to raise taxes after an election. In the 12 months following the five general elections of 1992, 1997, 2001, 2005 and 2010, significant tax-raising measures were announced (despite these measures typically not featuring in the winning party’s general election manifesto). Across these elections, the average net tax rise in the 12 months following the election was £7.5 billion.[1] The 2015 general election followed this trend: the net impact of announcements made in the 12 months following the election boosted revenues by an estimated £3.5 billion. This is true despite a £5 billion giveaway from increasing the personal allowance and the higher-rate threshold. The main offsetting takeaways came from increases in dividend taxes (£1.8 billion), reductions in pension tax relief for those with incomes above £150,000 (£1.3 billion) and increases to insurance premium tax (£1.6 billion).

Income tax, NICs and VAT raise almost two thirds of revenues

Income tax, National Insurance contributions (NICs) and VAT are the three largest sources of revenues. They are forecast to contribute almost two-thirds (62%) of tax receipts in 2017–18 (Figure 2).

Figure 2: Composition of tax receipts, 2017–18 [download data]

Note: ‘Other indirect taxes’ includes alcohol duties, tobacco duties, betting and gaming duties, air passenger duty, insurance premium tax, landfill tax, climate change levy, vehicle excise duties and soft drinks industry levy. ‘Corporation taxes’ includes corporation tax, petroleum revenue tax, oil royalties, bank surcharge, bank levy and diverted profits tax. ‘Property taxes’ includes council tax and business rates. ‘Capital taxes’ includes stamp duties, capital gains tax and inheritance tax. ‘Other taxes’ is a residual measure, including devolved taxes and environmental levies, which are generally part of government schemes that translate higher revenues directly into higher spending.

Source: Authors’ calculations using Office for Budget Responsibility, Economic and Fiscal Outlook, March 2017, http://budgetresponsibility.org.uk/efo/economic-fiscal-outlook-march-2017/.

Income tax payments are highly concentrated

In 2016–17 (the most recent year for which data are available), the top 1% of income tax payers (those with gross incomes over about £164,000) earned 12% of the pre-tax income of income tax payers and contributed 27% of income tax receipts (Figure 3). The top 10% of income tax payers (those with incomes over about £54,000) paid 59% of income tax, while the bottom half of income tax payers accounted for less than 10% of income tax receipts.

Figure 3: Income tax very top heavy: top 1% pay 27%, top 50% pay 90%, 2016–17 [download data]

Note: Both bars show shares for the population of income tax payers.

Source: HMRC table 2.4, https://www.gov.uk/government/statistics/shares-of-total-income-before-and-after-tax-and-income-tax-for-percentile-groups.

This extreme concentration of income tax payments among a small number of people is partly a reflection of the progressivity[2] of the income tax system and partly a reflection of the fact that private income is very unequally distributed.

Share of income tax paid by the top 1% has been growing

The share of income tax paid by the top 1% has increased from 25% in 2010–11. The change since the early 1990s (Figure 4) is a continuation of a much longer-term trend; in 1978–79, only 11% of income tax receipts were paid by the top 1% of taxpayers. There are two important sources of this change: growing income inequality and policy change.

The trend pre-2007 was overwhelmingly driven by the distribution of pre-tax income: that is, the growing burden on richer taxpayers mostly reflected their higher share of total income.[3] Post-2007, the trend has resulted from policy choices. The share of tax coming from those on higher incomes has been increased by: a cut to the higher-rate threshold (in 2011); withdrawal of the personal allowance for those with taxable incomes over £100,000 (in 2010); and cuts in income tax relief on pension contributions and the increase in the tax rate for those with an income of over £150,000 (in April 2010). Increases in the personal allowance have taken many of those on relatively low incomes out of income tax altogether. Between 2010–11 and 2015–16, the share of the adult population who pay income tax fell from 61% to 57%. This means that the top 1% of income tax payers represent a falling share of the total adult population.

Figure 4: Fewer adults paying any income tax and top 1% paying growing share [download data]

 

Note: Data not available for 2008–09; linear extrapolation used (dashed line).

Source: Authors’ calculations using ONS population estimates and HMRC tables 2.4 (see source to Figure 3) and 2.1 (https://www.gov.uk/government/statistics/number-of-individual-income-taxpayers-by-marginal-rate-gender-and-age).

Official statistics reveal less about who pays other taxes

Income tax is the government’s single biggest revenue-raiser, but focusing on this alone can give a misleading picture of the whole tax system because income tax is a particularly progressive tax and is certainly more progressive than the other two big taxes – NICs and VAT. Official statistics do not provide as much information for other taxes as for income tax (e.g. there is not a breakdown of how much of NICs is paid by the top 1%). It is also difficult to compare across taxes because an individual with a high income is not necessarily the same person who has high capital gains, or property values or fuel use etc. We do know that some sources of tax revenues are, like income tax, highly concentrated. For example, only 4% of individuals leave an inheritance tax liability when they die and, based on the most recent data (2013–14), over 70% of tax is paid by estates worth over £1 million.[4] Other taxes, such as VAT, are less concentrated.[5]

Overall, tax payments are highly concentrated, but to a lesser extent than income tax

We can use survey data, combined with the IFS model of the tax system, to consider how a broader set of tax payments are distributed across households, rather than individuals. This is shown in Figure 5 by plotting the cumulative shares of income tax, NICs, VAT and ‘total taxes’ paid by households ranked from richest to poorest in terms of income adjusted for household size.

Figure 5: Top half of households based on income contribute 78% of receipts [download data]

Note: Figure shows cumulative shares of tax liability. Blue line includes income tax, employer and employee NICs, VAT, excise duties and council tax; corporation tax, business rates, capital gains tax, inheritance tax and stamp duties are excluded.

Source: Authors’ calculations using the IFS tax and benefit microsimulation model, TAXBEN, applying 2017–18 tax system to uprated data from the 2013 Living Costs and Food Survey.

The figure shows that, like income tax, NICs are concentrated among better-off households, although to a lesser extent because of the structure of NICs. VAT payments, by contrast, are more broadly distributed across households. The blue line shows an estimate of the concentration of payments for a set of taxes that, together, account for over three-quarters of total tax revenue (including income tax, NICs, VAT, excise duties and council tax). It shows that the top half of households contribute around 78% of these taxes, suggesting that, overall, these tax payments are concentrated but less so than income tax payments.

Because household surveys under-report the income of the highest earners, this analysis will in fact understate their tax contributions. This can be seen from our estimate of the proportion of income tax receipts paid by the top 10% of households: 47%, likely a significant underestimate as we know from the official data above (based on tax returns) that the top 10% of individual income tax payers (who represent 6% of the adult population) contribute 59% of these receipts. In addition, this analysis does not include all taxes. Some of the smaller taxes omitted, including inheritance tax and capital gains tax, are also highly concentrated on the better off. There is a set of larger taxes for which the burden cannot be easily assigned to individual households. Most notably these include corporation tax, business rates and stamp duty on shares. One difficulty is that there is no good data on which UK households hold shares in companies subject to UK corporation tax (many shares are held indirectly through private pension funds).[6]

An assessment of the distributional impact of government policy as a whole would also include the effect of benefits and of spending on public services (both of which do a very large amount of redistribution).

2. Change in composition of tax revenues

Since 2010, smaller taxes have become more important

Figure 6 shows the changing composition of tax revenues between 2010–11 and the end of the forecast horizon. Receipts are forecast to be 0.5% of national income higher in 2021–22 than in 2010–11 (34.2% versus 33.7%). The taxman looks set to raise similar shares of national income from personal income taxes and indirect taxes but this relative stability masks important changes in the composition of revenues. Most notably, we will be raising more from VAT but less from fuel duties, and more from NICs but less from income tax. About the same will be raised from onshore corporation taxes, with overall corporation tax reduced by North Sea revenues. Capital taxes and a handful of other small and new taxes are set to become more important revenue sources.[7] An appendix lists the main recent policy changes.

Figure 6: Changing composition of tax receipts since 2010 [download data]

Note: Dashed lines indicate forecasts. ‘Personal income taxes’ includes income tax, NICs (employer and employee), payroll tax on bankers’ bonuses and the apprenticeship levy. This series is adjusted to remove revenues forecast to be raised from the proposed, but now scrapped, increase in Class 4 NICs. ‘Indirect taxes’ includes VAT, fuel duties, and other indirect taxes as defined in Figure 2. Other categories as defined in Figure 2.

Source: Authors’ calculations using IFS revenue composition spreadsheet, accruals measures: https://https://www.ifs.org.uk/uploads/publications/ff/revenue_composition.xlsx.

Personal income taxes were 0.8% of national income lower in 2014–15 than in 2010–11 but are forecast to increase to close to their 2010–11 level by 2021–22. At that point, the share of revenues coming from income tax would be 0.6% of national income lower and the share coming from NICs 0.4% of national income higher than in 2010–11. Policy decisions since 2010 have acted to increase revenues but with large giveaways (most notably through increases to the personal allowance and the higher-rate threshold) and takeaways (including through reduced relief on pension contributions, increases in tax on dividends and a new apprenticeship levy). NICs receipts got a boost in 2016 when the move to the single-tier pension led to the end of contracting out for those in defined benefit pensions (with much of this revenue coming from public sector workers and their employers). NICs and income tax receipts are due to increase slightly as a share of national income in the next few years due to ‘fiscal drag’ bringing more people into higher tax brackets and due to the new apprenticeship levy. Overall, personal income tax receipts are due to be lower than they would otherwise have been as a result of weak earnings growth and growth in self-employment and company owner-management (see Section 3).

Indirect tax receipts increased when the main rate of VAT was increased from 17.5% to 20% (in January 2011) but have been falling since, largely as a result of ongoing freezes to fuel duties. These falls have been partly offset by policy choices to increase smaller taxes, including insurance premium tax and the climate change levy.

Corporation taxes revenues are forecast to be 0.4% of national income lower by the end of the forecast horizon than in 2010–11. This is the result of a sharp fall in North Sea revenues. Onshore revenues will return to roughly their 2010–11 level. This is despite the corporation tax rate having been cut from 28% in 2010–11 to 19% in 2017–18 and forecast to be cut to 17% in 2020–21. Overall, onshore receipts have been buoyed by policy measures that raise revenues (including new taxes on banks and anti-avoidance measures) and bring revenues forward (including by restricting loss offsets).[8] Underlying growth in profits, including those from the financial sector, has increased receipts. Revenues are forecast to fall in cash terms in 2020–21 and 2021–22, in part as a result of the additional cut in the rate currently planned for 2020–21.

Property taxes will be contributing a similar share of revenue by the end of the forecast period. Rates of council tax in England were largely frozen between 2010 and 2015. They are expected to rise going forward as English councils use higher revenues to fund social care. Business rates receipts have been reduced by policy decisions that reduce the tax base, including the extension of relief for small businesses, and by the switch to uprating business rates in line with the Consumer Prices Index (CPI) rather than the discredited Retail Prices Index (RPI; historically, the former has increased less quickly).

Capital taxes are set to become more important; by 2021–22, the share of revenue they account for will have almost doubled relative to 2010. The increase since 2012–13 largely reflects increases in the underlying value of assets (including residential property). It also reflects an increase in stamp duty land tax as a result of a 3% surcharge on buy-to-let investments and second homes introduced in April 2016.

Changes to small taxes tended to be made in an ad hoc fashion

The Conservative government (and the coalition government that preceded it) have relied on a host of smaller and new taxes to offset revenue falls elsewhere. Examples of this include stamp duty land tax, insurance premium tax, diverted profits tax, bank surcharge, bank levy, apprenticeship levy and soft drinks levy (the last three are new taxes). These policy changes have tended to be made in an ad hoc fashion. This approach gives insufficient attention to tax design and can lead to poor policy choices. For example: insurance premium tax was increased with no discernible attempt to calculate what the appropriate level is; the apprenticeship levy is poorly designed;[9] and taxes on banks have not been underpinned by a clear strategy.

Even if one finds sensible policy reforms to small taxes, they will not provide substantial revenue increases. If the next government needs to deal with structural falls in revenues (e.g. from the move towards more efficient vehicles and self-employment) or wants to find revenues to fund giveaways, maintain the quality of public services as the population ages or cut the deficit, then there is a limit to how much it will be able to rely on small taxes.

The tax lock is bad policy and should not be in the party manifestos

Arguably, one reason why there has been a move towards smaller taxes is the 2015 Conservative party manifesto pledge not to increase the rates of income tax or NICs or the rates or scope of VAT during the current parliament. This so-called ‘tax lock’ is a serious constraint because these three taxes contribute almost two-thirds of tax revenues.

A government that wanted, or thought it might be necessary, to raise additional revenues in future would be foolish to tie its hands by ruling out increases in these workhorse taxes. Such a constraint would also prevent desirable tax reforms (as we have seen recently in relation to the taxation of the self-employed – see below), restrict the policy levers available to deal with any unexpected change in the economy and possibly lead to poor policy choices if a government is forced to rely heavily on smaller taxes (as it has done recently).

The recent NICs U-turn highlights the problems with the tax lock. In the March 2017 Budget, the Chancellor, Phillip Hammond, tried to increase the rate of self-employed (Class 4) NICs in response to new evidence that growth in the number of individuals working for their own businesses was creating a growing problem for the public finances (more on this in Section 3). Mr Hammond U-turned on the NICs increase, because it was widely – and rightly – deemed to breach the tax lock proposed in the 2015 manifesto, while clearly stating that he ‘continues to believe that’ reducing the tax difference between employees and the self-employed ‘is the right approach’.[10] The tax lock constrained the Chancellor’s ability to deal with an unexpected problem and, if the tax lock were to be renewed, the next government would be unable to meet the challenge associated with growing self-employment.

3. Challenges for tax receipts and tax policy

There is always some degree of uncertainty around tax receipts. This is driven by the fact that the economy will develop in unforeseen ways, the difficulty with forecasting the effect of some policy measures, and the fact that future Budgets will announce new policy measures that affect receipts. Recent IFS research has discussed the key risks to tax receipts, including the uncertainty that is associated with anti-avoidance measures.[11] Below are three challenges that the next government will have to meet.

Ongoing fuel duty freezes create uncertainty and a revenue shortfall

Fuel duties currently raise around £28 billion, 4.0% of tax revenues. Government policy is that rates of fuel duties should increase each April in line with inflation (measured using the RPI). As a result, this is factored into all Office for Budget Responsibility (OBR) forecasts. Yet, the uprating of rates of fuel duties has been scrapped every year since 2011 such that they remain frozen in cash terms at 2011 levels (Figure 7). The policy decisions to freeze rates of fuel duties in cash terms in successive Budgets and Autumn Statements cost around £5.4 billion a year in 2017–18 terms (relative to uprating in line with the RPI).

Figure 7: Constantly freezing fuel duties now costs £5.4bn a year [download data]

 

Source: Authors’ calculations using various policy costing documents.

Given the recent unwillingness to increase rates of fuel duties even in line with inflation – and even in April 2016 when the oil price had been falling and the new parliament was less than a year old – there is a high degree of uncertainty around this revenue stream. If the next government continues to freeze fuel duties, it will need to deal with this revenue loss (by raising other taxes, increasing borrowing or cutting spending). Freezing duties each year until 2021–22 would cost £2.9 billion (in 2017–18 terms). If a government plans to continue to freeze fuel duties, then it would be preferable to make that clear in advance. This would remove the ridiculous situation we currently have in which revenue forecasts are flattered by a planned tax change that presumably few believe will happen and governments have to plug the shortfall with ad hoc tax increases at each fiscal event.

Whether or not rates of fuel duties are in fact increased in line with inflation, there is also a structural decline in receipts of these duties under way as a result of the move towards more fuel-efficient vehicles. The OBR forecasts that this structural change will itself lead to a fall in fuel duties revenues of a third by 2033–34, as demand for petrol and diesel continues to fall. So even if we manage to raise fuel duties in line with inflation, revenues are still likely to fall by 0.5% of GDP within less than 20 years.[12]

A new government could usefully review fuel duties. Such a review should consider moving to automatically uprating fuel duties each month by the CPI, in order to remove discredited RPI indexation and prevent campaigning for freezes in the run-up to fiscal events. It should also review new evidence on the emissions from diesel vehicles, which suggests that diesel is undertaxed relative to petrol.

Increased working for own business reduces revenues by £4.5 billion

Two-fifths of workforce growth since 2008 has come from individuals working for their own businesses through self-employment or company owner-management. These groups are taxed substantially less heavily than employees. The self-employed are subject to a lower rate of employee NICs and attract no equivalent of employer NICs. The 2 percentage point increase in self-employed (Class 4) NICs that the Chancellor announced in Budget 2017 (and U-turned on shortly after) would have only narrowed the NICs gap slightly (Figure 8).

Figure 8: Employees face higher NICs and increase in Class 4 NICs would have done little to change that [download data]

Note: Dashed line includes Class 4 NICs at 11% and abolition of Class 2 NICs. For illustration, both are shown as if introduced in the 2017–18 system. Employee schedule includes employer NICs.

Source: Authors’ calculations.

Company owner-managers can access lower tax rates than employees or the self-employed by, among other things, taking income out of their companies in the form of (more lightly taxed) dividends rather than salary. A change in the labour market away from employment towards self-employment therefore has a substantial effect on the public finances. The OBR forecasts that revenues will be £3.5 billion lower in 2021–22 as a result of growth in incorporations outstripping employment growth, and an additional £1 billion lower as a result of further growth in self-employment.

These figures are in addition to the already substantial revenue forgone through giving lower taxes to these groups. HMRC estimates that lower NICs rates for the self-employed relative to employees cost £5.1 billion each year and lower taxes for company owner managers cost £6.0 billion each year. These figures equate to £1,240 per self-employed person and £9,040 per company owner-manager on average, where the averages mask the fact that most tax savings are going to high-income individuals.

The differential tax treatment of employees, the self-employed and company owner-managers creates a tax system that is complex, unfair and inefficient. Ideally, a new government would set out a long-term vision for how to tax different ways of working. Even if the next government does not wish to take action to improve the tax system, it will have to face the public finance consequences of growing numbers of individuals choosing to work in more lightly taxed forms.[13]

Income tax receipts getting riskier as higher share comes from dividends and high earners

The increase in the number of individuals working for their own companies and taking income through dividends rather than salary makes income tax receipts more unpredictable and riskier (from the government’s point of view). This is because this group has greater opportunities to avoid tax, including by altering the timing of tax payments. We recently saw a clear example of this. In July 2015, the government announced that the tax rate on dividends would increase in April 2016. In response, individuals brought forward dividends payouts to avoid paying the higher rate later. Dividend forestalling was sufficiently large that the estimated tax saving for individuals (and therefore the loss to government revenues) was £800 million.

Income tax receipts are also riskier because they now rely more heavily on a small group of high-earning taxpayers. This makes tax revenues more sensitive to the composition of income growth and thereby more uncertain. This includes both upside and downside risk. If the earnings of the top 1% or 10% grow more/less quickly than the rest of the distribution, tax revenues may increase more/less quickly than total earnings. These taxpayers also pay a large share of other taxes (such as capital gains tax, stamp duty land tax and inheritance tax), meaning that changes in their fortunes can have a large impact on tax receipts. The OBR forecasts that earnings growth for the top 10% will be lower for the years after 2018–19 as a result of the UK’s decision to leave the EU. This will reduce tax receipts.[14] Regardless of one’s view of income inequality, or the share of total income that accrues to high-earning bankers, well-paid chief executives and the like, if top taxpayers experience weak earnings growth or decide to move elsewhere – and many of them were not born in the UK – then the rest of us will have to pick up a very big bill.

Appendix. Main policy changes since 2015

Measure

£ million, 2017–18 terms

Income taxes

 

Increases to personal allowance

–4,100

Increases in higher-rate threshold

–1,100

Reduction in pension tax relief for those with income above £150,000

1,300

Changes in dividend allowance and increase in effective rates

2,500

Abolition of self-employed Class 2 NICs

–660

Primary (employee) and secondary (employer) NICs thresholds aligned

130

Introduction of apprenticeship levy

2,800

Indirect taxes

 

Fuel duties freezes

–1,200

Increases to insurance premium tax main rate

2,400

Introduction of soft drinks industry levy

330

Reform to VED structure for new cars

1,300

Corporation taxes

 

Reduction in corporation tax rate from 20% to 17%

–3,100

8% corporation tax surcharge on banks and reduced bank levy

100

Petroleum revenue tax abolished; supplementary charge reduced to 10%

–180

Annual investment allowance set at new permanent level of £200,000

–720

Property taxes

 

Increase in council tax to fund social care

2,000

Business rates small business relief extension made permanent

–1,100

Business rates: switch from RPI to CPI uprating

–290

Capital taxes

 

Stamp duty land tax for non-residential property from ‘slab’ to ‘slice’

530

Higher rates of stamp duty land tax on additional properties

800

Capital gains tax rate reduced to 10% for basic-rate and 20% for higher-rate taxpayers (excluding residential property)

–660

Inheritance tax: phased introduction of residence nil rate band

–850

Note: Not a comprehensive list of measures. Cost shows official forecast cost of policy in 2021–22, estimated at time of announcement, expressed as equivalent value of 2017–18 GDP.

Source: Authors’ calculations using Office for Budget Responsibility, ‘Policy measures database’, March 2017, http://budgetresponsibility.org.uk/download/policy-measures-database/.

Previous IFS work discusses policy changes between 2010 and 2015. See S. Adam and B. Roantree, ‘The coalition government’s record on tax’, IFS Briefing Note BN167, 2015, https://www.ifs.org.uk/uploads/publications/bns/BN167170315.pdf

 

[1]    See figure 5.13 in C. Emmerson, S. Keynes and G. Tetlow, ‘Public finances: outlook and risks’, in C. Emmerson, P. Johnson and H. Miller (eds), The IFS Green Budget: February 2013, https://www.ifs.org.uk/budgets/gb2013/GB2013_Ch5.pdf.

[2]    Progressivity refers to a situation in which the average tax rate for a specific tax (or tax system) increases with the tax base, i.e. in which a larger share of income is taken from high income groups than from lower income groups.

[3]    See figure 1 of C. Belfield, R. Blundell, J. Cribb, A. Hood, R. Joyce and A. Norris Keiller, ‘Two decades of income inequality in Britain: the role of wages, household earnings and redistribution’, IFS Report Summary, January 2017, https://www.ifs.org.uk/publications/8849.

[4]    HMRC, ‘Inheritance tax statistics’, https://www.gov.uk/government/collections/inheritance-tax-statistics.

[5]    For a discussion of the distributional effects of VAT, see section 6 of S. Adam and B. Roantree, ‘The coalition government’s record on tax’, IFS Briefing Note BN167, 2015, https://www.ifs.org.uk/uploads/publications/bns/BN167170315.pdf.

[6]    Note that the ultimate economic burden of all taxes may fall on a different group of individuals from those who formally remit the money to the government.

[7]    For a full discussion, including longer-term trends, see H. Miller and T. Pope, ‘The changing composition of UK tax revenues’, IFS Briefing Note BN182, 2016, https://www.ifs.org.uk/uploads/publications/bns/BN_182.pdf.

[8]    For additional discussion, see section 3 of H. Miller and T. Pope, ‘The changing composition of UK tax revenues’, IFS Briefing Note BN182, 2016, https://www.ifs.org.uk/uploads/publications/bns/BN_182.pdf.

[9]    See N. Amin-Smith, J. Cribb and L. Sibieta, ‘Reforms to apprenticeship funding in England’, in C. Emmerson, P. Johnson and R. Joyce (eds), The IFS Green Budget: February 2017, https://www.ifs.org.uk/publications/8863.

[10] http://www.bbc.co.uk/news/uk-politics-39281754.

[11] R. Crawford, C. Emmerson, T. Pope and G. Tetlow, ‘Risks to the rules: tax revenues’, in C. Emmerson, P. Johnson and R. Joyce (eds), The IFS Green Budget: February 2016, https://www.ifs.org.uk/uploads/gb/gb2016/gb2016ch5.pdf.

[12] Office for Budget Responsibility, Fiscal Sustainability Report, July 2014, http://budgetresponsibility.org.uk/fsr/fiscal-sustainability-report-july-2014/.

[13] For a full discussion, see S. Adam, H. Miller and T. Pope, ‘Tax, legal form and the gig economy’, in C. Emmerson, P. Johnson and R. Joyce (eds), The IFS Green Budget: February 2017, https://www.ifs.org.uk/publications/8872. For a summary, see H. Miller, ‘Tax in a changing world of work’, Tax Journal, 20 April 2017, https://www.taxjournal.com/articles/tax-changing-world-work-20042017.

[14] See box 4.1 of Office for Budget Responsibility, Economic and Fiscal Outlook, March 2017, http://cdn.budgetresponsibility.org.uk/March2017EFO-231.pdf.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9178 Mon, 01 May 2017 00:00:00 +0000
<![CDATA[The UK labour market: where do we stand now?]]> This Briefing Note provides key information on the UK labour market in recent years, and summarises the challenges in the labour market facing the next government. It uses up-to-date data to understand how the labour market has performed in recent years and how it might continue to evolve over the course of the next parliament. IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the General Election is informed by independent and rigorous evidence.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the General Election is informed by independent and rigorous evidence. For more information go to www.nuffieldfoundation.org

Key findings

1. The remarkable growth in employment since 2012 means the current employment rate is at a record high of 75%. However, it has levelled off in recent months and is not forecast to rise further.

2. There is no evidence that recent employment growth has been disproportionately driven by jobs in low-skilled occupations. Measures of ‘under-employment’ (workers who want to work more hours) are still higher than in 2008, but have fallen back since 2012.

3. Although the number of non-UK-born workers has increased faster than the number of UK-born workers since 2008, the employment rate of UK-born individuals is at a record high.

4. After adjusting for inflation, average earnings of employees are still substantially below pre-recession levels, and are currently being squeezed by rising household inflation (linked in large part to falls in sterling). Central forecasts from the Office for Budget Responsibility (OBR) imply average earnings will still be lower than their 2007–08 level in 2021‒22. This is despite an extraordinary increase in the education levels of the workforce: 35% are now graduates compared with 25% in 2008.

5. Men and younger workers have seen larger falls in average earnings than women and older workers since 2008. Low-earning workers, boosted by recent large increases in minimum wage rates, have seen stronger pay growth since 2008 than higher-paid workers.

6. With unemployment having fallen to below 5%, further increases in employment will be harder to achieve. A key future challenge is pay growth: it will continue to disappoint unless poor productivity growth can be redressed. It is hard to overstate how important this is to increasing living standards in the long run.

The remarkable recovery in the employment rate since 2012 has pushed it to a record high, though employment growth has slowed in recent months.

Figure 1. Employment rate (aged 16–64)

Employment rate (aged 16–64)

Note: 2017Q1 data point contains data for the three months ending in February 2017.

Source: ONS series LF24, MGSV and LF25.

Employment in the UK since the 2008 recession has consistently performed better than expected. The strong recovery since 2012 has pushed the employment rate above its pre-recession level and it now stands at an all-time high of nearly 75%. Employment growth has been particularly strong among women, with the female employment rate increasing from 67% in 2008 to 70% in 2016. Despite falling further during the recession, male employment has now also slightly exceeded its 2008 level, reaching 79% in early 2017.

Since early 2016, however, the employment rate has barely changed. With unemployment now lower than in 2007, substantial further rises in the employment rate are unlikely unless groups who are currently not actively seeking paid work start to do so. Neither the Office for Budget Responsibility (OBR) nor the Bank of England anticipates further increases in the employment rate in their central forecasts.

Despite rises in self-employment, full-time employee jobs still dominate the UK workforce.

Figure 2. Composition of workforce, by type of work in main job

Figure 2. Composition of workforce, by type of work in main job

Note: Restricted to the 16–64 workforce.

Source: Authors’ calculations using the Labour Force Survey.

In recent years, there has been considerable interest in the growth of ‘non-standard’ ways of working, particularly in the increase in self-employment. The past decade has witnessed a steady increase in the share of workers who are self-employed, which has risen from 12.2% in 2005 to 14.1% in 2016. This may not sound dramatic but it amounts to 860,000 more self-employed workers in 2016 than in 2005, an increase of 25%.

The share of workers working as part-time employees increased in the aftermath of the recession but has since returned to its pre-crisis level. This overall trend masks a falling prevalence of part-time employment for women and a rising prevalence for men. While these trends have caused a small overall decline in the share of workers in full-time employee jobs, working as a full-time employee continues to be by far the most prevalent, and accounted for 64% of the UK workforce in 2016 compared with 66% in 2008. Overall, changes in employment and hours mean working-age adults are working 4% more hours in 2016 than in 2008.

Measures of ‘under-employment’ have been falling but remain above pre-recession levels.

Figure 3. Indicators of ‘under-employment’

Indicators of ‘under-employment’

Note: Restricted to the 16–64 workforce.

Source: Authors’ calculations using the Labour Force Survey.

Although employment is at a record high, there is evidence that some workers still want to work more hours than they are currently working. The proportion of part-time workers wanting to work full-time is still higher than in 2008, at 15% of part-time workers compared with 10% in 2008. The fraction of workers who want to work more hours (at the same rate of pay) is also slightly above pre-recession levels. However, both of these measures of underemployment are reduced from their recent peaks in 2012 and 2013, particularly the fraction of part-time workers who could not find a full-time job.

Recent years have not seen a rise in the share of jobs in low-skilled occupations.

Figure 4. Composition of workforce, by skill level of occupation and education

Figure 4. Composition of workforce, by skill level of occupation and education

Note: Restricted to the 16–64 workforce. Adjusted for discontinuity caused by the introduction of SOC2010 occupation coding between 2010Q4 and 2011Q1. Skill level of occupation is defined by one-digit Standard Occupational Classification (SOC) 2000 code (SOC 2010 since 2011). ‘High-skilled’ is defined as codes 1– 3, ‘medium-skilled’ is codes 4–6 and ‘low-skilled’ is codes 7–9.

Source: Authors’ calculations using the Labour Force Survey.

Despite some perceptions that recent employment gains have been driven by an expansion of low-skill work, low-skill occupations have not increased any faster than overall employment. As a result, the share of workers in low-skill jobs has remained virtually unchanged during the labour market recovery in recent years. By contrast, the share of workers in high-skill jobs has increased slightly, at a slower rate than during the years preceding the recession.

However, there has been a very large increase in the percentage of workers who are university graduates: 35% of workers now have completed an undergraduate degree, up from 25% in 2008. This share is set to rise further in coming years as younger generations are more educated than older generations. In combination, these trends mean the proportion of graduates working in low-skill jobs has increased, from 5.3% in 2008 to 8.1% in 2016.

Numbers of non-UK-born workers have increased rapidly, but employment rate of UK-born also higher than pre-crisis.

Figure 5. Change in (16+) employment level since 2000, by country of birth

Figure 5. Change in (16+) employment level since 2000, by country of birth

Source: ONS series JF6F and JF6G.

Figure 6. Employment rate (aged 16–64), by country of birth

Figure 6. Employment rate (aged 16–64), by country of birth 

Source: ONS series LFM6 and LFM7.

Increases in the non-UK-born population and their employment rate resulted in the number of non-UK-born workers rising by 1.7 million between 2008 and 2016. This large increase means that workers born outside the UK have accounted for a large share of overall employment growth in recent years. However, the number of UK-born people in work has also increased substantially during the recent labour market recovery, rising by 1.1 million between 2011 and 2016. Moreover, the fraction of UK-born people in work, at 75%, is now higher than at any point since consistent statistics began in 1997.

Average earnings are still substantially below pre-crisis levels; central forecasts see average earnings not reaching 2007–08 levels even in 2021–22.

Figure 7. Real median earnings of employees since 2007–08, and forecasts

Figure 7. Real median earnings of employees since 2007–08, and forecasts

Note: Adjusted for inflation using the Consumer Prices Index. The line ‘Pre-recession trend’ projects what real median earnings growth would have been had the growth in real median earnings in the decade before the recession (1.8% p.a.) continued in each year after 2007­–08.

Source: Authors’ calculations using the Annual Survey of Hours and Earnings and the OBR’s Economic and Fiscal Outlook March 2017.

The recession had a particularly severe impact on employees’ pay, with median (middle) employee earnings falling by 9.4% between 2007‒08 and 2013‒14 after adjusting for inflation. Although growth has returned since then, growth rates have consistently been lower than expected, with the result that median earnings in 2015‒16 were still 7.1% (£1,700 per year) lower than in 2007‒08. In comparison, had real earnings continued to grow at the same pace after 2007–08 as in the decade prior to the recession, by 2015–16 median earnings would have been 15% (£3,700 per year) higher than they were in 2007–08.

These statistics are informative because they allow us to understand how the average pay of people in work in 2015–16 compares with the pay of those in work in previous years. However, it is important to stress that this is not the same as the average pay growth of people who have been in work continuously since 2007–08. Many individuals will have personally experienced substantial pay growth over this period.

More recent data from ONS, shown in Figure 8, show growth in real mean weekly earnings slowing substantially since the middle of 2016. This is due to the increase in inflation, which has risen in recent months in large part due to the fall in the value of sterling following the vote to leave the European Union. Real mean pay in early 2017 was only 0.3% above its level a year earlier. With inflation rising, it would not be surprising for official statistics to record falling real earnings in the coming months.

Figure 8. Annual nominal mean earnings growth, inflation and real mean earnings growth since 2015Q1

Annual nominal mean earnings growth, inflation and real mean earnings growth since 2015Q1

Note: Inflation measured using the Consumer Prices Index. 2017Q1 refers to the three months December 2016 to February 2017. Growth in prices and earnings are calculated compared with the same three months a year earlier.

Source: Authors’ calculations using ONS Average Weekly Earnings series.

Looking further ahead, the OBR’s central estimate is that only modest real pay growth will mean that average earnings will still not have returned to pre-recession levels by 2021‒22 – an astonishing and unprecedentedly long period without a rise in average earnings in the UK. Given current forecasts are subject to particularly high uncertainty, Figure 7 also presents two alternative scenarios, which show the path of average earnings if productivity growth is 1% higher or lower per year than the OBR expects. The low-productivity scenario results in essentially no earnings growth over the next five years. Even under the optimistic high-productivity scenario, it would take until 2020–21 for average earnings to exceed pre-recession levels.

Men have seen greater reductions in pay, due to sharper falls following the recession.

Figure 9. Real median earnings growth of employees since 2008, by sex

Figure 9. Real median earnings growth of employees since 2008, by sex

Note: Adjusted for inflation using the Consumer Prices Index.

Source: Authors’ calculations using the Annual Survey of Hours and Earnings.

Figure 9 shows the difference in earnings growth in recent years between men and women. It gives the change in real earnings between 2008 and 2016 and also split between 2008‒14 and 2014–16. Earnings fell in the first period and started to recover in the second.

Average earnings of male employees were 7.3% lower than their 2008 levels in 2016, whereas average earnings of female employees were only 1.8% lower. This largely reflects much bigger falls in male average earnings in the years following the financial crisis.

Younger workers have seen the biggest falls in earnings, although their earnings have bounced back in recent years.

Figure 10. Real median earnings growth of employees since 2008, by age group

Figure 10. Real median earnings growth of employees since 2008, by age group

Note: Adjusted for inflation using the Consumer Prices Index.

Source: Authors’ calculations using the Annual Survey of Hours and Earnings.

Distinguishing between younger and older workers shows that those aged below 40 have seen the greatest reductions in their earnings between 2008 and 2016. Workers in their 20s saw the sharpest earnings falls in the aftermath of the recession; younger workers typically fare worse during downturns. Earnings growth for this group, however, has been particularly strong during the recent recovery, to the extent that it is those in their 30s who have seen the largest earnings falls over the entire period.

Strong growth in the earnings of low earners since 2014 has reduced earnings inequality.

Figure 11. Real earnings growth of employees since 2008, by percentile point

Figure 11. Real earnings growth of employees since 2008, by percentile point

Note: Adjusted for inflation using the Consumer Prices Index.

Source: Authors’ calculations using the Annual Survey of Hours and Earnings.

Although earnings fell relatively uniformly for high, middle and low earners during the aftermath of the recession, earnings growth since 2014 has been strongest for low-paid workers. Between 2014 and 2016, pay at the tenth percentile (i.e. the pay of someone who earns less than 90% of employees) rose by an impressive 12.3% in comparison with growth of only 4.6% at the median. The surge in earnings at the bottom of the distribution is largely driven by increases in minimum wage rates, which we will discuss further in an upcoming election briefing note. The combined result of these trends is that earnings inequality is lower in 2016 than it was in 2008.

Earnings growth will remain weak unless poor productivity growth can be redressed. Further increases in employment will be harder to achieve than in recent years.

It is hard to overstate the importance of boosting productivity if robust pay growth is to return and be sustained. It is the very poor productivity performance of the economy which has led directly to the worst earnings growth we have seen in more than a century. While there are no quick fixes, investment in infrastructure, genuine improvements in education and skills, and a more efficient tax system are all important avenues to pursue.

It will be harder for employment to grow in the next parliament than in recent years. Employment has reached record highs and unemployment has fallen to below 5% for the first time since the mid 2000s. With the unemployment rate near its long-term sustainable level, further growth in the employment rate will have to come from encouraging more people to seek work and participate in the labour force. There may well be scope for this – male employment rates, especially among older men, are still well below historical highs. While past policy reforms have successfully increased the participation of some groups – notably lone parents and women aged 60 and over – additional increases in participation will probably be more challenging.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9170 Fri, 28 Apr 2017 00:00:00 +0000
<![CDATA[The impact of tax and benefit reforms on household incomes]]> This Briefing Note, produced in advance of the 2017 Election, analyses the impact of tax and benefit changes since May 2015 on the incomes of different kinds of households. We look both at reforms already implemented, and those planned by the current government (but not at any potential manifesto commitments, which will be analysed later).

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the General Election is informed by independent and rigorous evidence. For more information go to www.nuffieldfoundation.org

Key findings

Increases to the income tax personal allowance and higher-rate threshold, costing the government around £5 billion per year, have been the biggest change to taxes or benefits so far this parliament.

 

These have benefited most basic-rate taxpayers to the tune of £160 a year, while most higher-rate taxpayers have gained £380 a year. However, for the latter group, all this giveaway is doing is reversing most of the effect of the cuts in the higher-rate threshold in the last parliament. And cuts in pension tax relief, on top of a large number of tax increases in the last parliament, have hit those with the very highest incomes.

While cuts to benefits have been small as yet, government plans for future cuts would significantly reduce the incomes of low-income working-age households, particularly those with children.

 

The most important changes are the cash freeze in most benefit rates, cuts to child tax credit and the continued roll-out of the less generous universal credit.

If these planned cuts were fully in place now, nearly 3 million working households with children on tax credits would be an average of £2,500 a year worse off, with larger families losing more.

 

The 1 million families with children and nobody in paid work would be £3,000 a year worse off on average. But it is important to stress that many of the changes will not create immediate losses of benefit income, because of protections for existing claimants.

Planned cuts will have a bigger effect on the entitlements of the poorest families than the cuts made by the coalition.

 

More broadly, the period since 2010 has seen lower-income households lose as a result of benefit cuts and the richest households lose from increases in income tax. But those on average and moderately high incomes, as well as most pensioners, have seen their incomes almost completely protected on average.

 

This analysis does not tell you what has actually happened to the incomes of different types of households. That depends on changes in earnings, employment and inflation as well as changes to taxes and benefits. For analysis of overall trends in household income see here and here. Further IFS election analysis to be published shortly will provide the latest picture on what we know about overall trends in household incomes.

Tax and benefit reforms since May 2015 have so far had little effect, but there are big benefit cuts to come

Figure 1. Impact of tax and benefit reforms implemented between May 2015 and June 2017 by income decile [download the data]

Figure 1. Impact of tax and benefit reforms implemented between May 2015 and June 2017 by income decile

Note: For the cash equivalents of these impacts, please see Appendix B. Income decile groups are derived by dividing all households into 10 equal-sized groups according to net income adjusted for household size using the McClements equivalence scale. Assumes full take-up of means-tested benefits and tax credits.

Source: Authors’ calculations using TAXBEN run on uprated data from the 2015–16 FRS and 2014 LCFS.

The key point to take from Figure 1 is that the average impact of tax and benefit changes since May 2015 has been relatively small – less than 1% of income in each income decile. Cash impacts are shown in Appendix B.

Cuts to income tax – the above-inflation increases in the income tax personal allowance (to £11,500 rather than £10,710) and the higher-rate threshold (to £45,000 rather than £42,815) – largely explain the gains for higher-income households. Together, these tax cuts will cost the government around £5 billion in 2017–18, with most basic-rate taxpayers gaining £160 a year and most higher-rate taxpayers gaining £380 a year. In the top decile, those changes have been roughly offset on average by increases in tax on income that is paid into private pensions, although those rises predominantly affect those towards the top of the top decile.

For lower-income households, there has been a cash freeze in most working-age benefits – affecting 11 million households. But low inflation over the last two years has meant that this has only amounted to a 1% real cut so far. Meanwhile, the reduction in the benefit cap, while hitting some households very hard, has affected fewer than 100,000 households. Hence, the overall scale of benefit cuts seen over the past two years has been small.[1]

Figure 2. Long-run impact of tax and benefit reforms since May 2015 by income decile [download the data]

Figure 2. Long-run impact of tax and benefit reforms since May 2015 by income decile

Note: For the cash equivalents of these impacts, please see Appendix B. Income decile groups are derived by dividing all households into 10 equal-sized groups according to net income adjusted for household size using the McClements equivalence scale. Assumes full take-up of means-tested benefits and tax credits, and that all planned changes are fully in place.

Source: Authors’ calculations using TAXBEN run on uprated data from the 2015–16 FRS and 2014 LCFS.

Looking ahead, Figure 2 adds the long-run impact of tax and benefit changes that are now being rolled out or are planned by the current government. The large losses for low-income households (more than 4% of income, on average, in each of the bottom three deciles) are mostly explained by three planned benefit cuts:

  • the continued freeze in most working-age benefit rates until March 2020; under current inflation forecasts, this will reduce the real value of these benefits by 5% between now and 2020, and reduce government spending by over £3 billion a year;
  • cuts to the generosity of tax credits for families with children – limiting entitlement to two children and removing the ‘family element’ – that are expected to reduce government spending by around £5 billion a year in the long run;
  • the roll-out of universal credit, expected to reduce government spending by around £5 billion a year in the long run.

The small number of tax measures due to be implemented in the coming years will have a very limited impact. We do not include the effects of meeting the 2015 Conservative manifesto commitment to a £12,500 personal allowance and a £50,000 higher-rate threshold (although note that standard inflation uprating is expected to get these thresholds most of the way to those commitments by 2020, without any further policy action). Later IFS election work will analyse the potential effects of 2017 manifesto commitments.

Figure 3. Long-run impact of planned tax and benefit reforms by income decile and household type [download the data]

Figure 3. Long-run impact of planned tax and benefit reforms by income decile and household type

Note: For the cash equivalents of these impacts, please see Appendix B. Income decile groups are derived by dividing all households into 10 equal-sized groups according to net income adjusted for household size using the McClements equivalence scale. Assumes full take-up of means-tested benefits and tax credits, and that all planned changes are fully in place.

Source: Authors’ calculations using TAXBEN run on uprated data from the 2015–16 FRS and 2014 LCFS.

Figure 3 focuses on the impact of future tax and benefit changes (those being rolled out or planned by the current government, shown by the green bars in Figure 2), and splits households within each decile into working-age households with children, working-age households without children and those containing a pensioner.

Pensioner households are mostly protected from future benefit cuts. By contrast, the impact on the incomes of working-age households with children is large, with average losses of more than 10% in the bottom two income deciles. This reflects the overall importance of benefit income for these households, as well as the specifics of the reforms chosen. Looking in more detail at the impact of future cuts on working-age households with children, if all planned cuts were fully in place now:

  • the 1 million households with children and no one in paid work would be an average of £3,000 a year worse off;
  • the 3 million working households with children currently entitled to tax credits (those with lower earnings) would be an average of £2,500 a year worse off;
  • the 4 million working households with children not entitled to tax credits (generally those with higher earnings) would be an average of £100 a year worse off.

It is important to stress that many of the changes will not create immediate losses of benefit income, because of protections for existing claimants. Rather, they will significantly reduce the generosity of the system in the long run.

These changes come on top of lots of reforms made by the coalition government

Figure 4. Impact of tax and benefit reforms implemented between May 2010 and May 2015 by income decile [download the data]

Figure 4. Impact of tax and benefit reforms implemented between May 2010 and May 2015 by income decile

Notes and sources: Figure 3.1 of Browne and Elming (2015) http://www.ifs.org.uk/publications/7534.
For the cash equivalents of these impacts, please see Appendix B.

Figure 4, taken from our 2015 election analysis, shows the average gain or loss in each income decile resulting from tax and benefit changes between May 2010 and May 2015, as a percentage of income. It shows the following:

  • The cuts to working-age benefits made by the coalition government led to significant reductions in household income across the lower-income half of households (of over 3% in each of the bottom two income deciles, on average).
  • The top income decile faced large tax increases on average, both as a result of cuts to the higher-rate threshold, and due to other measures targeting predominantly those on the very highest incomes (approximately the top 1%). Indeed, if one were also to include measures introduced in the final months of the last Labour government, the top decile lost the most as a share of income over the period of fiscal consolidation up to May 2015 (6.5%).[2]
  • Households in the sixth to ninth income deciles were protected from the impact of reforms over this period to a remarkable degree. That is because, on average, large increases in the income tax personal allowance and cuts in fuel duty roughly offset the increases in VAT and NICs and the benefit cuts for this group.

Figure 5. Impact of tax and benefit reforms implemented between May 2010 and May 2015 by income decile and household type [download the data]

Figure 5. Impact of tax and benefit reforms implemented between May 2010 and May 2015 by income decile and household type

Note: For the cash equivalents of these impacts, see Table 5 in Appendix B.

Source: Figure 3.4 of J. Browne and W. Elming, ‘The effect of the coalition’s tax and benefit changes on household incomes and work incentives’, IFS Briefing Note BN159, 2015, https://www.ifs.org.uk/publications/7534.

Figure 5, again taken from our 2015 election analysis, shows the effects of tax and benefit reforms over the same period, but this time splitting households within each income decile into working-age households with children, working-age households without children and pensioner households (households containing someone aged over the state pension age).

Pensioners outside of the top income decile were broadly unaffected by tax and benefit changes on average. They did not gain from increases in the personal allowance, but they were also unaffected by the increase in NICs and mostly protected from benefit cuts. Losses from the increase in VAT were broadly cancelled out by gains from the ‘triple lock’ on the basic state pension (and knock-on increases in pension credit).

Meanwhile, working-age households without children did much better than those with children – in fact, the former group actually gained on average in the fourth to ninth income deciles. This divergence is explained by the fact that families with children were affected by benefit cuts to a much greater extent. It is worth remembering, however, that there were large increases in the generosity of benefits for families with children under Labour, which were only partly offset by the cuts implemented by the coalition government.[3]

[1] Small gains from benefit reforms in the top half of the income distribution are explained by the introduction of ‘tax-free’ childcare.

[2] See figure 3.2 of J. Browne and W. Elming, ‘The effect of the coalition’s tax and benefit changes on household incomes and work incentives’, IFS Briefing Note BN159, 2015, https://www.ifs.org.uk/publications/7534.

[3] See figure 3.5 of J. Browne and W. Elming, ‘The effect of the coalition’s tax and benefit changes on household incomes and work incentives’, IFS Briefing Note BN159, 2015, https://www.ifs.org.uk/publications/7534.

Please see pdf version of this briefing note for appendices.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

]]>
https://www.ifs.org.uk/publications/9164 Thu, 27 Apr 2017 00:00:00 +0000
<![CDATA[The short- and long-run impact of the national funding formula for schools in England]]> The government is embarking on the single largest reform of the school funding system in England for the last 25 years. Currently, the level of funding a school receives is determined by a local-authority-specific funding formula and the amount each local authority receives from central government. The proposed reform, due to be introduced from financial year 2018–19, will replace the 152 different local authority funding formulae with one single National Funding Formula (NFF). When fully in place, this 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, setting out the reasons for the choices it has made and publishing a large amount of data alongside these proposals to enable effective scrutiny.

This briefing note provides impartial explanation and analysis of the proposed reforms. We start by briefly presenting the case for reform, before setting out what the government has proposed, including transition arrangements. We then analyse the likely effects of these reforms on different schools and areas in the short run up to 2019–20. Such analysis confirms and complements the detailed report recently released by the Education Policy Institute. We then extend this to analyse what is likely to happen after 2019–20. Only about 60% of schools will be on the main funding formula by this date and the government has provided worryingly little clarity on how quickly remaining schools will be moved onto the new formula. We analyse a number of hypothetical paths for the transition after 2019–20. 

Key findings

Largest reform to school funding in over 25 years

 

Government proposals for a National Funding Formula (NFF) for schools in England starting in 2018–19 would replace the 152 different local authority funding formulae with one single formula. The government is to be applauded for making specific proposals and setting out the reasons for the choices it has made.

Reform comes at a time of heavy strain on school budgets

 

School funding per pupil has been frozen in cash terms between 2015–16 and 2019–20, resulting in a real-terms cut of 6.5%. This would be the largest cut in school spending per pupil over a four-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. Any losses schools face as a result of the NFF come on top of this cut.

Wide variation in funding per pupil mostly preserved

 

Wide variation in funding across schools that currently exists is mostly the result of deliberate choices to target funding towards disadvantaged schools and high-cost areas. The proposed NFF would largely preserve this variation. The intention of the reform is to ensure similar schools are funded in a similar way, rather than to reduce all disparities in funding across schools.

Inevitably, there are winners and losers

 

Grants to local authorities are currently based on information that is nearly 15 years out of date. Local authorities also make different choices in their current funding formulae. Harmonising these formulae and ensuring allocations to different areas are based on up-to-date information was always going to create winners and losers.

Some redistribution across different types of schools and areas

 

Funding is diverted from schools with very high levels of deprivation to those with average levels. There is also a shift in funding towards small primary schools and large secondary schools. Schools in inner London are among the biggest losers, with average cuts of around 2.5% in cash-terms per-pupil funding between 2017–18 and 2019–20.

Pupil Premium not included in the funding formula

 

This is despite the formula including a specific amount for pupils who have been eligible for free school meals in the past six years – the same factor Pupil Premium is based on. The government should rationalise sources of funding by adding the Pupil Premium to the NFF and hold schools to account for all additional funding they receive for pupils from disadvantaged backgrounds.

Large number of schools won’t be on the main funding formula by 2019­–20

 

Proposed protections would prevent any school from losing more than 3% of funding per pupil in cash terms between 2017–18 and 2019–20. Since many schools’ budgets are a long way from those implied by the formula, only 60% of schools will be on the main formula in 2019–20. Around 5% of schools would have budgets over 7% higher than that implied by the formula in 2019–20.

Government has not said how it will move all schools to main formula after 2019–20

 

We model three scenarios for transiting all schools to the new formula, all incorporating a maximum annual cash-terms loss of 1.5%. If overall school spending per pupil is frozen in cash terms after 2019–20, all schools get to the main formula by 2029–30. If there is a real-terms freeze to overall spending, all schools get there by 2024–25; and if there is 2% real-terms growth, all schools get there by 2023–24. 

 

]]>
https://www.ifs.org.uk/publications/9075 Wed, 22 Mar 2017 00:00:00 +0000
<![CDATA[Income growth in 2015–16 modest but widespread, leaving inequality and poverty roughly unchanged]]> The Department for Work and Pensions (DWP) has today published the latest official statistics on household incomes, covering the financial year 2015–16. IFS researchers have summarised the headline trends observed in the new data and placed them in historical context in order to understand better changes in living standards in recent years.

The full analysis with graphics can be found here.

Key findings are:

Average household incomes

  • The latest data suggest that median household income grew by 1.4% in 2015–16 after adjusting for inflation, leaving it 5% higher than in 2013–14 – a welcome improvement on the recent past. But it is just 3.7% above its pre-recession (2007–08) level.
  • The record for those of working age has been worse than that, with almost no income growth since 2007-08 on average. Median pensioner incomes on the other hand are around 10% higher than they were in 2007-08.

Income inequality

  • Income inequality was roughly unchanged in 2015–16, remaining lower than on the eve of the financial crisis, and around the same level as in 1990. The fall in inequality just after the recession was driven by benefits rising faster than earnings. During the recovery, a combination of weak pay growth and strong employment growth has stopped inequality bouncing back.

Income poverty

  • Poverty rates were little changed in 2015–16. But a slight uptick in child poverty, while small at this stage and not statistically significant, is likely to continue as cuts to working-age benefits act to reduce the incomes of low-income households with children.

Agnes Norris Keiller, a Research Economist at IFS said:

“Growth in household incomes in 2015–16 was modest but widespread, continuing the pattern seen in recent years. The period since the recession has been defined not by sharp rises in inequality or poverty, but historically slow growth in average incomes – in 2015–16 average income for working-age adults was no higher than 8 years previously. Inequality and poverty actually remained slightly lower than before the financial crisis. However, large planned benefit cuts mean child poverty is likely to rise over the next few years.”

 

 

]]>
https://www.ifs.org.uk/publications/9001 Thu, 16 Mar 2017 00:00:00 +0000
<![CDATA[The business rates revaluation, appeals and local revenue retention]]> For the last seven years, the business rates that occupiers of non-residential property have paid have been based on the value of their property in 2008. From April 2017, updated property values as of 2015 will be used to calculate rates bills. While the revaluation is meant, as far as possible, to be revenue-neutral (redistributing rates bills according to changes in relative rental values of properties), individual occupiers will see major changes in their rates bills. Because the changes in average value have varied significantly, there will also be big changes in the business rates revenues raised in different council areas, which requires that an adjustment is made to the business rates retention system (BRRS), which allocates a proportion of business rates to councils. Appeals by occupiers against their new rateable values will also pose a financial risk to councils, despite an increase in the headline business rates tax rate (the multiplier) to fund the cost of these appeals.

Key findings

Across England as a whole, revaluation will lead to an 11% (cash-terms) increase in the rateable value of the average non-domestic property.   Changes in values are very unevenly distributed though. At a regional level, the largest increases are in inner London (28.4%), with values falling in the North East (–0.9%). More generally, property values are estimated to have gone up by more in the south and midlands than in the north, and by more in the central parts of urban areas than in their hinterlands.
     
The business rates ‘multiplier’ will be adjusted so that the revaluation is revenue-neutral, after accounting for a forecast of the costs of appeals against the new values assigned to properties.   This means that the immediate effect of the revaluation will be to increase revenues and the average rates bill by around 4.6%, on top of inflation. The additional revenues raised up front will then be used to fund the cost of successful appeals further down the line. These costs include refunds for ‘overpayments’ of people who successfully appeal their rateable values.
     
Revaluation would lead to average bills increasing in London (16%), the South East (4%) and East Midlands (2%), and falling in the other regions of England, after this adjustment.   However, as ratepayers successfully appeal against their rateable values, these bills and revenues will eventually come down. The figures published by the government – which show London as the only region where average bills and revenues will increase (by 11%) – are based on assumed bills after appeals, under the assumption that each region sees appeals in line with the government’s forecast for England as a whole.
     
A complex package of transitional relief will phase in the biggest increases in bills. After accounting for such reliefs, revenues and the average bill in London will rise by 12% above inflation in the first year following the revaluation, 2017–18.   Transitional relief is paid for by phasing in rates cuts for other taxpayers. In 2017–18, these ‘caps’ to cuts will fully offset the 6% reductions in revenues and average bills in the North West and Yorkshire & the Humber that are implied by the revaluation itself. Individual rates payers due a large cut in bills will, of course, still see some cut, just not as much as they would if the transitional relief scheme did not exist.
     
More frequent revaluation of properties could provide a better way of smoothing the shock of big overnight changes in values and bills than transitional relief.   This is because, in general, it takes time for large changes in property values to occur. More frequent revaluation would also mean that rates bills are based on more up-to-date information on local economic conditions – whereas transitional relief delays that adjustment process.
     
The impact of the revaluation on the amount of business rates retained by individual councils under the BRRS will be offset by changes to the redistributive ‘tariffs’ and ‘top-ups’ between councils, with the aim of leaving their budgets unaffected by revaluation.   This will prevent some large overnight cuts (and increases) to councils’ budgets. It also avoids the risk that councils will try to constrain the supply of local properties to push up rents, values and hence their revenues. 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. This suggests devolution of other revenues may need to be considered if broader incentives for growth are seen as desirable.
     
The unequal pattern of growth in rateable values and revenues means that the amount of redistribution of business rates revenues the BRRS needs to undertake will increase slightly.   The total amount of top-ups required will increase from £4.2 billion to £4.4 billion. London councils will see an increase in their net tariff of almost £400 million to £730 million, while councils in the north will get bigger top-ups. This reflects a more general trend towards greater reliance on London for government revenues.
     
For the majority of councils that see a relative reduction in the amount of business rates they collect following the revaluation (and an increase in their top-up or decrease in their tariff), fiscal incentives to boost local growth will weaken.   This is because their own business rates revenues will be a relatively less important source of their overall funding. Conversely, incentives will strengthen for those councils that see a relative increase in the amount of rates they collect. More generally, the BRRS implies very different fiscal incentives for growth in different parts of the country.
     
Presently, the BRRS requires councils to bear the risk associated with appeals against rateable values in their areas.   In order to cover the cost of appeals in their area, councils will retain their share of the additional 4.6% business rates raised by increasing the multiplier. This means they will bear the risk of appeals in their area being higher or lower than this forecast for the average cost across England as a whole.
     
During the first three years of the BRRS (2013–14 to 2015–16), there was significant variation in the amount councils put away in ‘provisions’ for appeals and in the proportion of these provisions they have had to use.   This suggests that the financial risk associated with appeals is large and difficult to forecast. Furthermore, appeals have been a little larger, on average, in areas that saw big increases in their bills at the last revaluation (in 2010). If this pattern holds again, areas that have seen large increases in rateable values and bills, such as inner London, may be especially likely to find the extra revenues collected up front insufficient to cover the costs of appeals.
     
The government is currently consulting on ‘centralising’ the risk associated with appeals that are backdated to the start of the relevant rating list, coming into effect when councils move to retaining 100% of business rates in April 2019.   This proposal would insulate councils from a risk – valuation errors – that is largely outside their control. It would also remove the temptation for councils to ‘game’ the appeals system by initially over-providing for appeals, claiming ‘safety-net’ payments from central government, and then releasing the provisions at a later date (a temptation that would have increased under 100% retention).
]]>
https://www.ifs.org.uk/publications/8962 Fri, 03 Mar 2017 00:00:00 +0000
<![CDATA[Inheritances and inequality across and within generations]]> Today’s elderly have much more wealth to bequeath than their predecessors, primarily as the result of rising 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, the dramatic decline of defined benefit pensions in the private sector and the stagnation in household incomes. Together, these trends mean inherited wealth is likely to play a more important role in determining the lifetime economic resources of younger generations, with important implications for inequality and social mobility.

Looking at current pensioners, we find that those with the highest lifetime incomes are also those who have inherited the most across the course of their lives. High-lifetime-income individuals are around twice as likely as low-income individuals to have inherited something, and many times more likely to have inherited hundreds of thousands of pounds. There is evidence that these patterns are likely to be maintained among younger generations: those with higher incomes are much more likely to either have received an inheritance or expect to receive one in future. An assessment of how inequality in the amounts inherited will differ for younger generations would require the collection of new data, but would be a worthy topic for future research.

The growing importance of inherited wealth

Elderly households now have much more wealth than households of the same age a decade ago.

Among households where all members are 80 or older, average real non-pension wealth in 2012–13 was £230,000, compared with £160,000 for the same age group in 2002–03.

An increased proportion of elderly households intend to leave a large inheritance.

In 2012–13, 44% of elderly households expected to leave an inheritance of £150,000 or more, compared with just 24% in 2002–03.

Younger generations are much more likely to expect to receive an inheritance than their predecessors.

Of those born in the 1970s, 75% either have received or expect to receive an inheritance, compared with 68% of those born in the 1960s, 61% of those born in the 1950s, 55% of those born in the 1940s and less than 40% of those born in the 1930s.

 

Current pensioners: who inherited?

People with higher incomes over their lifetimes are also more likely to receive an inheritance.

Looking at a group of individuals born in England in the 1930s and 1940s, 64% of the highest-income fifth (top quintile) have benefited from an inheritance, compared with 32% of the lowest-income fifth (bottom quintile).

Among heirs, those with higher incomes inherit more on average.

Looking at the same group, mean inheritance among heirs averaged £150,000 for the top quintile, but less than £100,000 for everyone else. Combined with being more likely to receive an inheritance at all, this meant the top quintile inherited four times as much on average as the bottom quintile (£100,000 compared with £25,000).

Those with the highest lifetime incomes are much more likely to have received an extremely large inheritance.

Nearly 10% of those in the top lifetime income quintile have inherited more than £250,000, compared with around 1% of those in the bottom three quintiles. In other words, more than half of those who have inherited more than £250,000 are also in the top lifetime income quintile.

As a proportion of lifetime income, inheritances are largest for the highest- and lowest-income individuals.

Lifetime inheritances are 4.4% of net lifetime income for the top quintile and 3.6% for the bottom quintile, compared with around 2% for the second and third lifetime income quintiles.

These inheritances can be significant multiples of annual income from employment, particularly for low earners.

Across the group as a whole, 12% have inherited more than 5 years’ worth of net earnings and 4% have inherited more than 10 years of net earnings. But among the lowest-earning fifth, those figures rise to 16% and 9% respectively.

 

Younger generations: who will inherit? 

The wealth of elderly households is extremely unequally distributed.

The top half of households where all members are 80 or older hold 90% of the wealth, and the top 10% hold 40% of the wealth. Hence a ‘lucky half’ of younger households look likely to get the vast majority of the inherited wealth from the older generation.

In younger generations, those with higher current incomes are significantly more likely to have received an inheritance or expect to receive one at some point in future.

Among those born in the 1970s, 87% of those in the top income quintile have received or expect to receive an inheritance, compared with 58% of those in the bottom income quintile.

Inheritances have become more important for both low- and high-income households.

The poorest 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.

]]>
https://www.ifs.org.uk/publications/8831 Thu, 05 Jan 2017 00:00:00 +0000
<![CDATA[Police officer retention in England and Wales]]> Key findings

Police force numbers are driven by changing entry rates, not exit rates

Police officers are not employees, as in other occupations.

 

The absence of a contract of employment implies, among other things, that police officers cannot be made redundant.

Changes in police officer numbers are largely driven by changes in the entry rate.

 

Police officer numbers rose sharply between 2001 and 2005, and contracted between 2010 and 2013. Exit rates changed little over time.

Which officers leave, and what do they do next?

The primary exit route for police officers is through ordinary retirement via the police pension schemes.

 

Over the period 2004–05 to 2014–15, 62% of police officer exits from the force were ordinary retirements, while 7% were early retirements on the grounds of ill health. Less than one-third (27%) were voluntary resignations from the police force.

Most police retire from the labour force on leaving the police service; those who remain in the labour force choose a variety of occupations.

 

Of the third that leave the police (either through retirement or for other reasons) and continue in employment, 15% continue in protective services or elementary security occupations. However, the majority go to occupations not directly related to policing, including administrative and secretarial (25%) and associate professional and technical (19%) occupations.

Leaving rates differ across police forces and this variation reflects the relative attractiveness of alternative occupations.

 

We show that better outside local labour market opportunities (higher wages and lower unemployment rates) are statistically significantly associated with higher resignation rates across police forces. Those forces geographically close to London also have higher rates of exit through transfers. We find no evidence that variation in crime rates and workload affect exit from the police service.

Introduction

The labour market in England and Wales for police officers is unusual in two respects. First, unlike virtually all other occupations in the UK, police officers have security of tenure. Police officers are not employees, but officers under the Crown, and there are no provisions for making police officers redundant. Hence, fluctuations in the size of the police officer workforce are largely driven by changes in entry rates rather than exit rates over time. Second, the requirement that an active police officer should be ‘fully deployable’ over a whole range of activities has underpinned a relatively young ‘normal age of retirement’ in police pension schemes relative to most other occupations.

These two characteristics of the police labour market imply that standard analyses of employee retirement in other occupations are less pertinent to police officers. Exit rates are not very sensitive to aggregate fluctuations in public spending or the aggregate business cycle. In addition, many police officers do not retire from the labour force on leaving the police. Nevertheless, local conditions may be an important factor in considering retention and exit strategies of police officers. This briefing note therefore considers retention in the police force: who leaves the police, what they go on to do, and how retention differs across the individual police forces of England and Wales.

To set the scene, Figure 1 illustrates the size of the total police officer workforce across England and Wales between 1989 and 2015. During the 1990s, the number of police

Figure 1. Total police officer strength

Total police officer strength

Note: Full-time equivalents as at 31 March. Excludes secondments outside the police service in England and Wales.

Source: Home Office, Police Service Personnel, 1998–2000; Home Office, Police Service Strength, 2000–12; Home Office, Police Workforce, 2013–15.

officers was relatively steady at around 125,000, though on a gradual decline from 1993 onwards. However, from 2001, the number of police officers increased markedly, reaching around 141,000 in 2005. This expansion was an explicit decision by the Labour government, who were re-elected in 2001 on the basis of a manifesto that included a pledge to increase police spending significantly and to thereby increase police numbers to record levels. Between 2005 and 2010, officer numbers were again relatively stable (increasing slightly in 2009). From 2010 onwards, as a consequence of the coalition government’s cuts to public spending in the wake of the financial crisis, the number of police officers has fallen to roughly the level in 2002.

Figure 2 shows that these changes in police officer numbers are largely driven by changes in the rate at which officers join the police force; the leaving rate is relatively stable over this period by comparison. This is unsurprising given, as we have suggested, that police forces have little direct control over leaving rates.

Figure 2. Police officer joining and leaving rates

Police officer joining and leaving rates

Note: Joining/leaving rates are calculated as the number of police officers joining/leaving the police during a financial year, divided by the total number of police officers (full-time equivalents) at the end of the financial year. Figures include transfers (i.e. officers who transfer between forces will count as both a joiner and a leaver).

Source: Home Office, Police Service Personnel, 1998–2000; Home Office, Police Service Strength, 2000–12; Home Office, Police Workforce, 2013–15.

In this briefing note, we examine police officer retention in more detail. We start in Section 2 by describing the institutional context – the ways by which police officers can leave the force voluntarily or involuntarily and the incentives created by the police pension schemes. In Section 3, we examine how common different types of exit are across England and Wales as a whole, how this has changed over time and what police officers do when they leave the police force. Then in Section 4 we explore differences across individual police forces in exit rates and reasons. Section 5 concludes.

]]>
https://www.ifs.org.uk/publications/8824 Tue, 03 Jan 2017 00:00:00 +0000
<![CDATA[Does free childcare help parents work?]]> Free part-time childcare places for all 3- and 4-year-olds in England were introduced in the early 2000s. The government is now planning to extend this offer from 15 to 30 hours per week (still for 38 weeks of the year) for children in working families from September 2017. One of the aims of the policy is to enable parents to work more – but is it likely to achieve this aim? This briefing note draws on the findings of a new IFS working paper, ‘Free childcare and parents’ labour supply: is more better?’, by Mike Brewer, Sarah Cattan, Claire Crawford and Birgitta Rabe, to try to answer this question.

In this new work, the researchers compared what happened to the labour market outcomes of mothers and fathers as their children moved from being entitled to a free part-time nursery place (offering 15 hours of free childcare per week) to a full-time place at primary school (which effectively offers parents 30–35 hours of free childcare per week).

The research found no evidence that the work patterns of mothers with younger children, or those of fathers, were affected. There was evidence of an effect for mothers whose youngest child became eligible for free full-time care, but this was still relatively small: at the end of the first year of entitlement to free full-time care, mothers whose youngest child was eligible were found to be 5.7 percentage points more likely to be in the labour force and 3.5 percentage points more likely to be in work than mothers whose youngest child was at the end of their first year of part-time entitlement. This was equivalent to around 12,000 more mothers in work each year.

Should we infer from these results that the planned increase in entitlement to free care from 15 to 30 hours per week for 3- and 4-year-olds in working families in England will have a similarly small effect on parents’ labour supply? There are some reasons to think that the effects identified by the researchers might be smaller than the future impact of this policy: for example, the researchers examined the effects of moving to a very rigid form of full-time childcare – that delivered during school hours and only during term time – while the plans for the new policy suggest that the additional hours of free care could be taken more flexibly, across fewer than 5 days per week and more than 38 weeks per year. The fact that the additional hours are only available to working parents may also encourage more parents to move into work in order to become entitled to the extra care. But there are also reasons to think that the effects of the new policy might be smaller than those identified by the researchers: 30 hours is slightly less than the number of hours per week that children spend in school, and more mothers are in work now than they were at the time of the study.

Overall, it is difficult to judge what effect the proposed extension of free care from 15 to 30 hours per week for 3- and 4-year-olds in working families in England will have on parental labour supply, but the recent research conducted in England – together with the balance of evidence from the international literature – suggests that it is only likely to increase parental employment slightly.

Of course, the provision of additional free childcare is also likely to reduce the amount parents spend on childcare. But it will probably do so by far less than the amount the government will spend providing the extra care, because many parents use informal care (for which they do not have to pay) rather than paying for formal care to meet their childcare needs.

]]>
https://www.ifs.org.uk/publications/8792 Thu, 01 Dec 2016 00:00:00 +0000
<![CDATA[Winter is Coming: the outlook for the public finances in the 2016 Autumn Statement]]> As the new Chancellor prepares for his first fiscal statement this briefing note looks at how significant a public finance challenge he faces.

Prior to the referendum the public finance challenge facing the UK already looked far from easy. Two out of the three fiscal targets that the new Conservative Government set itself had already been breached and further net tax rises, benefit cuts and real cuts to spending on public services – which will not be easy to deliver – were planned for the remainder of this parliament in order to try to eliminate a still relatively high budget deficit by 2019–20. And there was a further longer-term public finance challenge caused by the financial costs of an ageing population.

But since then the referendum result has led to the Government abandoning its other fiscal target and virtually all leading economic forecasters – including the Bank of England – substantially revising down their forecasts for economic growth. If correct this worsens the UK’s public finance position. This briefing note attempts to quantify how much greater the public finance challenge might be, taking into account not just the latest macroeconomic forecasts but also the movements in gilt rates, equity markets and oil prices seen since the last Budget and the scope for a cut to public spending as a result of no longer having to make a net financial contribution to the EU budget.

The note is structured as follows. Section 2 sets out the UK government’s public finance plans as of the March 2016 Budget. Section 3 describes how forecasts for growth and inflation from the Bank of England and other leading forecasters have changed since the referendum result, and also highlights the evolution of equity markets, gilt rates and the sterling oil price over the same period as these can all affect revenues and spending. Given these changes, Section 4 takes a plausible outlook for the UK economy and describes how this would change the forecasts for receipts, spending, borrowing and debt through to 2019–20. In Section 5 we discuss considerations for the Chancellor around his choice of fiscal targets and how fiscal policy might need to adjust to the changing public finance outlook both over the next few years and over the longer-term. Section 6 concludes.

]]>
https://www.ifs.org.uk/publications/8718 Tue, 08 Nov 2016 00:00:00 +0000
<![CDATA[The economic circumstances of different generations: the latest picture]]> 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).

Differences in the economic circumstances of people born at different times and the role of government policy in exacerbating or mitigating those differences, have risen in prominence in recent years.The Work and Pensions Select Committee is currently conducting an inquiry into ‘intergenerational fairness’. The new Prime Minister included the fact that ‘if you’re young, you’ll find it harder than ever before to own your own home’ in a list of ‘injustices’ she intends to fight.

This briefing note provides an up-to-date and comprehensive picture of the incomes and wealth of different cohorts as they have moved through their lives. It is partly an update of previous work by some of the same authors, which focused on those born between the 1940s and the 1970s. The key finding of that research was that, compared with those born 10 years earlier at the same age, those born in the 1960s and 1970s have no higher takehome incomes; have saved no more of their previous take-home income; are less likely to own a home; probably have lower private pension wealth relative to their earnings; and will tend to find that their state pensions replace a smaller proportion of previous earnings. On the other hand, they expect to inherit more wealth – perhaps the main reason they could still hope to be better off than their predecessors in retirement, on average.

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.

The underlying data for this briefing note can be found here.

]]>
https://www.ifs.org.uk/publications/8583 Thu, 29 Sep 2016 00:00:00 +0000
<![CDATA[The gender wage gap]]> "If you’re a woman, you will earn less than a man." - From Theresa May’s first statement as Prime Minister
"Last year Britain was ranked 18th in the world for its gender pay gap ... We can and must do far better." - From Jeremy Corbyn’s campaign speech in July 2016

Gender wage differentials remain substantial and, as evidenced by the quotations above, a hot topic in policy debate. Inequalities between men and women are clearly of direct interest in their own right. In addition, poverty is increasingly a problem of low pay rather than lack of employment. The proportion of people in paid work is at a record high, and female employment has risen especially quickly, particularly among lone parents. Two-thirds of children in poverty now live in a household with someone in paid work.3 In an age when the main challenge with respect to poverty alleviation is to boost incomes for those in work, and when so many more women are in work than in the past, understanding the gender wage gap is all the more important.

This briefing note is the first output in a programme of work seeking to understand the gender wage gap and its relationship to poverty. Section 1 sets out what we mean by the gender wage gap, how it differs according to education level and how it has evolved over time and across generations. Section 2 provides some descriptive evidence on how the gender wage gap relates to the presence of dependent children and the employment outcomes associated with that.

 

 

]]>
https://www.ifs.org.uk/publications/8428 Tue, 23 Aug 2016 00:00:00 +0000
<![CDATA[The puzzle of graduate wages]]> The UK higher education sector has expanded remarkably over the past three decades. In 1993, 13% of 25- to 29-year-olds had first degrees or higher degrees. By 2015, this had roughly tripled to 41%. Naturally, one may wonder whether the big expansion has reduced the economic returns to having a first degree. We have all heard stories about graduate unemployment and graduates employed in low-wage jobs. But what do the data show and what can we learn from history?

This briefing note will document the historical trends of rising graduate numbers and their relative wages, and provide economic intuition for what is driving these trends. Understanding the past will be helpful in thinking about the future: if the proportion of graduates continues to increase (which is rather likely given current policies), will it lower graduate earnings?

  • Fact 1: The UK has seen a rapid increase in the proportion of young people with degrees over the past three decades. 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.

Percentage of 25- to 29-year-olds with first degrees or above, by birth cohort and gender

Percentage of 25- to 29-year-olds with first degrees or above, by birth cohort and gender

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

  • Fact 2: Despite the recent fall in the average graduate real wage, their wage relative to school-leavers’ has remained relatively unchanged. Indeed, at any given age, the wage differential between graduates and school-leavers has stayed essentially unchanged across birth cohorts.

Median real hourly wage of 25- to 29-year-olds, by education

Median real hourly wage of 25- to 29-year-olds, by education

Source: Authors’ calculations from Labour Force Survey 1992–2015. The deflator is the Consumer Price Index, ONS series D7BT.

]]>
https://www.ifs.org.uk/publications/8409 Thu, 18 Aug 2016 00:00:00 +0000
<![CDATA[An evaluation of different ways to incentivise citizens to co-produce public services in Lambeth]]> Reductions in budgets for public services are forcing all areas of government to consider how we best deliver public services to meet these new fiscal conditions. One potential solution is to engage citizens to assist in the production of services with government officials. This method, known as ‘co-production’, shares the burden of cost whilst capitalising on the skills of the citizenry. 

The viability of this solution for government services in the UK is an open question. Generating empirical evidence and investigating the appropriate design of such a scheme requires a government organisation ready to undertake the appropriate research. US states have frequently trialled different approaches to public service delivery, with successful examples taken up by other states. To date, however, there has been limited use of rigorous evaluation methods in evaluating the organisation of government in the UK and determining ‘what works’. 

The UK’s local councils have the potential to be laboratories for effective public policy in the same way as the US states are. In this project, we have partnered with Lambeth Council to design a randomised controlled trial that tests the efficacy of different incentives for citizens to involve themselves in the co-production of public services.

]]>
https://www.ifs.org.uk/publications/8352 Mon, 11 Jul 2016 00:00:00 +0000
<![CDATA[Improving CLTS targeting: evidence from Nigeria]]> Many low-income countries face the hefty challenge of increasing sanitation coverage, in both rural and urban areas, which demand di fferent solutions. In response, governments, with support from international agencies, bilateral donors and non-government organisations, are deploying a range of programmes and policies to accelerate progress towards the new global goals. Community-led total sanitation (CLTS) is one popular approach. CLTS works with an entire community to identify the negative e ffects of poor sanitation, especially the practice of open defecation, and empowers them to collectively find solutions. CLTS is understood to be more suitable for small, rural and homogeneous communities, however it is still considered an appropriate solution for more urbanised areas.

The Institute for Fiscal Studies and WaterAid have co-authored this brief which provides quantitative evidence to support this conjecture and bring forward a simple rule of thumb that allows more efficient programme targeting. We suggest that using this information can improve the targeting of CLTS in Nigeria, and possibly other countries, freeing up scarce resources to identify and test complementary sanitation approaches suitable for more urbanised communities.

Please also see WaterAid's blog: CLTS in urbanised areas: is it time to stop tweaking and start targeting?



]]>
https://www.ifs.org.uk/publications/8300 Fri, 03 Jun 2016 00:00:00 +0000
<![CDATA[The changing composition of UK tax revenues]]> In this IFS Briefing Note we look at the changing composition of UK tax revenues between 2007-8 and 2020-21. 

 

 

 

]]>
https://www.ifs.org.uk/publications/8244 Tue, 26 Apr 2016 00:00:00 +0000
<![CDATA[The budget of the European Union: a guide]]> On 23 June 2016, voters in the UK will be asked to decide whether they wish to remain in the European Union (EU) or leave. This decision will have profound economic implications, particularly given the importance of EU membership to trade and immigration. Leaving the EU would affect UK GDP and hence the level of tax revenues and the state of the public finances.  

Membership of the EU also has a more direct impact on the UK’s public finances, since the UK is obliged to make contributions towards the EU’s budget, and benefits from spending by the EU in the UK that might otherwise have to be met by tax revenues. As is well known, the UK is a net contributor to the EU budget since the UK’s contributions to the EU budget exceed the amount that the EU spends in the UK, even after the rebate on its contribution that the UK has enjoyed since 1984. These impacts of EU membership on the public finances are easiest to calculate, but not the most important: if leaving the EU significantly increased or reduced national income, the impact on the public finances would dwarf the UK’s current overall net contribution (around £5.7 billion in 2014).

This report is the first of several that the IFS will produce in the run up to the EU referendum that will look at these public finance and budgetary issues. In it we set out the EU’s budget process, describe the EU’s different sources of revenue and items of expenditure and evaluate the rules underlying these, and compare the contributions and receipts of the 28 EU member states and their overall net positions. By bringing the information together and explaining it in a clear and concise way, we hope this ‘guide’ helps demystify the EU budget and how it works – although, as we shall see, the workings of some major parts of the budget are less than transparent.  

]]>
https://www.ifs.org.uk/publications/8225 Wed, 06 Apr 2016 00:00:00 +0000
<![CDATA[Using taxation to reduce sugar consumption]]> In the recent Budget, the Chancellor introduced a tax on the sugar content of soft drinks, citing concerns about childhood obesity. This tax will be introduced in 2018 and will not apply to fruit juices or milk-based drinks. It has followed calls from various bodies for intervention to reduce people’s sugar consumption. In this briefing note, we provide some descriptive evidence on the main sources of dietary sugar and we lay out some of the economic issues related to the introduction of a tax on sugar.

The key points in this note are:

  • In the recent Budget, the Chancellor introduced a tax on the sugar content of soft drinks, citing concerns about childhood obesity. This tax will be introduced in 2018 and will not apply to fruit juices or milk-based drinks.
  • Government intervention to reduce sugar intake is potentially justified if there are costs associated with consumption that are not taken into account by the individual when choosing what to eat – for example, the publicly-funded health costs of treating diet-related disease or unanticipated future health problems.
  • The extent of these costs is likely to vary across individuals and potentially across different types of products.
  • Corrective taxes, such as the kind levied on cigarettes, alcohol, fuel and other goods that are thought to have high social costs, should aim to raise the price to bring the costs perceived by an individual into line with the true costs associated with their consumption.
  • An appropriately-defined tax base can help to ensure that a tax is better targeted at socially costly consumption. The tax base will determine the way that the tax changes relative prices faced by individuals, and hence how they switch across products in response.
  • A tax levied on sugary soft drinks has the advantage that reduction in consumption of these products is not likely to directly adversely impact other aspects of diet quality. However, its effectiveness at reducing sugar consumption will depend on the products towards which people switch.
  • Carbonated and non-carbonated soft drinks account for on average around 17% of the added sugar that households purchase. Therefore, a tax imposed on these products would target only a fraction of the average household’s total added sugar purchases.
  • However, households that purchase the largest amounts of sugar get around twice as much of their sugar from carbonated and non-carbonated soft drinks as households that purchase the lowest amounts of sugar (based on a comparison of the top 20% and the bottom 20% of households’ share of calories from processed added sugar), making a soft drinks tax potentially well targeted.
  • In addition, households with children purchase on average around 50% more of their added sugar from carbonated and non-carbonated soft drinks, compared with households without children, which also suggests that a soft drinks tax could potentially be well targeted.
  • A broader-based tax levied on a wider range of sugary products would raise the price of products that collectively account for a larger fraction of added sugar, but is likely to be less well targeted – for instance, potentially strongly impacting consumers for whom the rationale for government intervention is weak.

 

]]>
https://www.ifs.org.uk/publications/8216 Thu, 24 Mar 2016 00:00:00 +0000
<![CDATA[Funding the English & Welsh police service: from boom to bust?]]> Spending on the police in England and Wales was cut by 14% in real terms between 2010–11 and 2014–15. This briefing note, funded by the Economic and Social Research Council, places these spending cuts in the context of the large spending increases over the 2000s, and explores the differences between police forces in how they fared over these two periods.

Executive summary

  • Police spending in England and Wales is financed from two main sources: grants from central government, and a component added to local council tax called the police precept. Some police forces are much more reliant on grant funding than others. For example, in 2010–11, Surrey Police received 54% of its revenue from grants, while Northumbria Police received 88%.

  • Between 2000–01 and 2010–11, total police spending increased by 31% in real terms. This was mainly due to increases in precept revenues, which increased from 17% of total revenues to 25%.

  • The forces that saw the biggest increases in police spending over the 2000s were those that increased revenues from the precept by the most. North Yorkshire more than tripled its precept revenues between 2000–01 and 2010–11 and saw overall revenues increase by more than 50%, whereas Northumbria increased precept revenues by only a third and saw overall revenues increase by just 14%.

  • In marked contrast to the 2000s, police grants were cut by 20% in real terms between 2010–11 and 2014–15, and total police spending fell by 14%. Because some forces are much more reliant on grant funding than others, the cuts to spending power varied substantially across forces: Surrey Police saw its revenues fall by 10% between 2010–11 and 2014–15, while Northumbria Police saw its revenues fall by 19%.

  • The forces least reliant on grant funding in 2010–11 were also those that raised most revenues from the precept over the 2000s. Therefore, the forces that saw the biggest cuts to spending between 2010–11 and 2014–15 also typically saw the smallest increases over the 2000s.

  • The forces that increased their precept revenues most over the 2000s generally had lower levels of spending per person in 2000–01. This meant there was convergence in levels of police funding per person across England and Wales between 2000–01 and 2014–15.

  • Why some forces increased precept revenues by so much more than others remains an important question. It could be a result of the formula for allocating grants not adequately reflecting relative need. Or it could be due to local preferences. Understanding these different motivations will be crucial for the Home Office as it seeks to reform how grant funding is allocated between forces going forward.
]]>
https://www.ifs.org.uk/publications/8049 Tue, 17 Nov 2015 00:00:00 +0000
<![CDATA[Social Housing in England: A Survey]]> This briefing note provides an overview of the social housing system. Except where stated otherwise, it focuses on the system in operation in England: many of the institutional and policy details differ in the other nations of the UK, and a full treatment of those is beyond the scope of this survey. However, some of the basic facts about social housing can be provided at a Great Britain or UK level, and we do that where possible (making clear the distinction). This note accompanies a detailed report analysing the choice over the level of rents charged to tenants in the social housing sector. Chapter 2 of that report, which provides some necessary policy and institutional background, is an abridged version of this briefing note.

]]>
https://www.ifs.org.uk/publications/8035 Thu, 05 Nov 2015 00:00:00 +0000
<![CDATA[Response to the government’s consultation on freezing the repayment threshold]]> This briefing note was submitted to The Department for Business, Innovation and Skills public consultation on 14 July 2015.

 

In the Summer Budget on 8 July 2015, the Chancellor announced plans for several important changes to higher education funding and student support. These reforms are analysed in detail in Britton, Crawford and Dearden (2015).  One of the proposed reforms was a plan to freeze the income threshold above which student loan repayments are made in nominal terms at its current level (£21,000 per year in 2016 prices) for 5 years.  The Department for Business, Innovation and Skills launched a public consultation regarding the proposal on 22 July 2015. This short note extends the work of Britton, Crawford and Dearden (2015), analysing the likely implications of the proposed changes for students entering university in 2016-17.

 

 

]]>
https://www.ifs.org.uk/publications/8021 Fri, 16 Oct 2015 00:00:00 +0000
<![CDATA[The outlook for the 2015 spending review]]> On 25th November the government will announce the results of its 2015 Spending Review, allocating spending between government departments for the four years 2016-17 to 2019-20. This background briefing note sets out the constraints facing the Chancellor, given the plans for the public finances that he published in the July Budget.

An accompanying online calculator allows you to act as Chancellor and conduct your own Spending Review. Complete with data visualisation and infographics, the interactive tool guides you through the headline plans the Chancellor has made, and lets you make your own decisions about how to allocate spending between government departments.

Visit the online guide and calculator

]]>
https://www.ifs.org.uk/publications/8008 Fri, 02 Oct 2015 00:00:00 +0000
<![CDATA[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]]> This briefing note, prepared for the House of Commons Treasury Select Committee, documents the estimated distributional impact of the tax and benefit changes that have been announced for implementation in the current parliament. It then considers the extent to which households might expect the net losses from these changes to be offset through increased wages as a result of the large increase in the minimum wage for those aged 25 and over that was announced in the July 2015 Budget. 

Executive summary

  • A package of changes to the tax, tax credit and benefit system has been announced for implementation in the current parliament as part of the government’s deficit reduction programme. These 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).

  • If the NLW were to have no effect on GDP, employment or hours of work it would offset 27% of the drop in household incomes from the impact of net tax and benefit reforms. In fact, as the Office for Budget Responsibility stresses, the NLW is likely to depress GDP and employment, and the money for it has to come from somewhere so this can be taken as a “better case” scenario, at least in the short term.

  • 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.

  • Among the 8.4 million working age households who are currently eligible for benefits or tax credits who do contain someone in paid work the average loss from the cuts to benefits and tax credits is £750 per year. Among this same group the average gain from the new NLW, is estimated at £200 per year (in a “better case” scenario). This suggests that those in paid work and eligible for benefits or tax credits are, on average, being compensated for 26% of their losses from changes to taxes, tax credits and benefits through the new NLW.

  • 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 on a “better case” scenario). This suggests that a “better case” estimate of the compensation these groups are receiving is 7%, 13% and 24% respectively, on average.

  • There may be strong arguments for introducing the new NLW, but it should not be considered a direct substitute for benefits and tax credits aimed at lower income households.
]]>
https://www.ifs.org.uk/publications/7975 Wed, 09 Sep 2015 00:00:00 +0000
<![CDATA[Analysis of the higher education funding reforms announced in Summer Budget 2015]]> In the Summer Budget of 2015, the Chancellor announced some further changes to higher education funding and student support. This briefing note assesses each of these reforms in turn. The authors start by providing a brief overview of the model underlying our estimates. Next they discuss the implications of the removal of maintenance grants for students and the government, followed by the likely implications of the proposed changes to the repayment threshold, fees and the discount rate, which will all be subject to public consultation. The note ends with some brief conclusions.

]]>
https://www.ifs.org.uk/publications/7904 Tue, 21 Jul 2015 00:00:00 +0000
<![CDATA[Mobility of public and private sector workers]]> 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. 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.

In this Briefing Note, funded by the Joseph Rowntree Foundation and the Economic and Social Research Council (ESRC), we look at the movement between jobs, or ‘mobility’, of workers in the public and private sectors.

We set out the extent to which reductions in the public workforce to date have been delivered by reducing net inflows from outside the labour force (freezing recruitment of new workers and not replacing workers who move to non-employment) and increasing net outflows to the private sector (more workers moving from the public sector to the private sector than moving in the other direction).

We also explore the extent to which workers change jobs within sectors and move around the country. Both these forms of job mobility provide evidence on how the fluidity and flexibility of labour markets are changing over time and form a useful comparison in order to judge whether across-sector moves are relatively common or not. We might also expect these forms of job mobility to differ between the public and private sectors because of differences in the transferability of skills within sectors and the nature of rewards. 

]]>
https://www.ifs.org.uk/publications/7775 Tue, 16 Jun 2015 00:00:00 +0000
<![CDATA[Taxes and benefits: the parties’ plans]]> Click here to download the Executive Summary only.

The last five years have seen considerable policy activity in the tax and benefit sphere: in total, some £56 billion per year of giveaways and £89 billion per year of takeaways by 2015–16. Most of the main tax reforms have simply changed rates or thresholds within current structures – the increase in the main rate of VAT, cuts to the main corporation tax rate, real cuts to the rates of fuel duties and the big increase in the income tax personal allowance being the most important. Only for pensions and savings has there been a significant reshaping in terms of what is taxed and what is not. Changes to benefits have mostly been straightforward cuts in generosity, with more significant structural reform coming in the next parliament – the introduction of the single tier pension, the introduction of universal credit and the replacement of disability living allowance (DLA) with personal independence payment (PIP).

As for what is to come, there are important areas of agreement between the main UK parties. There is apparently a huge amount of money to be extracted through a clampdown on tax avoidance (mysteriously missed by all previous clampdowns). There is yet more money to be extracted from those on very high incomes saving in a private pension. The main rates of income tax, NICs and VAT will not be increased. The ‘triple lock’ on indexation of the basic state pension will remain and most pensioner benefits will be protected. There is also a shared lack of any attempt to paint a coherent strategy for tax reform, a shared desire to impose further, often absurd, complications to the tax system, and a shared lack of willingness to set out specific benefit measures which chime with the parties’ rhetoric. On that latter point, on the one hand the Conservatives have spent two years promising substantial additional benefit cuts of £12 billion a year whilst failing to come up with more than 10% of that figure in actual cuts. On the other hand Labour’s promised ‘toughness’ involves reducing spending by almost nothing by taking winter fuel payments from the small number of pensioners subject to the higher rates of income tax, and, most likely, literally nothing by limiting the uprating of child benefit rates.

There are significant differences between the parties too. The Conservatives are promising significant income tax cuts through further increases in the personal allowance and an increase in the point at which higher rate tax becomes payable. The first of these ambitions is shared by the Liberal Democrats while the Labour manifesto is silent on these points. Labour and the Liberal Democrats (and the SNP) share a desire to impose a ‘mansion tax’, not a policy adopted by the Conservatives. Labour (and the SNP) would return the top rate of income tax to 50%. The Conservatives are alone in saying they would seek big cuts in benefit spending and generosity.

In this summary we look at the main proposed changes to income tax, mansion tax, other taxes, and benefits in turn, with a particular focus on Labour and the Conservatives. The main body of this document then examines most of the specific tax and benefit policies of Labour, Conservatives and Liberal Democrats in some detail.

 

Watch a recording of the briefing at which the note was launched here:

]]>
https://www.ifs.org.uk/publications/7733 Tue, 28 Apr 2015 00:00:00 +0000
<![CDATA[Extending Right to Buy: risks and uncertainties]]> The flagship new announcement in the Conservative Party manifesto last week was a major extension of Right to Buy (in England) to cover 1.3 million housing association (HA) tenants. The Conservatives also announced a second, distinct policy of requiring councils (referred to here as local authorities, or LAs) to sell their most expensive properties as they become vacant, which they estimate would raise £4.5 billion per year. The two policies are related because part of the revenue raised from sales of expensive LA properties will be used to pay for the extension of Right to Buy – with the rest funding a commitment to replace properties sold on a ‘one-for-one’ basis and to create a £1 billion ‘Brownfield Regeneration Fund’.

This briefing note, which is part of IFS’s election analysis funded by the Nuffield Foundation, sets out what we know about these two policies. We start in Section 2 by providing some context in terms of the impact of Right to Buy on the social housing sector over time and how housing associations have been (largely) exempt from Right to Buy. In Section 3, we describe the detail of the two Conservative Party proposals. Section 4 attempts to shed light on some of the questions left open by this announcement: the cost of the Right to Buy discounts, the amount that can be raised from sales of expensive LA properties, and the likely cost of funding the proposed ‘one-for-one’ replacement of sold social housing. Section 5 concludes. 

]]>
https://www.ifs.org.uk/publications/7730 Fri, 24 Apr 2015 00:00:00 +0000
<![CDATA[Post-election austerity: parties’ plans compared]]> In this election briefing note we compare and contrast the fiscal plans laid out by the four political parties that are widely predicted to win the most seats in the forthcoming UK general election: the Conservatives, Labour, the Liberal Democrats and the Scottish National Party (SNP). All these parties are proposing reductions in borrowing relative to current levels, though they appear to differ in what they think a suitable medium term level of borrowing is and how quickly they wish to get to that level of borrowing (and, therefore, in how quickly they want debt to fall).

The parties also differ in the extent to which they think that a borrowing reduction should be achieved through tax rises, cuts to social security spending, or cuts to spending on public services. In this note we compare the composition of the future tightening planned by the parties – to the extent that we know what their plans are. We also draw attention to what has been left unsaid.

Watch a recording of the briefing at which the note was launched here:

]]>
https://www.ifs.org.uk/publications/7725 Thu, 23 Apr 2015 00:00:00 +0000
<![CDATA[The link between childhood reading skills and adult outcomes: analysis of a cohort of British children]]> This briefing note builds on previous work by Crawford and Cribb (2013) to investigate the link between children’s reading skills at age 10 and their outcomes as adults using data from the British Cohort Study (a survey of individuals born in one week of April 1970). We find that reading skills are associated with significant increases in gross hourly wages and gross weekly earnings, particularly at older ages (ages 38 and 42), but less consistent evidence for strong links between reading skills in childhood and other outcomes in adulthood, including the likelihood of being in work, self-reported health status and the intergenerational transmission of reading skills. We also find some suggestive evidence that the link between reading skills in childhood and wages and earnings in adulthood is stronger amongst those from poor backgrounds. Overall, this note provides suggestive evidence that improving reading skills in childhood may be one route through which earnings potential in adulthood could be increased, although it should be noted that these estimates are associations rather than evidence of causality.

]]>
https://www.ifs.org.uk/publications/7687 Thu, 09 Apr 2015 00:00:00 +0000
<![CDATA[Schools spending]]> This briefing note focuses on changes in schools spending in England over time, comparing these with other areas of education spending, and examines how reforms to school funding have affected different groups of schools.  

  • Current or day-to-day spending on schools in England has been relatively protected both compared with other areas of public service spending and compared with other areas of education spending under the coalition government. Between 2010–11 and 2014–15, current spending on schools has risen by 3.0% in real terms and by 0.6% in terms of real spending per pupil. This compares with a real-terms cut of 13.6% to the age 16–19 education budget and a large real-terms cut to capital spending (across all phases of education) of about one-third. Current public service spending was cut by just over 8% in real terms.
  • The coalition government has made a number of important reforms to the school funding system in England, including: the introduction of the pupil premium; simpler school funding formulae, which help ensure local authority maintained schools, academies and free schools are funded on a similar basis; and giving schools more financial autonomy and responsibility.
  • Even before the pupil premium, there was already a substantial level of funding targeted at deprivation. In 2010–11, funding per pupil was 35% higher amongst the most deprived set of primary schools than amongst the least deprived ones, and it was 41% higher amongst the most deprived secondary schools than amongst the least deprived. By 2014–15, these figures had increased to about 42% and 49%, respectively, as funding per pupil rose more strongly amongst more deprived schools as a result of the pupil premium.
  • As well as a relatively generous settlement in the current parliament, squeezes on public sector pay mean that the actual costs faced by schools are likely to have increased by less than overall measures of economy-wide inflation. This is probably 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 actually increased from 210,000 in 2010 to reach 240,000 by 2013.
  • There are likely to be some significant cost pressures on schools’ spending over the next parliament. First, overall pupil numbers are expected to grow by 7% between 2016 and 2020. Second, the cost of employing staff for schools is likely to rise. There will be upward pressure on public sector pay levels in the next few years if private sector earnings continue to recover. The Office for Budget Responsibility (OBR) currently expects public sector pay per head to rise by 14.2% between 2014–15 and 2019–20. Additional employer pension contributions and higher National Insurance contributions (due to the end of contracting out) will further push up costs. The level of economy-wide inflation as measured by the GDP deflator is currently expected to be 9.1% between 2014–15 and 2019–20. If we account for the end of contracting out and increased employer pension contributions, we estimate that costs faced by schools will increase by 11.7% between 2014–15 and 2019–20. This increases to 16.0% if we further account for the OBR’s assumptions for likely growth in public sector earnings.
  • Labour and the Liberal Democrats have committed to protecting the age 3–19 education budget in real terms, though neither have said how this will be split across different parts of the budget. Meanwhile, the Conservatives have committed to protecting cash school spending per pupil. In practice, these commitments might imply similar overall settlements for schools if nominal spending increases are allocated equally across all areas by Labour and the Liberal Democrats (and assuming the protections are only just met). However, all could 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. This would be less generous than the real-terms increase in spending per pupil seen over the current parliament. There are clearer differences on proposals for education spending outside schools, such as 16–19 education, which has already seen large cuts.

The briefing note forms part of the IFS election 2015 analysis, funded by the Nuffield Foundation.

]]>
https://www.ifs.org.uk/publications/7669 Thu, 26 Mar 2015 00:00:00 +0000
<![CDATA[The coalition government’s record on tax]]> In this briefing note, we assess the coalition government’s reforms to the tax system. Although it implemented some large tax rises early in the parliament – an increase in the main rate of VAT and in all rates of National Insurance contributions (NICs) – the government has also managed to find scope for significant tax cuts. Just three of these – increases in the income tax personal allowance (net of reductions in the higher-rate threshold), cuts to the main rate of corporation tax, and real-terms cuts to fuel duties – have a combined cost of £19.5 billion in 2015–16. But the coalition’s changes to the tax system go far beyond that, with a large number of smaller measures constituting the bulk of its activity.

]]>
https://www.ifs.org.uk/publications/7642 Fri, 13 Mar 2015 00:00:00 +0000
<![CDATA[Central cuts, local decision-making: changes in local government spending and revenues in England, 2009-10 to 2014-15]]> This briefing note uses data from the Department for Communities and Local Government (DCLG) to delve into a number of questions about how local governments in England have responded to the reductions in their revenues. They have been forced to cut back significantly on service spending, but not all local authorities have been affected equally or reacted in the same way.

  • The note focuses on net spending by local authorities on public services. We exclude spending on police and fire and rescue as this is not directly under the control of single-tier and county councils. We also exclude spending on education, public health and a small component of social care as local authorities’ responsibilities for these areas have been changing over time. During this parliament, this measure of spending by local authorities in England has been cut significantly in real terms. Between 2009–10 and 2014–15, it was cut by 20.4% after accounting for economy-wide inflation. Taking into account population growth over this period, spending per person was cut by 23.4%.
  • These cuts to local authority spending were similar in magnitude to those seen on average across central government departments outside protected areas such as the NHS, schools and official development assistance.
  • Local authorities have had to cut spending in the face of falls in their main sources of revenue. Grants from central government to local government (excluding housing benefit grant and those specifically for education, public health, police, and fire and rescue services and the housing benefit grant) have been cut by 36.3% overall (and by 38.7% per person) in real terms between 2009–10 and 2014–15. Total council tax revenues have grown slightly in real terms over this period (3.2%), although 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. Council tax revenues funded just over half of local government spending in 2014–15, up from 41% in 2009–10.
  • Even though revenues have fallen significantly, on average local authorities have spent less than they received from grants and council tax over the last five years, meaning that on average they have increased their reserves rather than drawn from them. The average increase in reserves across local authorities in England was an increase equal to 5% of annual spending in 2009–10.

The size of cuts has varied across the country

  • While the average cut to local authority net service spending per person (excluding education, public health, police, and fire and rescue) was 23.4%, the change seen by individual local authorities ranged from a maximum reduction of 46.3% per person (in Westminster) to a reduction of 6.2% per person (in North East Lincolnshire).
  • Cuts to net service spending have tended to be larger in those areas that were initially more reliant on central government grants (as opposed to locally-raised revenues) to fund spending – 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.
  • As a result, London boroughs, the North East and the North West have seen the largest average cuts to spending per person. Since these regions initially had the highest level of spending per person, there has been some equalisation in the average level of local authority spending per person across regions over the last five years. In 2009–10, spending per person was on average 80.1% higher in London than 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%.
  • Since central government grants were cut much more deeply than council tax revenues, it is perhaps not surprising that those authorities for which grants made up a larger share of income saw larger cuts to their overall spending power. However, up to 2013–14 at least, the mechanism for allocating government grants was intended to take account of differences in local need and local revenue-raising capacity. But we can find no evidence that the formula actually operated in this way between 2009–10 and 2013–14. Indeed, there seems to have been no greater protection of more needy areas over this period than there was in 2014–15 when the new system for allocating grants – which explicitly does not account for changing relative needs – was introduced.

Some services have been cut more than others

  • Social care was the single largest component (comprising 47.2%) of local service spending in 2009–10 (excluding education, police and fire services). It is also one of the areas that have experienced smaller-than-average cuts in spending per person over this parliament. Between 2009–10 and 2014–15, net spending per capita on social care was cut by 16.7%.
  • 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%). Net local authority spending on transport was cut by 45% in London, and by between a quarter and a third in other areas of the country, although transport providers offset some of this cut by raising fares.
  • There was variation across the country, however, in which services different local authorities chose to focus the cuts on. The vast majority of local authorities chose to cut social care spending by less than other service areas. But prioritisation of other service areas has varied: for example, most areas have cut housing spending heavily but a minority of areas (particularly in London) have actually afforded it relative protection.

Planned cuts for 2015–16

  • Local authorities are expected to face further cuts to revenues per person of 4.1% in 2015–16 (excluding specific grants for mandatory housing benefit payments and education, public health, fire and police services), meaning that the cumulative cut to revenues per person since 2009–10 will be 26.1%. This assumes that all councils freeze council tax rates (and accept the ‘freeze grant’ from central government) next year.
  • The local authorities that have seen the largest cuts to revenues per person since 2009–10 are also those expected to see the largest cuts in 2015–16. London boroughs face a cut to revenues per person of 6.3%, which compares with 1.9% for shire counties.
  • Local authorities differ in their ability to offset the cuts to their grants by increasing council tax revenues, because a given increase in council tax rates would increase overall revenues by less for councils that are more grant-reliant. For example, a 2% increase in council tax rates would, on average, increase revenues per person by 0.3% for London boroughs, compared with 0.5% for shire counties. This may explain why London boroughs have been the most likely, over recent years, to accept the council tax freeze grants, while unitary authorities have been the least likely to do so.

Future pressures

  • There are likely to be further cuts to public service spending, and therefore local authority spending, over the next parliament. Future cuts may well be focused on the same local authorities that have experienced the largest cuts over this parliament.
  • The new system for allocating central government grants essentially applies a uniform cut to all authorities’ grants, meaning that those with less local revenue-raising capacity will see larger cuts to their total spending power. These areas have also, on average, seen the largest cuts to spending power over this parliament.
  • The new system also will not account for differences in population growth across areas. This means that those areas that see the fastest population growth will (other things equal) see the sharpest falls in grants per head. Official population projections suggest that the eight local authorities expected to have the fastest population growth over the next five years are all London boroughs, which also saw the fastest growth over the last five years.
  • Social care spending is already the single largest activity undertaken by local authorities, comprising more than half (53.1%) of total local authority spending (excluding education, public health, police and fire services) in 2014–15, and it has been relatively protected from cuts over this parliament. However, pressures on this area of service provision are likely to continue to grow over the next parliament, as the Office for National Statistics (ONS) projects that the population aged 75 and over will grow by 13.9%, much faster than overall population growth.
  • A future government could choose to increase spending on local government, although – since all three main UK parties are committed to reducing borrowing over the next parliament – this would likely have to come at the cost of reducing spending (or raising taxes) elsewhere.
  • Another option for easing the pressure on some local authorities would be to increase the cap on council tax rises before a local referendum is required (which is set at 2% for 2015–16) and/or change the mechanism for allocating central government grants to distribute these in a way that implies more equal cuts to local authorities’ total revenues.
]]>
https://www.ifs.org.uk/publications/7617 Fri, 06 Mar 2015 00:00:00 +0000
<![CDATA[Living standards: recent trends and future challenges]]> This briefing note examines what has been happening to living standards and unpicks the main reasons for these trends. It looks both at living standards on average and at the considerable variation in trends across different parts of the population. 

  • The coalition government took office after the Great Recession, just as household incomes were beginning their subsequent and inevitable decline. It would be misleading to attribute all trends in living standards that occurred before May 2010 to Labour and all trends thereafter to the coalition.
  • We project that real (RPIJ-adjusted) median household income is at around the same level in 2014–15 as in 2007–08 (before the financial crisis), and about 2% below its 2009–10 peak.
  • Having continued to rise slowly during the recession itself, real median household income then fell by 4.0% from peak in 2009–10 to trough in 2011–12, driven by falls in workers’ pay and in employment. This was a larger peak-to-trough fall than occurred around the early 1990s recession (1.2%), but smaller than in the early 1980s (5.7%).
  • Since then, employment has recovered strongly but real pay, and hence average income, has not. This is consistent with the absence of productivity growth since 2011. Meanwhile, the coalition has implemented a large package of tax and benefit measures taking money away from households in response to the structural budget deficit caused or revealed by the crisis.
  • The slow recovery in household incomes has been more remarkable by historical standards than the peak-to-trough fall. We project that median household income grew by just 1.8% in total between 2011–12 and 2014–15. In contrast, the first three years of recovery in the early 1980s and early 1990s saw median income grow by 9.2% and 5.1% respectively.
  • Household consumption has also been very slow to recover by historical standards. Consumption per head of non-durables (things such as food and fuel that are bought and consumed roughly 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 might reflect households’ perceptions that their income prospects have been permanently damaged by the crisis and that a significant cut to their spending is therefore required.
  • Assuming all households face the same inflation rate, income inequality is lower in 2014–15 than it was in 2007–08. This is explained by changes between 2007–08 and 2012–13, when earnings fell relative to benefits. Since 2012–13, incomes are projected to have fallen towards the top and bottom of the distribution but risen across the middle, in line with the distributional impact of recent tax and benefit reforms.
  • However, low-income families have faced higher-than-average inflation since 2007–08. This is mostly due to price changes in the period up to and including 2009–10: these families were hit harder by rising food and energy prices, and benefited less from falling mortgage interest rates. When this is taken into account, the changes in real incomes between 2007–08 and 2014–15 look similar across most of the income distribution.
  • The incomes of older individuals have caught up with those of the rest of the population in recent years, while living standards have fallen the most for young adults. After adjusting for group-specific inflation, median income among those aged 60 and over is projected to be 1.8% higher in 2014–15 than in 2007–08, compared with a 2.5% fall for those aged 31–59 and a 7.6% fall for those aged 22–30.
  • In the long run, policies that spur productivity growth will have the most significant effect on living standards. Over the course of the next parliament, the choices that the next government makes about the shape and size of any further fiscal consolidation will also affect how the living standards of different groups change. 

This briefing note forms part of the IFS election 2015 analysis, funded by the Nuffield Foundation.

]]>
https://www.ifs.org.uk/publications/7615 Wed, 04 Mar 2015 00:00:00 +0000
<![CDATA[Labour’s higher education funding plans]]> This briefing note looks at the implications of Labour's proposals for higher education funding plans.

  • On 27 February 2015, Labour announced its much-anticipated policy to reduce the undergraduate tuition fee cap to £6,000 per year for students in England. Alongside this change, it announced an increase in the interest rate charged on loans after graduation amongst high-income graduates, as well as a rise in average maintenance grants. University funding would be held constant under its proposal, with additional teaching grants distributed to universities to offset the lower fee income that they would receive.
  • Mid- to high-income graduates are the primary beneficiaries of this reform, with the very highest earners benefiting the most, despite the rise in interest rates that they would face. This is because high-earning graduates are the most likely to repay their loan in full under the current system; hence, they experience the largest reduction in repayments as a result of the lower fee cap (which the higher interest rate does not offset). Most lower-earning graduates will be unaffected.
  • The introduction of the £9,000 per year tuition fee cap in 2012 appears to have had little or no effect on applications to, or participation in, higher education (HE) amongst full-time students. For this group, it is therefore unlikely that a reduction in the cap to £6,000 will boost enrolment. On the other hand, there have been large reductions in part-time enrolment. It is possible that the cut in the cap could help those numbers recover.
  • Taken in isolation, this policy would slightly weaken the public finances. Debt will be permanently higher in the long run as a result of replacing fee loans with teaching grants, since some of the loans would have been repaid while grants are not.
  • Based on current estimates of future graduate loan repayments, we estimate that the changes made to the HE finance system would result in an increase in the long-run taxpayer contribution to higher education of around £1,000 per student per year (£3,000 per student per degree) in today’s money. For a cohort of 350,000 students, this is an increase in taxpayer support for higher education (resulting in an increase in public debt in the long run) of around £1 billion in today’s money. The long-run cost of this policy relative to the current system, however, depends crucially on future graduate loan repayments, which are highly uncertain.
  • In the absence of any other policy changes, Labour would have to find around £3.2 billion from net tax rises or spending cuts to pay for the full difference between current fees and the new £6,000 per year cap (which we assume all universities would charge) if borrowing is to be left unchanged in the short run.
  • The Labour party proposes to avoid these effects by implementing a permanent tax increase through restricting tax relief available on pension contributions. This would more than offset the long-term increase in government debt created by the HE policy changes.
]]>
https://www.ifs.org.uk/publications/7612 Fri, 27 Feb 2015 00:00:00 +0000
<![CDATA[Corporation tax changes and challenges]]> Corporate tax has rarely received as much attention as in recent years. The coalition government has enacted a series of policy changes – the most prominent being an 8 percentage point cut in the main rate – with an explicit aim of increasing the competitiveness of the UK’s corporate tax system. Concurrently, there have been prominent debates about the types of policies individual governments use to attract mobile investments, about corporate tax avoidance and about how the international corporate tax system can be improved.

In this election briefing note, we review the policy changes since 2010 and assess where this leaves the UK regime in an international context. Despite the large number of changes in this parliament, challenges remain for the next government. In particular, the UK has a corporate tax base that embeds a number of distortions, we are likely to face further international competitive pressure and we must balance the desire to be competitive with the aim of cooperating with international attempts to reduce avoidance. 

This briefing note forms part of the IFS election 2015 analysis, funded by the Nuffield Foundation.

]]>
https://www.ifs.org.uk/publications/7590 Thu, 26 Feb 2015 00:00:00 +0000
<![CDATA[Housing: trends in prices, costs and tenure]]> This briefing note looks at changes in the cost of housing for different groups, distinguishing between the purchase price of houses, regular spending on housing costs, and concepts of ‘affordability’ with respect to both house purchases and regular housing costs. It then looks at changes in housing circumstances, with a focus on tenure and dwelling size, and considers how these might be related to trends in prices and the balance of demand and supply. It concludes by reflecting on the policy challenges that these trends present.

This briefing note forms part of the IFS election 2015 analysis, funded by the Nuffield Foundation.

]]>
https://www.ifs.org.uk/publications/7593 Thu, 19 Feb 2015 00:00:00 +0000
<![CDATA[The right to buy public housing in Britain: a welfare analysis]]> This briefing note examines the Right to Buy policy in the United Kingdom, by which council tenants could buy their council properties at a discounted price, and the subsequent extension of the policy to most forms of social housing. This policy constituted the largest source of privatisation revenue to HM Treasury, especially in the 1980s, exceeding the revenues from all other individual privatisations. It was responsible for one of the biggest transformations of housing tenure of households in the UK’s history. The briefing note shows how the Right to Buy policy might be evaluated using economic principles; a formal theoretical economic model of housing tenure choices in the presence of Right to Buy is contained in an associated working paper published by IFS. 

]]>
https://www.ifs.org.uk/publications/7589 Tue, 17 Feb 2015 00:00:00 +0000
<![CDATA[Benefit spending and reforms: the coalition government's record]]> The coalition government has implemented changes to the benefit system that mean spending in 2015–16 will be £16.7 billion (7%) lower than it would otherwise have been. Real terms benefit spending, however, is forecast to be almost exactly the same in 2015–16 as it was in 2010–11, at £220 billion. This reflects the effect of underlying economic and demographic factors which are pushing up spending – most importantly an ageing population, but also weak wage growth and rising private rents.

Of course there have been some controversial benefit cuts. But, most of the major structural changes, such as universal credit, have run into problems, and are yet to be delivered. So far then, the reforms actually in place represent an evolution of the systm rather than revolution promised. These are among the findings of a new Election Briefing Note on the coalition’s reforms to the benefit system, part of a programme of work at the IFS in the run up to the election, funded by the Nuffield Foundation.

]]>
https://www.ifs.org.uk/publications/7535 Wed, 28 Jan 2015 00:00:00 +0000
<![CDATA[The effect of the coalition’s tax and benefit changes on household incomes and work incentives]]> The coalition government has introduced a large number of tax and benefit changes during its five years in office. In this briefing note, we examine the effect of all these changes on households' disposable incomes. In other election briefing notes, we will describe these changes, their individual merits and how they change the shape of the tax and benefit system as a whole.

This briefing note forms part of the IFS election 2015 analysis, funded by the Nuffield Foundation.

]]>
https://www.ifs.org.uk/publications/7534 Fri, 23 Jan 2015 00:00:00 +0000
<![CDATA[Fiscal aims and austerity: the parties’ plans compared]]> Each of the three main UK political parties has stated an objective for reducing borrowing over the next parliament. Somewhat oddly, each of these targets would allow a looser fiscal position in the medium-term than is currently planned by the coalition government. However, the coalition government’s ‘plans’ are predicated on a large, as yet unspecified, spending cut. Therefore, while each of parties could meet their fiscal targets while running slightly looser fiscal policy that planned by the coalition government, they would still need to announce further details of net tax increases, cuts to social security spending, or further cuts to departmental budgets in order to make their sums add up. This briefing note describes each of the three main parties' proposed fiscal targets and sets out the trade-offs that each of the parties face between tax increases, benefit cuts, and cuts to departmental spending.

]]>
https://www.ifs.org.uk/publications/7495 Fri, 19 Dec 2014 00:00:00 +0000
<![CDATA[The Smith Commission’s proposals – how big a change do they represent? And what questions remain to be addressed?]]> On 27 November 2014, the Smith Commission published proposals for further devolution of powers to Scotland. We now know what is to be devolved – the UK and Scottish Government now have the more prosaic task of implementing the changes. Getting the details of how the taxes and welfare are devolved will be crucial. In this Briefing Note, funded by the ESRC through Centre for Microeconomic Analysis of Public Policy at IFS, we analyse some of these ‘technical’ issues (and critically appraises the Smith Commission proposals more generally). In it we suggest a solution to one of the most difficult issues the Commission did not tackle – how to adjust the block grant given to Scotland when more taxes and spending are devolved. We also question some of the recommendations of the Commission – arguing that implementing them in practice might not always be feasible or fair. This observation provides a summary of these “big issues”.  

]]>
https://www.ifs.org.uk/publications/7484 Thu, 18 Dec 2014 00:00:00 +0000
<![CDATA[Child and working-age poverty in Northern Ireland over the next decade: an update]]> The UK government has ambitious, legally-binding targets to reduce child poverty by 2020–21. This briefing note updates previous IFS projections of how these poverty measures are likely to evolve in Northern Ireland and the UK as a whole between 2013–14 and 2020–21 under current policies and forecasts about how the economy will evolve over this period. As in previous work, we find that the targets will be missed by a wide margin under current policies as cuts to benefits and tax credits for those of working age are brought in and a recovery in earnings increases the incomes of middle-income households by more than the incomes of the poor. This will be slightly offset by the introduction of universal credit, which will tend to make poverty increase less quickly. We project that increases in poverty will be particularly large for Northern Ireland, mainly because employment growth is forecast to be considerably slower in Northern Ireland than elsewhere in the UK, most notably than in London and the East and South-East of England. 

]]>
https://www.ifs.org.uk/publications/7448 Mon, 24 Nov 2014 00:00:00 +0000
<![CDATA[The social security system: long-term trends and recent changes]]> The British welfare state has changed dramatically in size and shape over the 70 years since the Beveridge Report. The share of national income spent on social security has increased more than threefold, from around 4% of national income in 1948–49 to nearly 13% in 2013–14. Spending on social security now makes up around 30% of total government expenditure. And having started with a focus on the old, ill and unemployed, the system now also supports the incomes of many low-income working families, particularly those with children. In addition to these long-run trends, the welfare state has undergone a significant reshaping in recent years, as a result of the fiscal consolidation. By the end of the parliament, reforms introduced by the current government will have reduced social security spending on those of working age by around £20 billion a year (relative to estimated spending on an unreformed system) while leaving pensioners broadly unaffected. This briefing note describes both long run trends and more recent changes, providing an overview of the evolution of the British benefits system over the last half-century.     

]]>
https://www.ifs.org.uk/publications/7438 Mon, 17 Nov 2014 00:00:00 +0000
<![CDATA[Business as usual? The Barnett formula, business rates and further tax devolution]]> This briefing note takes a step back from the big questions about whether there should be further tax devolution and whether there should be a move to a needs-based formula. Instead, it focuses on the more technical – but important – question of how devolved taxes should interact with the block grant and the Barnett formula. And, more specifically, it examines how the formula interacts with business rates, which are already fully devolved to Scotland and Northern Ireland and are set to be fully devolved to Wales from April 2015. This is important because it has implications for the debate about ‘fair funding’ and lessons for how to adjust funding mechanisms as further taxes are devolved.

The current treatment of business rates by the Barnett formula for Scotland and Northern Ireland is flawed, and could be reformed to better meet the stated policy aims. The calculations presented in this paper suggest that these flaws have resulted in Scotland receiving around £400 million more and Northern Ireland around £130 million more in funding this year than they would have if a ‘corrected’ version of the formula had been in place when the fiscal consolidation began in 2010. By next year, 2015–16, these figures will have grown to £600 million extra for Scotland and £200 million extra for Northern Ireland. In the context of block grants and business rates revenues that together total around £30 billion and £11 billion, respectively, this means funding will be over 2% higher than it would have been had a ‘corrected’ Barnett formula been introduced in 2010. Put another way, the cuts Scotland and Northern Ireland will have had to deliver between 2010–11 and 2015–16 will be more than one-fifth smaller than if the ‘corrected’ formula had been in place during this period.

 

The appendix is available to download here.

]]>
https://www.ifs.org.uk/publications/7442 Wed, 12 Nov 2014 00:00:00 +0000
<![CDATA[Employment of older people in England: 2012–13]]> There are many reasons to be interested in the employment of older people. At a micro level, income from employment could help individuals to top up other sources of ‘retirement’ income. There is also some evidence that continuing to engage in intellectually engaging tasks (for example, through work) into older age can help to preserve cognitive functioning. At a macro level, older people make up a large and increasing share of the population and thus their labour supply fundamentally affects England’s productive capacity.


In this briefing note we use data from the Labour Force Survey (LFS) and the English Longitudinal Study of Ageing (ELSA) to describe patterns of employment and self-employment among people aged between 50 and 74 in England in 2012–13. We focus on England because, unfortunately, comparable data on the circumstances of older people in the rest of the UK are not currently available. While the LFS covers the whole of the UK, ELSA – which provides detailed information on the wealth, health and other characteristics of older people – covers only England.

 

Click here to download supplementary data.  

]]>
https://www.ifs.org.uk/publications/7400 Thu, 23 Oct 2014 00:00:00 +0000
<![CDATA[Financial support for HE students since 2012]]> This briefing note addresses the following questions:
1. How much financial support will be available to undergraduate students entering university in 2014?
2. How does it vary across different types of students (e.g. by income) and groups of universities?
3. How does it compare to preceding cohorts, who enrolled in 2012 and in 2013?
4. What are the effects of recent policy changes on universities’ design of financial support schemes? In particular, how have universities responded to the unexpected cut to the NSP for the 2014 cohort (which was announced after universities made plans of student support schemes)?

The authors gratefully acknowledge funding from the Nuffield Foundation and the ESRC. This briefing note and accompanying observation are based on an earlier paper on the National Scholarship Programme and Bursaries http://www.ifs.org.uk/publications/6429, part of a project funded by the Nuffield Foundation. Our most recent analysis, taking into account the 2013 and 2014 Office for Fair Access (OFFA) agreements was funded by the ESRC though the ESRC Centre for the Microeconomic Analysis of Public Policy (CPP; grant number ES/H021221/1). 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 part-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

]]>
https://www.ifs.org.uk/publications/7408 Wed, 22 Oct 2014 00:00:00 +0000
<![CDATA[Workplace pensions and remuneration in the public and private sectors in the UK]]>
There has been considerable interest in recent years in the level of pay in the public sector, and how it compares to that in the private sector, particularly in a context in which the coalition government is limiting nominal growth in public sector pay as part of its fiscal consolidation strategy. However, pay in the form of a wage or salary is not the only form of remuneration that employees receive. The promises made by employers in the form of pension rights, or the contributions made by employers to pension schemes, are an important form of remuneration, albeit of a deferred form, and one that varies between the public and private sectors.

In this briefing note, we estimate the value of employer-provided pensions and compare their value between public and private sector workers, and over time. We then assess what effect the incorporation of the value of workplace pensions has on the estimated differential between remuneration in the public and private sectors when measured just using pay. We also document how this changes over time and how it varies across different groups of the population.

]]>
https://www.ifs.org.uk/publications/7396 Fri, 10 Oct 2014 00:00:00 +0000
<![CDATA[The distributional effects of the UK government’s tax and welfare reforms in Wales: an update]]> This report is an updated analysis of the personal tax and benefit reforms implemented, or due to be implemented, by the UK’s coalition government from when it was elected in May 2010 up to and including April 2015. This includes those measures that had been pre-announced by the previous Labour government which the new government chose to implement. Attention is restricted to personal tax and benefit reforms alone: it does not examine the impact of reforms to corporation tax and other taxes formally paid by businesses, nor the impact of changes to spending on public services.

 

Word version of the report

Welsh translation of the report (pdf)

Welsh translation of the report (word)

]]>
https://www.ifs.org.uk/publications/7258 Wed, 02 Jul 2014 00:00:00 +0000
<![CDATA[Policies for an independent Scotland? Putting the Independence White Paper in its fiscal context]]> The potential consequences of independence for taxation, public services, and the welfare system in Scotland are a key battleground in the ongoing campaigning ahead of the independence referendum this September. In its White Paper, the Scottish Government sets out a number of tax and spending changes that it argues would lead to a fairer and more economically successful Scotland. In this Briefing Note we discuss a number of the most significant policy changes suggested, and place them in the context of the fiscal backdrop that an independent Scotland looks likely to inherit.

]]>
https://www.ifs.org.uk/publications/7230 Wed, 04 Jun 2014 00:00:00 +0000
<![CDATA[Taxation, government spending and the public finances of Scotland: updating the medium term outlook]]> The potential consequences of independence for taxation, public services, and the welfare system in Scotland are a key battleground in the ongoing campaigning ahead of the independence referendum this September. This briefing note provides a summary of the key findings of recent IFS research on Scotland, including the medium-term outlook for Scotland's public finances. In doing this, it also updates the figures to take into account the latest data on taxation and spending contained in the Scottish government’s latest Government Expenditure and Revenues Scotland (GERS) publication covering 2012–13; and updated forecasts from the Office for Budget Responsibility’s (OBR) March 2014 Economic and Fiscal Outlook.

Additional data relating to section 4 are available here.

]]>
https://www.ifs.org.uk/publications/7229 Wed, 04 Jun 2014 00:00:00 +0000
<![CDATA[Characteristics of those directly affected by the 2014 Budget pension reforms]]> The 2014 Budget announced fundamental changes to private pensions in the UK, removing restrictions on how individuals could withdraw funds from their defined contribution (DC) pensions. Under the current rules, many people with a DC pension are forced to use their accumulated pension to buy an annuity by the age of 75, or else face a 55% tax rate on the withdrawn income. From April 2015, such restrictions are now set to be removed, increasing flexibility for some individuals with DC pensions.

This Briefing Note summarises the characteristics of those who are most likely to be directly affected by these announced changes to the pensions system. We restrict our attention to those who might be affected in the immediate future, using survey data from the English Longitudinal Study of Ageing (ELSA).The survey’s rich mix of information on pensions, other types of wealth, demographics, other socio-economic characteristics and individuals’ expectations allows us to estimate the proportion of people affected by the increase in flexibility. It also allows us to investigate the characteristics of those individuals most likely to be affected by the reforms, which should inform anyone trying to predict the short-term response to the policy changes.

This Briefing Note accompanies the Observation Budget 2014 pension reforms: increased flexibility, but for whom?.

This briefing note was updated on 4 June 2014 with minor changes to tables 3.2 and 3.3.

]]>
https://www.ifs.org.uk/publications/7205 Thu, 15 May 2014 00:00:00 +0000
<![CDATA[Measuring house prices: a comparison of different indices]]> House price indices are some of the most closely watched economic indicators in the United Kingdom. This has been particularly true since early 2013 due to the stronger-than-expected growth in house prices and housing demand. This growth takes place against a background of several government initiatives to stimulate the housing market – most notably the introduction of the policy of Help to Buy, which was designed to allow those with small down payments to purchase a home.

With the extension to one of the components of the Help to Buy policy announced in the March 2014 Budget, the current and prospective trajectory of house prices continues to be an important issue. However, whilst there is no doubt that house prices are on a general upward trend, exactly how fast house prices are increasing and whether they have attained their previous peak are less clear. This briefing note is designed to shed some light on these issues.

This briefing note is accompanied by the observation House prices: what do the statistics really mean?.

]]>
https://www.ifs.org.uk/publications/7198 Fri, 09 May 2014 00:00:00 +0000
<![CDATA[The public sector workforce: past, present and future]]> As in all advanced economies, the public sector is a sizeable employer in the UK. At its most recent high-point in 2010, the public sector employed about 6.1 million workers, or 20% of all UK workers. The public sector pay bill also makes up a large element of public spending, accounting for well over half of current or day-to-day spending at the latest count. With the government in the process of making significant cuts in departmental spending as part of a fiscal consolidation aimed at helping to bring the public finances back on to a sustainable path, cuts to the total pay bill and workforce are essentially unavoidable. Indeed, the OBR forecast is that the level of general government employment will fall by 1.1 million as a result of expected cuts to public spending between 2010–11 and 2018–19. With schools and NHS spending relatively protected from spending cuts, these workforce cuts are likely to be focused on other areas of spending, changing the shape of both public spending and the public workforce.

In this briefing note, we combine various data sources to provide for the first time a consistent picture on how the size and composition of the public sector workforce has changed over the past 50 years. This initial descriptive piece forms part of a larger project that will provide further detailed analysis of the differences in the remuneration packages of public and private sector workers, as well as the mobility of workers between sectors and different areas of the country.

]]>
https://www.ifs.org.uk/publications/7113 Fri, 14 Feb 2014 00:00:00 +0000
<![CDATA[Child and working-age poverty in Northern Ireland over the next decade: an update]]> This briefing note updates previous IFS projections of child and working-age poverty in Northern Ireland and the UK as a whole from 2012-13 to 2017-18, and in 2020-21. These projections take into account revised macroeconomic forecasts from the Office for Budget Responsibility (OBR) published alongside Budget 2013, new forecasts of employment and earnings growth provided by Oxford Economics, and new tax and benefit policy announcements, and make use of more recent data on the UK household population.

]]>
https://www.ifs.org.uk/publications/7054 Wed, 15 Jan 2014 00:00:00 +0000
<![CDATA[Gluttony in England? Long-term change in diet]]> There has been a marked increase in body weight across much of the developed world. This has taken place, even though data suggest that there has not been an increase in calories consumed. This leads to a puzzle. If calories are declining, why are people gaining weight?

Changes in the nature of work and leisure, housework and other activities have led to substantial reductions in the strenuousness of daily life. In ongoing work, we are investigating how changes in purchased foods correspond to changes in time use and the strenuousness of activities. It appears that weight gain has resulted from a faster decrease in activity levels than in calories consumed, leading to an excess of calories.

The aim of this research is to help inform policy by increasing our understanding of the factors that have driven the rapid rise in obesity. The results do not say that food is not a problem, but that we need to consider both - calories ingested and calories expended.

]]>
https://www.ifs.org.uk/publications/6918 Mon, 04 Nov 2013 00:00:00 +0000
<![CDATA[Food expenditure and nutritional quality over the Great Recession]]> In this briefing note, we document how the food purchases of households in the UK have changed over the recent period of recession and food price rises. We follow the same households over time, which allows us to control for fixed differences in households’ food purchasing behaviour. We show that, on average, real food expenditure (i.e. nominal expenditure on food divided by the food component of the consumer price index) declined and that households bought fewer calories and have switched to cheaper calories. This has coincided with a switch towards more calorie-dense types of food and substitution to more calorific food products within food types.

We also investigate how the nutritional quality of the foods that households purchase has changed over this period. We find that, on average, across a number of measures, the nutritional quality of foods purchased declined from 2005-07 to 2010-12. Households substituted towards less healthy food types, mainly towards processed foods and away from fruit and vegetables. However, they also shifted towards healthier food products within food types (for example, the average saturated fat content of processed food declined).

There are differences across households. Households with young children cut back on calories purchased by more than other household types. Pensioners reduced calories purchased by more than non-pensioner households without children. All household types reduced their real expenditure per calorie, with the average reduction being largest for households with young children.

Changes in the average nutritional quality of foods purchased also varied by household type. Pensioners, households with young children and single-parent households experienced a larger decline in the nutritional quality of the foods they purchased. This was partly due to greater substitution towards processed food and away from fruit and vegetables, which contributed towards increases in the intensity of saturated fat and sugar in their purchases.

]]>
https://www.ifs.org.uk/publications/6919 Mon, 04 Nov 2013 00:00:00 +0000
<![CDATA[Taxing an independent Scotland]]> This Briefing Note looks at the way that tax revenue in Scotland is currently delivered and at the reform options that would be open to an independent Scotland.

Note: This Briefing Note has been slightly revised to correct small errors in some cash figures in section 2 (repeated in the Executive Summary) where an incorrect factor had been used to convert 2011-12 revenue figures to 2013-14 prices. All changes are of less than 1% and do not materially affect any of the analysis or conclusions.

]]>
https://www.ifs.org.uk/publications/6912 Tue, 29 Oct 2013 00:00:00 +0000
<![CDATA[Government spending on public services in Scotland: current patterns and future issues]]> This briefing note aims to describe the patterns of public service expenditure in Scotland and to set out a number of issues for the future. In particular, it:

  • describes the big picture for public spending in Scotland and compares the amount spent with that in the rest of the UK;
  • examines how the amount spent on different service areas compares with the average for the UK as a whole and sets out some causes and consequences of these differences;
  • looks at how spending on different public services has changed over time;
  • discusses the options and issues in public service spending if Scotland were to vote for independence.
]]>
https://www.ifs.org.uk/publications/6858 Thu, 19 Sep 2013 00:00:00 +0000
<![CDATA[Government spending on benefits and state pensions in Scotland: current patterns and future issues]]> There has been a growing debate about how the benefits system (that is, the system of state benefits, pensions and tax credits) may be affected if Scotland becomes independent. This debate takes place at a time when the benefits system that Scotland currently shares with the rest of the UK is going through some major changes – such as the replacement of most means-tested benefits for working-age recipients by the new universal credit – and facing substantial cuts as part of the fiscal consolidation. The Scottish government has said it plans to reverse at least some of the cuts if Scotland were to become independent. It also plans to consult upon the principles and policies an independent Scotland should follow, which may result in broader changes to the benefits system. This briefing note aims to describe the patterns of benefit expenditure in Scotland and set out a number of issues for the future.

]]>
https://www.ifs.org.uk/publications/6818 Wed, 31 Jul 2013 00:00:00 +0000
<![CDATA[Price-based measures to reduce alcohol consumption]]> In this briefing note, we compare the effectiveness of the proposed minimum unit price and quantity discount ban to an alternative policy which reforms and significantly simplifies the structure of excise taxes levied on alcohol. We use detailed information on the off-trade alcohol purchases of a large number of households over a year to assess whether the reforms would target heavy drinkers, a group who are of particular policy concern because of harms they cause to themselves and others by their alcohol intake. We argue that a reformed tax system could be even better targeted on this group than a minimum unit price, and that a quantity discount ban is poorly targeted. We also show that a tax reform could generate additional tax revenue for the Exchequer, whereas a minimum unit price would raise revenue for alcohol retailers and manufacturers and reduce tax revenue.

If government wants to reduce alcohol consumption among heavy drinkers then it would be better advised to concentrate on reforming the excise duty system that already exists rather than to introduce a new system of minimum pricing.

See also the Observation Reforms to alcohol taxes would be more effective than minimum unit pricing and the presentation Price-based measures to reduce alcohol consumption .

 

]]>
https://www.ifs.org.uk/publications/6644 Mon, 18 Mar 2013 00:00:00 +0000
<![CDATA[Better Budgets: making tax policy work]]> Taxes, like death, are unavoidable. But we can design our taxes. We are not bound to have a tax system as inefficient, complex, and unfair as our current one. To improve things, we need to see the system as a whole, we need to design the system with a clear understanding of the population and economy on which it operates, and we need to apply economic insights and evidence to the design. We also need a much more informed public debate and a much better set of political processes than the ones we currently have.

This publication is related to the observation Making tax policy

 

]]>
https://www.ifs.org.uk/publications/6611 Wed, 20 Feb 2013 00:00:00 +0000
<![CDATA[Autumn Statement 2012: more fiscal pain to come?]]> This briefing not examined the outlook for the public finances in the run-up to the 2012 Autumn Statement.

]]>
https://www.ifs.org.uk/publications/6453 Mon, 26 Nov 2012 00:00:00 +0000
<![CDATA[Scottish independence: the fiscal context]]> In making a decision over whether to seek independence from the rest of the UK, one of the many issues that the Scottish people will need to consider is the fiscal consequences. The question is not whether an independent Scotland could survive from a fiscal point of view but rather whether, in the short term and in the longer run, the current pattern of taxes and spending is sustainable and hence what choices an independent Scotland might have to make. Would an independent Scotland require higher taxes to finance current levels of spending (or, equivalently, would it need to reduce spending in order not to raise taxes)? Or would the Scots enjoy a fiscal dividend in the form of lower taxes or higher spending?

This is the first output of a new project at IFS, funded by the Economic and Social Research Council (ESRC), looking at some of the fiscal choices that might face Scotland should it choose independence following the 2014 referendum.

This work will be presented at a David Hume Institute seminar in Edinburgh on Monday 19 November.

]]>
https://www.ifs.org.uk/publications/6444 Mon, 19 Nov 2012 00:00:00 +0000
<![CDATA[Socio-economic gaps in HE participation: how have they changed over time?]]> This Note examines what happened to HE participation overall and at highstatus institutions following the increase in tuition fees (and accompanying changes to student support and other policies designed to 'widen' participation) that occurred in 2006-07.

]]>
https://www.ifs.org.uk/publications/6428 Thu, 08 Nov 2012 00:00:00 +0000
<![CDATA[Fees and student support under the new higher education funding regime: what are different universities doing?]]> This briefing note contains the first in-depth analysis of the new student support arrangements following the changes to the higher education finance regime introduced in September 2012.

]]>
https://www.ifs.org.uk/publications/6429 Thu, 08 Nov 2012 00:00:00 +0000
<![CDATA[A dynamic perspective on how the UK personal tax and benefit system affects work incentives and redistributes income]]> https://www.ifs.org.uk/publications/6368 Tue, 16 Oct 2012 00:00:00 +0000 <![CDATA[Local government expenditure in Wales: recent trends and future pressures]]> The UK is part-way through significant real-terms reductions in government expenditure as it attempts to deal with the large hole in its public finances. Local government expenditure is not immune from the cuts, and in the 2012 Green Budget, IFS researchers examined the cuts made in 2010−11 and planned in 2011−12 by local authorities in England. This report focuses instead on Wales, and examines both the cuts made to date (up to and including 2012−13) and some scenarios for how much local authorities may have to spend in the period up to 2020−21. It also contains a brief discussion of the economic and fiscal situation and two other important public policy issues for the coming years: changes to the welfare system – which are also intended to reduce public spending – and demographic change.

To view the data used in this report click here

]]>
https://www.ifs.org.uk/publications/6359 Fri, 05 Oct 2012 00:00:00 +0000
<![CDATA[Pensioners and the tax and benefit system]]> This paper was commissioned by the Nuffield Foundation to aid discussion about ways in which the proposals produced by the Dilnot Commission on the Funding of Care and Support could be funded. These proposals would provide a greater degree of insurance against the costs of residential care, which would tend to be welfare-improving as individuals tend to be risk-averse. They also strengthen incentives to save for retirement.

]]> https://www.ifs.org.uk/publications/6207 Tue, 26 Jun 2012 00:00:00 +0000 <![CDATA[Reforming Council Tax Benefit: options for Wales]]> https://www.ifs.org.uk/publications/6204 Thu, 21 Jun 2012 00:00:00 +0000 <![CDATA[ Jubilees compared: incomes, spending and work in the late 1970s and early 2010s]]> https://www.ifs.org.uk/publications/6190 Mon, 04 Jun 2012 00:00:00 +0000 <![CDATA[Fund holdings in defined contribution pensions]]> https://www.ifs.org.uk/publications/6089 Mon, 26 Mar 2012 00:00:00 +0000 <![CDATA[Tax and benefit reforms due in 2012-13, and the outlook for household incomes]]> This Briefing Note is intended to provide background to the Chancellor's Budget on 21 March 2012. It first gives an overview of the tax and benefit reforms currently planned for the coming financial year and their likely impact on household incomes. It then considers the outlook for household incomes in the near future more broadly, given current macroeconomic forecasts of variables such as employment and earnings as well as planned tax and benefit policy.

]]>
https://www.ifs.org.uk/publications/6041 Thu, 08 Mar 2012 00:00:00 +0000
<![CDATA[Why did Britain's households get richer? Decomposing UK household income growth between 1968 and 2008-09 (IFS analysis for the Resolution Foundation)]]> Average UK household income has almost doubled in real terms over the past forty years. This report asks 'From where has the growth in household income come?' and answers this by documenting and analysing the various factors that have contributed to this growth.

]]>
https://www.ifs.org.uk/publications/5946 Mon, 05 Dec 2011 00:00:00 +0000
<![CDATA[Alcohol pricing and taxation policies]]> Recently, a range of policies that would affect alcohol prices have been introduced or considered. Following an announcement in the March 2011 Budget, higher taxes on strong beers (above 7.5% alcohol by volume) and reduced taxes on low-strength beers (of 2.8% ABV or less) came into force in October 2011. A ban on 'below-cost' sales of alcohol (where 'cost' is defined as the total tax - duty and VAT - due on the product) is set to be introduced for England and Wales, though the timetable is not yet clear. And following their victory in the 2011 Scottish Parliamentary election, the SNP have committed to introduce a minimum price per unit of alcohol, following an unsuccessful attempt to do so in 2010. This Briefing Note uses detailed data recording off-licence alcohol purchases for a large sample of households to assess which types of alcohol products, retailers and consumers would be most affected by these different reforms.

]]>
https://www.ifs.org.uk/publications/5922 Thu, 24 Nov 2011 00:00:00 +0000
<![CDATA[School funding reform: an empirical analysis of options for a national funding formula]]>

In this Briefing Note, we describe the options for a national funding formula for schools and examine how different options would affect the finances of different schools or areas of the country. Our analysis is based on data held by the Department for Education (DfE) and this work has been supported by the Esmée Fairbairn Foundation.

]]>
https://www.ifs.org.uk/publications/5754 Fri, 18 Nov 2011 00:00:00 +0000
<![CDATA[Does when you are born matter? The impact of month of birth on children's cognitive and non-cognitive skills in England]]> It is well known that children born at the start of the academic year tend to achieve better exam results, on average, than children born at the end of the academic year. This matters because educational attainment is known to have long-term consequences for a range of adult outcomes. But it is not only educational attainment that has long-lasting effects: there is a body of evidence that emphasises the significant effects that a whole range of skills and behaviours developed and exhibited during childhood may have on later outcomes. There is, however, relatively little evidence available on the extent to which month of birth is associated with many of these skills and behaviours, particularly in the UK.

The aim of this report is to build on this relatively limited existing evidence base by identifying the effect of month of birth on a range of key skills and behaviours amongst young people growing up in England today, from birth through to early adulthood. This work will extend far beyond the scope of previous research in this area - in terms of both the range of skills and behaviours considered, and the ability to consider recent cohorts of children - enabling us to build up a more complete picture of the impact of month of birth on children's lives than has previously been possible.

 

Authors interested in estimating the impact of month of birth often take advantage of a technique known as regression discontinuity design. A brief overview of the method and some of the ways it has been applied to this topic in different disciplines can be found here.

]]>
https://www.ifs.org.uk/publications/5736 Tue, 01 Nov 2011 00:00:00 +0000
<![CDATA[Trends in education and schools spending]]> Until recently, education spending has enjoyed healthy year-on-year increases, but that is set to change. Along with most areas of government spending, education spending is set to shrink over the current Spending Review period. What will be the size of the total cuts and how will they be shared across different areas of education spending? Somewhat surprisingly, the answers to these questions cannot be easily found in current data published by the government.

In this Briefing Note, we produce new estimates of the likely cuts to overall public spending on education in the UK up to 2014-15. We have also pieced together various published plans for grants and specific components of education spending. This provides the most comprehensive analysis of the pattern of cuts across different areas of education spending published to date. We also analyse which types of schools are likely to see the largest increases in funding and which are likely to see real-terms cuts.

]]>
https://www.ifs.org.uk/publications/5732 Tue, 25 Oct 2011 00:00:00 +0000
<![CDATA[The impact in 2012-13 of the change to indexation policy]]> The inflation figures for September 2011 released this week by the Office for National Statistics (ONS) are important, because they affect how the tax and benefit system will look in 2012-13. Most parameters of the personal tax and benefit system - such as income tax thresholds and benefit amounts - and public sector pensions are typically increased each April in line with the rate of annual inflation measured in the previous September .

These indexation policies matter a lot. They affect changes in indexed parameters every year, so the effects of indexation policy accumulate over time, and their impacts on the levels of (for example) benefits can soon become very large.

]]>
https://www.ifs.org.uk/publications/5713 Tue, 18 Oct 2011 00:00:00 +0000
<![CDATA[The changing composition of public spending ]]> This analysis finds that the shape of the state today is very different from that of 30 years ago. 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.

]]>
https://www.ifs.org.uk/publications/5650 Wed, 10 Aug 2011 00:00:00 +0000
<![CDATA[The impact of tax and benefit reforms by sex: some simple analysis]]> The Equalities Act 2010 puts an obligation on the government to give 'due consideration' to how its policies affect gender inequalities. In this paper, we show some simple ways in which the government could examine the impact of tax and benefit reforms on men and women using household level data that it already has available.

]]>
https://www.ifs.org.uk/publications/5610 Thu, 23 Jun 2011 00:00:00 +0000
<![CDATA[Living standards during the recession]]> We are used to our incomes rising over time. Since 1961, median (middle) household income before housing costs in the UK has increased by 1.6% per year on average. So over a typical three year period real incomes would rise by about 5%. However, our best estimate is that in the three years from 2008 to 2011 real household incomes will in fact have fallen by 1.6% - the biggest three year drop in real living standards since 1980-83. So households are about 6% worse off than they might have expected had incomes risen in the normal way.

]]>
https://www.ifs.org.uk/publications/5517 Mon, 21 Mar 2011 00:00:00 +0000
<![CDATA[Universal Credit: a preliminary analysis]]> The government plans to redesign entirely the system of means-tested benefits and tax credits for working-age adults by replacing them all with a single benefit, known as Universal Credit, to be administered by the Department for Work and Pensions. This Briefing Note analyses Universal Credit as set out in the government's White Paper, Universal Credit: Welfare that Works. A Welfare Reform Bill is due to be published later in January 2011, and this should contain more details of how Universal Credit will operate.

]]>
https://www.ifs.org.uk/publications/5415 Wed, 12 Jan 2011 00:00:00 +0000
<![CDATA[Child and working-age poverty from 2010 to 2013]]> This Briefing Note provides projections of income poverty among children and working-age adults in the UK under current tax and benefit policies. We also estimate the direct impact on poverty of tax and benefit reforms announced by the coalition government. Projections are produced for each year between 2010-11 and 2013-14.

]]>
https://www.ifs.org.uk/publications/5373 Thu, 16 Dec 2010 00:00:00 +0000
<![CDATA[The Impact of Tax and Benefit Reforms to be Introduced between 2010-11 and 2014-15 in Northern Ireland]]> Immediately following the Spending Review of 20th October, the IFS updated its analysis of the distributional impact of tax and benefit reforms to be introduced between 2010-11 and 2014-15, taking into account the effects of the reforms announced in the Spending Review.2 This did not substantially alter the conclusions from previous analysis by IFS researchers that the impact of the tax and benefit reforms to be introduced over this period was decreasing as a proportion of income within the lowest 90% of households in the income distribution, although it is the very richest households that will lose the most overall. If we were instead to rank households by expenditure, which as we have argued previously might better reflect households' lifetime incomes, losses as a proportion of expenditure again fall as we move up the expenditure distribution

]]>
https://www.ifs.org.uk/publications/5369 Fri, 10 Dec 2010 00:00:00 +0000
<![CDATA[Higher education reforms: progressive but complicated with an unwelcome incentive]]> Details of the proposed changes to higher education (HE) have been finalised ahead of tomorrow's vote in the House of Commons on the raising of the cap on tuition fees to £9,000. We find that:

  • By decile of graduate lifetime earnings, the Government's proposals are more progressive than the current system or that proposed by Lord Browne. The highest earning graduates would pay more on average than both the current system and that proposed by Lord Browne, while lower earning graduates would pay back less. By decile of parental income, graduates from the poorest 30% of households would pay back less than under Lord Browne's proposed system, but more than under the current system. While all graduates from families with incomes above this would pay more, graduates from the 6th and richest (10th) deciles of parental income would pay back the most under the proposed system.

  • The Government announced today that it will up-rate the threshold above which graduates pay back their loan annually in line with earnings (as was proposed by Lord Browne) rather than at 5 year intervals which makes the system more progressive than originally proposed.

  • The National Scholarship fund - through which the taxpayer will cover the third year of fees for students from low income families who attend universities charging over £6,000 a year - will cost the government money in the short term. But we estimate that in the long term the net impact will be to strengthen the public finances slightly (by around £11m a year) if average fee levels are around £7,500 per year. This is mainly because universities will be required to cover the cost of fees for these students in their first year thereby reducing the taxpayer subsidy.

  • The new system is less transparent than the current system and that proposed by Lord Browne, with a more complex system of student support and interest rates. The new system also generates perverse incentives - for example the National Scholarship fund provides a financial incentive for universities charging over £6,000 a year to turn away students from poorer backgrounds.

]]>
https://www.ifs.org.uk/publications/5366 Wed, 08 Dec 2010 00:00:00 +0000
<![CDATA[Corporate taxes and intellectual property: simulating the effect of Patent Boxes]]> The tax treatment of intellectual property is currently in the spotlight and there is considerable interest in understanding how taxes affect firms' choices over where to hold patents for tax purposes. In a forthcoming paper, we estimate the responsiveness of European multinationals' patent holdings to corporate taxes. We consider firms' decisions over which subsidiary to hold each of their patents in. This choice is crucial for determining the jurisdiction under which the patent income will be taxed. We consider taxes in the country where intellectual property is held as well as interactions with taxes in the home country via CFC regimes. We simulate the effects of introducing Patent Boxes, in terms of both the location of income and the resulting government revenues, under alternative assumptions about how CFC regimes will interact with Patent Boxes. This Briefing Note summarises the main results from that paper (Griffith, Miller and O'Connell, 2010) and discusses our findings in relation to the current policy issues.

]]>
https://www.ifs.org.uk/publications/5361 Tue, 30 Nov 2010 00:00:00 +0000
<![CDATA[Introducing a pupil premium: IFS researchers' response to government consultation on school funding arrangements]]> Leading up to the 2010 general election, both the Conservatives and the Liberal Democrats campaigned on the idea of a disadvantaged pupil premium (hereafter, a pupil premium) in the school funding system in England. A commitment to introduce a pupil premium was then included in the coalition's programme for government.

The main aim of the pupil premium is to narrow the achievement gap between children coming from rich and poor families. To achieve this, it would provide additional money to schools for each pupil from a disadvantaged background, however defined, with the intention of targeting resources more heavily towards schools with a high proportion of disadvantaged pupils, and reducing any disincentive that schools might have to recruit such pupils.

In July 2010, the Department for Education launched a consultation on school funding arrangements in 2011-12, and their plans for a pupil premium from September 2011 onwards. This briefing note contains the response of IFS researchers to this consultation.

]]>
https://www.ifs.org.uk/publications/5304 Fri, 15 Oct 2010 00:00:00 +0000
<![CDATA[21st Century Welfare: commentary on, and response to, the Government's consultation on welfare reform ]]> The Department for Work and Pensions (DWP) consultation paper, "21st Century Welfare", argues that there are substantial advantages to having a more integrated benefits and tax credits system: it would reduce the government's administration costs and the amount of money lost to fraud and error, and be simpler for claimants to understand, which might in itself encourage some to enter work. We agree with this assessment, and consider there to be a strong case for integrating all benefits and tax credits into a single benefit. If the Government decides that full integration of the benefits and tax credits system is too drastic a change or not worth the risk of upheaval, then it should seek integration or alignment on a smaller scale wherever possible; we suggest the Government look first at the way that housing benefit and council tax benefit interact with tax credits for those in work.

The DWP document also suggests that work incentives need to be strengthened. This is a separate issue from simplification and integration: benefits and tax credits could be integrated without altering anyone's entitlement or their financial work incentives, and work incentives could be strengthened within the current set of benefits and tax credits. The DWP document does not specify which groups it is most concerned about, and so it is not possible to suggest what direction reforms might take. Ultimately, strengthening incentives for low earners to work can be done only by paying less money to those who do not work or by paying more money to those with low earnings.

]]>
https://www.ifs.org.uk/publications/5292 Thu, 30 Sep 2010 00:00:00 +0000
<![CDATA[The impact of introducing a minimum price on alcohol in Britain]]> In this Briefing Note, we use detailed data on the grocery shopping of more than 25,000 households during 2007 to provide descriptive evidence of alcohol purchases from supermarkets and other off-licensed premises retailers. We calculate the impact of a 45p per unit minimum price and describe how different households and retailers would be affected. Our calculations are based on a number of assumptions about consumer and firm behaviour which we discuss; more precise estimates would require estimation of a detailed model of household purchasing and firm pricing decisions. Our figures are based on a sample of households from Great Britain and we consider a minimum price that is applied nationally.

We 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.

]]>
https://www.ifs.org.uk/publications/5287 Tue, 28 Sep 2010 00:00:00 +0000
<![CDATA[The distributional effect of tax and benefit reforms to be introduced between June 2010 and April 2014: a revised assessment]]> Please note: Section 5 of this note has been substantially revised since the initial publication of the report in August 2010: see Appendix E for a list of the changes. These changes do not affect our assessment of the Budget's progressivity/regressivity in Sections 1-4.

The June 2010 Emergency Budget set out a number of tax and benefit changes that will be introduced by 2014-15. For the first time, the Budget documentation contained distributional analysis of the changes by household income, which showed that the measures to be introduced between June 2010 and April 2012 were progressive relative to household income, and in his Budget speech the Chancellor used this as evidence that it was a 'progressive Budget'. In our post-budget briefing, we cast doubt on this claim, demonstrating that many of the progressive tax rises that will be introduced over the next two years were announced by the previous Government, and that the Budget measures scheduled to come in between 2012 and 2014 are generally regressive. Moreover, the distributional analysis in the Budget documentation did not include the effects of some cuts to housing benefit, Disability Living Allowance and tax credits that are likely to affect the poorer half of the income distribution more than the richer half.

In this Briefing Note, we attempt to model the full impact of tax and benefit changes in the Budget, including these additional benefit cuts, on different income and expenditure groups. In Section 4, we show their impact on different sorts of households.

]]>
https://www.ifs.org.uk/publications/5246 Wed, 25 Aug 2010 00:00:00 +0000
<![CDATA[Cohabitation, marriage and relationship stability]]> In the government's recent State of the Nation report it was asserted that cohabiting parents have an increased likelihood of separating relative to married couples. In this Briefing Note, we critically appraise this statement, building on analysis contained in our recent IFS Commentary, Cohabitation, Marriage and Child Outcomes.

]]>
https://www.ifs.org.uk/publications/5184 Wed, 07 Jul 2010 00:00:00 +0000
<![CDATA[Private schooling in the UK and Australia]]> The type of school a child attends is known to impact on educational attainment and later life outcomes. But there is very little persuasive empirical evidence (although widespread and varied anecdotal evidence) on why parents opt to take their children outside the state system.

As part of an international collaboration funded by the Economic and Social Research Council and the Australian Research Council, researchers at the IFS and the Australian National University have sought to address this question by comparing the determinants of private school choice in both Australia and the UK.

]]>
https://www.ifs.org.uk/publications/5082 Thu, 17 Jun 2010 00:00:00 +0000
<![CDATA[The history of state pensions in the UK: 1948 to 2010]]>

This Briefing Note describes state pension provision in the United Kingdom from the inception of the basic state pension in 1948, following the Beveridge Report, to Pensions Act 2007 and the plans of the Conservative/Liberal Democrat coalition government. The main objective is to provide a comprehensive description of the rules that currently determine pension benefits as well as those that have been in place in the past. However, we also provide a brief historical overview of the dilemmas facing policymakers when contemplating pension reforms and a summary of the most recent reforms. The history of the UK pension system is the story of a mainly non-contributory system, periodically tempted by the higher replacement rate of social insurance schemes, but always frightened once the costs become apparent. Recent reforms have tilted the system further in the direction of a universal flat-rate benefit, abandoning any social insurance design. This confirms that the main objective of the UK state pension system is to reduce poverty at old age. These flat-rate pensions will also reduce the reliance of the system on means-tested benefits, somewhat reinforcing the Beveridgean design of the system. Given these clarifications, it is unfortunate that the latest reforms have still sought to maintain much of the complex structure of the pre-existing system instead of reforming and rationalising it. However, once issues of transition have been dealt with, there may yet be scope for simplifying the presentation of the rules.

Historic rates for various parameters of the UK state pension system, discussed in this briefing note, can be found here.

]]>
https://www.ifs.org.uk/publications/5000 Wed, 09 Jun 2010 00:00:00 +0000
<![CDATA[Pensions and retirement policy]]> This election briefing note reviews the policies that the three main UK political parties have announced in their manifestos that relate to state pensions, private pension saving, public sector pensions, and employment at older ages.

]]>
https://www.ifs.org.uk/publications/4861 Tue, 04 May 2010 00:00:00 +0000
<![CDATA[Couple penalties and premiums in the UK tax and benefit system ]]> This report analyses the distribution of couple penalties and premiums in the tax and benefit system using a large, statistically representative sample of households. It defines 'couple penalties and premiums' in the tax and benefit system as the change in entitlements to benefits and tax credits and in liability to taxes that occurs when two single people marry, or start to live together as husband and wife. Two adults can almost certainly save on living costs by living together, but unlike some past studies, this study does not attempt to measure the overall financial or non-financial benefits or costs to living as a couple compared with living apart. This study cannot tell us whether couples would be better off living apart than living as a couple, but simply measures how taxes and benefits vary by family situation, an issue of more direct public policy concern. In general, our analysis is not always consistent with past studies of couple penalties and premiums, some of which have tried to measure not just couple penalties and premiums from the tax and benefit system, but also the inherent financial advantage that arises when living as a couple (by comparing equivalised net incomes after housing costs).

The report uses the phrase 'net state support' to refer to entitlements to benefits and tax credits less liability to taxes. If net state support rises when a couple splits up, then this is called a 'couple penalty'; if net state support falls, this is called a 'couple premium'. In some cases, net state support does not change when a couple splits up, and we say that the tax and benefit system is neutral towards relationship status in these cases. The words 'penalty' and 'premium' are unfortunate, because they suggest that couple penalties are undesirable and couple premiums desirable. Although policymakers may make that judgement, they may also make alternative judgements.

]]>
https://www.ifs.org.uk/publications/4856 Thu, 29 Apr 2010 00:00:00 +0000
<![CDATA[Families and children]]> This Election Briefing Note, drawing in part on past notes in this series, analyses the manifesto proposals of the three main political parties in the area of families with children. In particular, it discusses the following policies:

  • Taxes, benefits and tax credits for families with children (section 2);
  • Abolishing the couple penalty in the tax credit system (section 3);
  • Parental leave, pay and flexible working (section 4);
  • Childcare, early years education and education (section 5).

Other issues which are relevant to families with children, but not covered here, are welfare policy towards lone parents, and schools: these are also discussed in other notes in the series.

]]>
https://www.ifs.org.uk/publications/4858 Thu, 29 Apr 2010 00:00:00 +0000
<![CDATA[Environmental policy proposals]]> In this election briefing note, we look at the environment policy proposals put forward by the three main UK political parties in their manifestos, as well as the current government's plans for the future.

]]>
https://www.ifs.org.uk/publications/4855 Wed, 28 Apr 2010 00:00:00 +0000
<![CDATA[Filling the hole: how do the three main UK parties plan to repair the public finances?]]> The financial crisis and the recession have prompted a huge increase in government borrowing over the last two years, as the gap between what the public sector spends and raises from taxes has widened to an extent not seen since the Second World War. This Briefing Note examines what the parties have said (explicitly and implicitly) about the scale, timing and composition of the fiscal repair job ahead, teasing out the differences and similarities.

]]>
https://www.ifs.org.uk/publications/4848 Tue, 27 Apr 2010 00:00:00 +0000
<![CDATA[Taxes and benefits: the parties' plans]]> In the period since the impact of the financial crisis became apparent in its public finance forecasts, the current Labour government has announced and legislated for a number of net tax increases and benefit cuts to take effect over the course of the coming parliament to help reduce government borrowing. Labour has made no significant additional proposals in its manifesto. The Conservatives have accepted the bulk of Labour's proposals, but have also announced a very small additional benefit cut and a more substantial net tax cut to be paid for by cuts in spending on public services. The Liberal Democrats propose an additional cut in benefits than the Conservatives and a modest net tax increase rather than a net tax cut. The modest net tightening relative to Labour's plans masks much larger gross giveaways and takeaways in the most far-reaching of the three packages.

This note discusses these various proposals, looking at their economic and administrative merits, their distributional impact and their effect of incentives to work and save.

]]>
https://www.ifs.org.uk/publications/4849 Tue, 27 Apr 2010 00:00:00 +0000
<![CDATA[Education policy]]> In his speech to the Labour Party conference in October 1996, Tony Blair famously stated that his three main priorities for government would be 'education, education, education'. A commitment to increasing education spending as a share of national income over the course of the parliament was then included in the Labour Party's general election manifestos in 1997, 2001 and 2005.

In this general election briefing note we examine trends in education spending under Labour as well as plans going forwards. We then discuss policy and key trends under Labour to date and policy proposals from the three main UK political parties in each of the following areas of education policy: early years; schools; and higher education. For the most part we focus on education policy in England only, though we do discuss trends in UK education spending in Section 2.

]]>
https://www.ifs.org.uk/publications/4844 Mon, 26 Apr 2010 00:00:00 +0000
<![CDATA[Productivity, innovation and the corporate tax environment]]> We focus on changes to the corporate tax environment alongside direct policies that aim to correct market failures. To begin, we highlight the main policies that have been introduced by Labour governments since 1997 and the main policies being proposed by the three main UK parties in the run-up to the 2010 election.

]]>
https://www.ifs.org.uk/publications/4839 Fri, 23 Apr 2010 00:00:00 +0000
<![CDATA[UK productivity in the recession]]> In this Briefing Note, we briefly describe trends in UK productivity over the recent recession - which ran from the first quarter of 2008 to the last quarter of 2009 - and how they compare with those in the US.

Section 2 describes the path of output and hours worked, and shows how this has translated into labour productivity. Section 3 compares the changes in hours worked and the number of workers. Section 4 concludes.

]]>
https://www.ifs.org.uk/publications/4840 Fri, 23 Apr 2010 00:00:00 +0000
<![CDATA[Welfare reform and the minimum wage]]> This Briefing Note reviews developments in welfare policy under the current government and analyses the manifesto proposals of the three main political parties in this policy area. In some cases, we refer to statements made by the parties outside of their manifestos, in order to interpret or flesh out the detail of their proposals (we indicate this in the text). Note that many of the Labour Party's manifesto statements reflect existing government policy (again, we indicate this in the text where appropriate).

Other notes in this series will compare the three main parties' proposals on taxes and benefits, education policy and pensions.

]]>
https://www.ifs.org.uk/publications/4830 Wed, 21 Apr 2010 00:00:00 +0000
<![CDATA[Environmental policy since 1997]]> In this note, we will examine Labour's record on environmental policy since 1997. We begin in section 2 with a relatively broad overview of the environmental record, looking at key outcomes on environmental taxes, expenditures and emissions. Section 3 then looks in detail at policy developments and outcomes in three areas: energy, transport and waste management. Section 4 assesses the coherency of current environmental policy and section 5 concludes.

]]>
https://www.ifs.org.uk/publications/4829 Tue, 20 Apr 2010 00:00:00 +0000
<![CDATA[The public finances: 1997 to 2010]]> This general election briefing note looks at how overall levels of borrowing and debt changed between 1997 and 2010. Some discussion is, necessarily, included of trends in taxation and spending; however, readers who are particularly interested in the levels of taxation and spending during Labour's period in office may also wish to refer to two other notes in this series of IFS Election 2010 Briefing Notes. Section 2 describes how the UK public finances evolved between 1997 and 2007 (prior to the financial crisis). It then compares this to the pattern observed during the period of Conservative governments from 1979 to 1997 and to the trend seen in other industrial countries. Section 3 carries out the same analysis, but for the period between 2007 and 2010, when the financial crisis and associated recession adversely affected the public finances of the UK and of many other countries.

]]>
https://www.ifs.org.uk/publications/4822 Mon, 19 Apr 2010 00:00:00 +0000
<![CDATA[The tax burden under Labour]]> This election briefing note examines the evolution of the tax burden over the last 60 years. Section 2 begins by giving an overview of revenues over time. It compares the change in the tax burden since 1997 with historical changes and analyses how it reflects changes in the relative growth rates of revenue and national income. Section 2 also examines how the composition of tax revenues has changed since Labour came to power and compares this to the trend seen over the period in which the Conservatives were in power from 1979 to 1997. Finally this section puts the change in the tax burden since Labour came to power in an international context. Section 3 examines the extent to which changes in the tax burden since Labour came to power can be explained by discretionary policy changes, economic growth and other factors.

]]>
https://www.ifs.org.uk/publications/4814 Mon, 12 Apr 2010 00:00:00 +0000
<![CDATA[Public spending under Labour]]> Even more than in previous elections, the appropriate size of the state − measured by public spending as a share of national income − is a key issue. This briefing note describes the trends in public spending since Labour came to office in 1997. Section 2 compares the levels of public spending under Labour to date with historical levels and spending in other OECD countries. Section 3 compares the growth in the main components of public spending seen under Labour, both before and after the start of the financial crisis, with growth seen under previous governments. Section 4 considers productivity in public service provision, and how the increased spending under the Labour government compares with changes in measured output.

]]>
https://www.ifs.org.uk/publications/4815 Mon, 12 Apr 2010 00:00:00 +0000
<![CDATA[Tax and benefit reforms under Labour]]> This Election Briefing Note describes the main tax and benefit reforms since 1997, and shows how they have affected total government revenues. It then goes on to discuss the impact of these reforms on the distribution of income between household types, on work incentives and on the incentive to save. A subsequent Election Briefing Note will examine how Labour's reforms have affected the so-called 'couple penalty' that exists in the tax and benefit system.

]]>
https://www.ifs.org.uk/publications/4807 Wed, 07 Apr 2010 00:00:00 +0000
<![CDATA[Living standards, inequality and poverty: Labour's record]]> In this Briefing Note, we assess the changes to living standards that have occurred under the first 11 years of the Labour government, setting out how average incomes, income inequality and poverty have changed between 1996-97 and 2007-08 (the latest year for which data on all three are available). We compare these changes with what happened under previous governments.

]]>
https://www.ifs.org.uk/publications/4808 Wed, 07 Apr 2010 00:00:00 +0000
<![CDATA[What has happened to 'Severe Poverty' under Labour?]]> This election briefing note surveys a range of data sources and definitions. It finds strong evidence of an increase in the rate of severe poverty since 2004-05, mirroring a rise in the official poverty rate, although the rate of persistent poverty (i.e. where people remain poor for a number of years) does seem to have fallen under Labour, at least until 2007. But the evidence is less conclusive about whether severe poverty is now higher than when Labour came to power.

]]>
https://www.ifs.org.uk/publications/4809 Wed, 07 Apr 2010 00:00:00 +0000
<![CDATA[Britain's fiscal squeeze: the choices ahead]]> The economic and financial crisis that has unfolded over the last two years has caused a dramatic deterioration in the UK's public finances, with public sector borrowing set to peak this year at a level not seen since the Second World War and public sector indebtedness set to climb to levels not seen since the late 1960s.

With the next general election less than a year away, the Government and the main opposition parties alike will be under pressure to offer more detailed proposals to repair the public finances. This note discusses some of the key questions all the parties will have to grapple with.

]]>
https://www.ifs.org.uk/publications/4618 Thu, 17 Sep 2009 00:00:00 +0000
<![CDATA[The distribution of wealth in the population aged 50 and over in England.]]> The tables in this paper present a description of the distribution of wealth amongst those aged 50 and over in England in 2002/3, with the analysis split by a series of different factors. These include: age, education, income, social, with the analysis split by a series of different factors. These include: age, education, income, social class, housing tenure, self-reported health and self-reported disability.

]]>
https://www.ifs.org.uk/publications/5834 Mon, 15 Jun 2009 00:00:00 +0000
<![CDATA[The distribution of wealth in the population aged 50 and over in England]]> The tables in this paper present a description of the distribution of wealth amongst those aged 50 and over in England in 2002/3, with the analysis split by a series of different factors. These include: age, education, income, social, with the analysis split by a series of different factors. These include: age, education, income, social class, housing tenure, self-reported health and self-reported disability.

]]>
https://www.ifs.org.uk/publications/4536 Fri, 12 Jun 2009 00:00:00 +0000
<![CDATA[Living standards during previous recessions]]> The current recession is the first that the UK has experienced since the early 1990s. Much has changed since then, and society's collective memory of who fared worst during previous recessions seems likely to have faded. Many workers in their 20s or early 30s have not experienced a recession during their working lives - including both authors of this report, one of whom had just started secondary school at the end of the last recession and the other of whom had just started junior school. This Briefing Note thus aims to document the course of average living standards, and those of particular subgroups in society, during the previous three UK recessions. It will also show what happened to measures of poverty and inequality during these periods.

]]>
https://www.ifs.org.uk/publications/4525 Fri, 08 May 2009 00:00:00 +0000
<![CDATA[Can more revenue be raised by increasing income tax rates for the very rich? ]]> This Briefing Note discusses how much scope there is to raise revenue from the very rich by increasing income tax rates and assesses in detail the amount of revenue that is likely to be raised by the government's proposed reforms. It extends analysis presented in the 2009 IFS Green Budget and updates some calculations in a submission to the Mirrlees Review. It also discusses information recently released by HM Treasury and HM Revenue & Customs concerning their methodology for calculating how much revenue these reforms will raise. The Briefing Note shows that there is considerable uncertainty over the revenue that could be raised from the very rich by increasing income tax rates, both because we cannot be certain about the distribution of incomes above £100,000 and because we cannot be certain how those affected will respond to the tax increase. It goes on to discuss under what conditions the measures in PBR 2008 could yield as much revenue as the Treasury is forecasting.

]]>
https://www.ifs.org.uk/publications/4486 Mon, 20 Apr 2009 00:00:00 +0000
<![CDATA[Budget 2009: tightening the squeeze?]]> The outlook for the public finances appears significantly weaker than the Treasury predicted in the November 2008 Pre-Budget Report (PBR). This will have an important bearing on the two key tax and spending decisions that Chancellor Alistair Darling will have to take in his Budget statement on 22 April: whether to announce an additional short-term stimulus to help support the economy and whether to announce an additional long- term tightening to help repair the public finances.

This Briefing Note sets out illustrative projections for the outlook for government borrowing and debt over the next few years. It then assesses by how much this or a future government might need to cut existing public spending plans and/or increase taxes to ensure that the outlook for public sector borrowing was no worse than that laid out in the PBR.

The analysis in this Briefing Note builds on the detailed forecasts in the January 2009 IFS Green Budget. It does not re-estimate the Green Budget forecasts, but instead makes some broad-brush adjustments to them to reflect new information and analysis available since the PBR.

]]>
https://www.ifs.org.uk/publications/4469 Mon, 06 Apr 2009 00:00:00 +0000
<![CDATA[How much do we tax the return to saving?]]> The questions of whether, and if so how much, the return to saving ought to be taxed are of central importance in discussions of how to design or reform the tax system. This Briefing Note provides a description of how the UK tax system treats the return to saving. Some key findings are that:

  • UK households hold their assets in a range of forms that face different tax treatments.
  • These differences in tax treatment can equate to quite big differences in the level of the tax on the return to these assets.
  • Differences in tax treatment can be due to the tax rates that an individual faces, as well as to the types of asset in which he or she chooses to save.
  • Tax rates on the return to assets have generally converged over the last 30 years.

In order to undertake this description of the tax on the return to assets, it is necessary to address first some conceptual issues concerning how we measure the level of tax on returns. The inclusion of a discussion of these issues means that this note is somewhat more technical - in terms of discussion of taxes and economic concepts, and in terms of arithmetic content - than is typical for an IFS Briefing Note. Nonetheless, the note is intended to be accessible to individuals who are particularly interested in the policy or conceptual issues concerning the taxation of asset returns.

]]>
https://www.ifs.org.uk/publications/4467 Fri, 27 Mar 2009 00:00:00 +0000
<![CDATA[Proportion of families, and of individuals living in families, who have private incomes exceeding their net income from, the state]]>

This Briefing Note examines what proportion of families have pre-tax private incomes exceeding net support from the state. The analysis was undertaken using the IFS tax and benefit microsimulation model, TAXBEN, and data from the Family Resources Survey and the Family expenditure Survey.

]]>
https://www.ifs.org.uk/publications/4402 Fri, 19 Dec 2008 00:00:00 +0000
<![CDATA[The distributional effect of the 2008 Pre-Budget Report]]> The Pre-Budget Report given by the Chancellor on 24th November 2008 contained a number of changes to the tax and benefit system to come into effect at various points over the next three years.

This briefing note expands on the information provided at a briefing given by IFS researchers on the day after the Pre-Budget Report . It gives details of the changes to taxes, benefits and tax credits directly affecting households, and the total distributional impact of measures announced in PBR 2008 together with pre-announced changes, by income and expenditure decile and household type, at three points in time - January 2009, April 2009 and April 2011.

It also discusses what PBR 2008 does to our impression of all tax and benefit changes under this Government. Finally, it discusses what PBR 08 did for child poverty in 2010/11 and the likely effects of the income tax changes for those earning more than £100,000 a year.

]]>
https://www.ifs.org.uk/publications/4381 Fri, 05 Dec 2008 00:00:00 +0000
<![CDATA[The UK public finances: ready for recession?]]> As the UK economy begins to shrink for the first time in 16 years, the two main political parties have been arguing over whether the public finances are stronger or weaker now than they were at the outset of the last recession in 1990 and when Labour came to power in 1997. This note looks at a couple of key indicators of the health of the public finances in historical and international perspective to assess this.

]]>
https://www.ifs.org.uk/publications/4342 Fri, 31 Oct 2008 00:00:00 +0000
<![CDATA[Alistair Darling's mini-Budget: can he afford it?]]> The Government's decision on 13 May 2008 to increase the personal income tax allowance by £600 and to reduce the effective upper rate threshold by the same amount for 2008-09 is estimated to cost £2.7 billion (just under 0.2% of national income). The Chancellor, Alistair Darling, told the House of Commons: "I am able to finance this proposal through borrowing this year, ensuring that we do not take money out of the economy at this time."

The Government maintains that the tax cut:

  • is affordable within the constraints laid down by its fiscal rules; and
  • will provide a useful stimulus to the economy at a time when economic growth is slowing.

This note briefly assesses these claims.

]]>
https://www.ifs.org.uk/publications/4225 Wed, 21 May 2008 00:00:00 +0000
<![CDATA[The 10% tax rate: where next?]]> In Budget 2007, the Government announced the abolition of the 10% starting rate of income tax alongside a wider set of reforms to personal taxes and tax credits to take effect during the period April 2008 to April 2010. Further changes to tax credits and state benefits were announced in PBR 2007 and Budget 2008, some to take effect in 2008-09, some in 2009-10 and others in 2010-11.

During April 2008, the Government said that it was looking at ways of compensating the net losers from these changes (in practice, those for whom the losses from the abolition of the 10% band exceeded the gains from the other measures). On 13 May it announced a £600 rise in the income tax personal allowance for 2008-09, with a corresponding cut in the higher-rate threshold.

In the light of these changes, this note looks at:

  • To what extent the rise in the personal allowance, and other measures in Budget 2007, PBR 2007 and Budget 2008, compensate those who lost out from the abolition of the 10% rate of income tax;
  • To what extent the Government's pre-announced changes to personal taxes, tax credits and benefits for 2010-11 provide compensation for these losers over the medium term;
  • What options the Government has for 2009-10 and beyond.

]]>
https://www.ifs.org.uk/publications/4224 Wed, 21 May 2008 00:00:00 +0000
<![CDATA[Racing away? Income inequality and the evolution of high incomes]]> This Briefing Note provides an analysis of the characteristics of high-income individuals and how their incomes have evolved over time.

We begin by setting out recent trends in overall income inequality and why these lead us to focus on the pattern of income growth at the very top of the income distribution. We then present some basic facts about high-income individuals and how they compare with the rest of society (for example, what is their average before-tax income, what is their average tax rate, how much of total personal income do they receive, in what industries do they tend to work?). We then discuss recent trends in their incomes over time and how this pattern compares with that for the rest of the income distribution. We then briefly summarise some recent research on longer-term trends in high incomes. Appendix A will undertake a brief comparison with other sources of information - compensation of executives and measures of personal wealth.

]]>
https://www.ifs.org.uk/publications/4108 Thu, 17 Jan 2008 00:00:00 +0000
<![CDATA[The 2007 Comprehensive Spending Review: a challenging spending review? ]]> In advance of the publication of the CSR, this briefing note examines what we already know about the CSR settlement, what remains to be announced and what this might imply for government departments and public services.

]]>
https://www.ifs.org.uk/publications/4054 Thu, 04 Oct 2007 00:00:00 +0000
<![CDATA[A survey of UK local government finance]]> This document provides an overview of the current system of local government finance in the UK. It outlines the structure of local government, summarises the composition of local authority spending, and describes in detail how the spending is financed. It concludes with a brief discussion of options for reform.

]]>
https://www.ifs.org.uk/publications/4004 Tue, 31 Jul 2007 00:00:00 +0000
<![CDATA[Poverty and inequality in the UK: 2007]]> This Briefing Note provides an update on trends in living standards, income inequality and poverty. It uses the same approach to measuring income and poverty as the government employs in its Households Below Average Income (HBAI) publication. The analysis is based on the latest HBAI figures (published on 27 March 2007), providing information about incomes up to the year 2005-06. The measure of income used is net household weekly income, which has been adjusted to take account of family size ('equivalised'). The income amounts provided below are expressed as the equivalent for a couple with no children, and all changes given are in real terms (i.e. after adjusting for inflation). For the first time in recent years, data are available for the whole of the United Kingdom, not just Great Britain, but data for Northern Ireland are only available from 2002-03. Some comparisons over time are provided for Great Britain only, but others will compare statistics for GB before 2002-03 with those for the UK afterwards.

PLEASE NOTE: 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. This Briefing Note was based on the same dataset and therefore suffers from similar errors. In response to revisions announced by the DWP in May 2007, we have now updated our findings in a revised press release and have produced a revised summary.

]]>
https://www.ifs.org.uk/publications/3932 Wed, 28 Mar 2007 00:00:00 +0000
<![CDATA[Options for a UK 'flat tax': some simple simulations]]>

In all cases, the tax base is left unchanged. The analysis is conducted for the working-age population only, and in all cases the reforms are designed to be revenue neutral under the strong assumption that people do not change their behaviour in response to the reforms. We examine the effects of the reforms on particular example families and on the overall distributions of income and work incentives.

]]>
https://www.ifs.org.uk/publications/3695 Fri, 11 Aug 2006 00:00:00 +0000
<![CDATA[Public spending on education in the UK: prepared for the Education and Skills Select Committee]]>

The note discusses some key issues that have arisen in education spending in the last year. We begin by examining the significance of the Chancellor's statements in Budget 2006 - both regarding school capital expenditure and the pledge to increase funding per pupil in the state sector to that currently seen in the private sector. We then move on to what the Comprehensive Spending Review in 2007 is likely to mean for education, given commitments in other areas of government spending. An Appendix contains some information about overall trends in public spending on education in the UK, and the international context.]]> https://www.ifs.org.uk/publications/3667 Wed, 19 Jul 2006 00:00:00 +0000 <![CDATA[Labour supply project: Model application - employment effects of reforms between 1997 - 2002]]> This briefing note presents results from an application of the IFS dynamic labour supply model developed for the HMT and the DWP. The reports from the project (Reports 1-3) presented the background to the final model, its components and the methods of estimation used. In Report 3 we presented the estimated model and results of applying the model to simulate labour market behaviour following a 2p cut in the basic rate of income tax.

Below, we model the overall effect of a package of tax and benefit reforms: the reforms introduced between 1997 and 2002, i.e. in the first six years of the Labour government. The reforms we model include all the major changes directly affecting the disposable incomes of households.

Section 2 of this briefing note introduces the changes to the tax and benefit system between 1997 and 2002 which we model in the simulation. Results of the simulation are presented in section 3. Section 4 concludes.

]]>
https://www.ifs.org.uk/publications/3633 Mon, 19 Jun 2006 00:00:00 +0000
<![CDATA[How many lone parents are receiving tax credits?]]>

Brewer et al. (2006), who analyse what happened to child poverty between 1998/99 and 2004/05, show that estimates of spending on tax credits received by families with children based on the FRS have been getting increasingly inaccurate over time compared with estimates made by HM Revenue & Customs (HMRC), with around õ billion of spending on tax credits received by families with children going unrecorded by the FRS in 2004/05.

However, a detailed comparison of estimates of the number of families with children receiving tax credits (or equivalent in out-of-work benefits) based on the FRS with the equivalent estimates based on the government's administrative data is confounded by the fact that HMRC estimates that the government is paying the child tax credit and the equivalent in out-of-work benefits to more lone parents than official statistics suggest live in the UK.]]> https://www.ifs.org.uk/publications/3574 Sun, 12 Mar 2006 00:00:00 +0000 <![CDATA[The effect of the working families' tax credit on labour market participation]]> https://www.ifs.org.uk/publications/3564 Fri, 24 Feb 2006 00:00:00 +0000 <![CDATA[Background facts and comments on "Supporting growth in innovation: enhancing the R&D tax credit"]]> On 25 October 2005 IFS and HM Treasury hosted a round table discussion that brought together practitioners from business, tax professionals, academics and policy makers from HM Treasury, HMRC and DTI to consider the proposals put forward in the discussion document "Supporting growth in innovation: enhancing the R&D tax credit" published by HM Treasury, DTI and HM Revenue and Customs in July 2005. This IFS briefing note provides some background facts and comments related to the issues raised in the discussion document, and a final section summarises the discussion that took place at the round table.

]]>
https://www.ifs.org.uk/publications/3482 Mon, 21 Nov 2005 00:00:00 +0000
<![CDATA[Fuel taxation]]>

Despite the escalator being abandoned, petrol prices have risen once again and the threat of renewed protest has been debated. This Briefing Note updates earlier work (see asterisked footnote below) from the time of the last petrol crisis and considers the extent to which recent increases in prices can be attributed to government policy. It also considers whether there is a case for duties to be changed as a direct result of pump price changes, and examines evidence on the effects of fuel duty changes on different groups of the population.]]> https://www.ifs.org.uk/publications/3374 Mon, 06 Jun 2005 00:00:00 +0000 <![CDATA[Higher education funding policy: a guide to the debate]]>

At their root, all of the parties' proposals aim to increase the level of funding per university student. But the ways in which this will be achieved are very different. This has implications for how well off students will be and how well off future graduates will be, and will also have implications for universities and the taxpayer. All of these issues are explored in this Note.

The structure of the Note is as follows: Section 2 sets out the key features of the three partiesҍ HE funding policies; Section 3 describes how the numbers behind the different proposals add up, setting out the implications for taxpayers, universities, students and graduates; Section 4 sets out what the figures mean for university funding on a per-student basis, some distributional implications for universities and an international comparison; Section 5 provides an assessment of what the reforms would mean for the living standards of students whilst at university, and what levels of debt students are likely to graduate with under different funding systems; Section 6 gives an in-depth examination of the impact of different HE funding policies on graduates across the entire distribution of likely future graduate earnings paths; and Section 7 concludes.]]> https://www.ifs.org.uk/publications/3526 Sun, 01 May 2005 00:00:00 +0000 <![CDATA[Pension and saving policy]]> https://www.ifs.org.uk/publications/3368 Fri, 29 Apr 2005 00:00:00 +0000 <![CDATA[Proposed tax and benefit changes: winners and losers in the next term]]> https://www.ifs.org.uk/publications/3367 Thu, 28 Apr 2005 00:00:00 +0000 <![CDATA[Living standards, inequality and poverty]]> https://www.ifs.org.uk/publications/3365 Tue, 26 Apr 2005 00:00:00 +0000 <![CDATA[Better or worse off? More or less heavily taxed? An assessment of manifesto claims]]> https://www.ifs.org.uk/publications/3366 Tue, 26 Apr 2005 00:00:00 +0000 <![CDATA[Helping families: childcare, early education and the work-life balance]]> https://www.ifs.org.uk/publications/3363 Mon, 25 Apr 2005 00:00:00 +0000 <![CDATA[Business taxes]]>

This Election Briefing Note starts with a summary of tax reforms since 1997. This is followed by an assessment of the overall effect of these changes on the tax burden faced by businesses and on government revenues. The note concludes with a discussion of future trends in corporate taxation.]]> https://www.ifs.org.uk/publications/3364 Mon, 25 Apr 2005 00:00:00 +0000 <![CDATA[Productivity policy]]> https://www.ifs.org.uk/publications/3362 Sun, 24 Apr 2005 00:00:00 +0000 <![CDATA[Employment and the labour market]]>

Section 2 gives details of how the rates of employment, unemployment and economic inactivity have changed under the Labour government. Section 3 begins by detailing the national minimum wage and presents evidence on its impact, and continues in a somewhat similar vein, analysing the New Deal programmes and in-work tax credits. In Section 4, we show how financial work incentives have changed since 1997, and we briefly analyse the employment proposals of the main parties in Section 5. Finally, Section 6 concludes.]]> https://www.ifs.org.uk/publications/3361 Fri, 22 Apr 2005 00:00:00 +0000 <![CDATA[Public spending]]>

  • In its first three years in office, Labour saw public spending drop to a 39-year low as a share of national income, since when it has risen sharply. The overall increase in public spending seen between 1997 and 2005 is the 2nd largest among the OECD countries on which we have comparable information. But even the increases planned by Labour through to March 2008 would still leave the state spending a smaller share of national income than it did in the early 1990s.
  • Public spending on the NHS, transport and education has increased much faster since Labour came to power than it did during the Conservatives' 18 years in office. By historical standards, spending in these areas has grown particularly quickly during Labour's second term in office.
  • The period from April 1999 to date represents the largest sustained increase in spending on the NHS since its inception. This has meant that the Prime Minister's pledge to bring health spending up to the EU average has been met, if the benchmark is the simple average of EU health spending in 1998. However, UK health spending in 2005ְ6 is likely to be below the more meaningful weighted average of health spending among other EU countries in 1998, let alone what they have spent on healthcare more recently.
]]>
https://www.ifs.org.uk/publications/3354 Thu, 21 Apr 2005 00:00:00 +0000
<![CDATA[Taxation]]>
  • Net taxes and National Insurance contributions have risen from 34.8% of national income in 1996ֹ7 to 36.3% in 2004ְ5. According to Treasury projections, these will rise to 38.5% of national income in 2008ְ9. This would be the highest level since 1984ָ5.
  • Total government revenues have averaged 38.4% of national income under the two Labour governments, compared with 40.6% over the 18 years of Conservative government from 1979 to 1997. According to Treasury forecasts, revenues will equal 39.3% of national income in 2005ְ6, rising to 40.6% by 2009ֱ0. This would be the highest level since 1988ָ9.
  • Over Labour's two parliaments since 1997, current receipts have risen by 3.5% a year on average, in real terms, while national income rose by 2.8% on average, leaving national income minus tax to rise at 2.4% on average.
  • Of the total ò8.5 billion revenue increase seen since 1996ֹ7, ñ9.1 billion was due to discretionary changes to the tax system, with the remainder being due to the impact of the economy on overall revenues. The largest discretionary change occurred in the first Budget after the 2001 election (the Spring 2002 Budget), which increased taxes to yield an additional ù.9 billion by 2005ְ6.
  • Between 1997 and 2005, the UK saw one of the highest increases in revenues among OECD countries, although the UK remains a low-tax economy compared with EU countries.
]]>
https://www.ifs.org.uk/publications/3356 Thu, 21 Apr 2005 00:00:00 +0000
<![CDATA[The public finances]]>
  • The public finances were strengthening when Labour took office in 1997 and continued to do so during its first term in office, thanks to spending restraint and buoyant revenues. Then they weakened in the second term, as a deliberate decision to increase spending coincided with lower-than-expected revenues.
  • Fiscal policy has been broadly successful to date under Labour, judged against the government's self-imposed rules. Debt has been kept below 40% of national income and government borrowing is likely to be broadly in line with investment spending in the economic cycle running from 1999ֲ000 to 2005ְ6.
  • By historic standards, government debt and borrowing are modest compared with levels under recent previous governments. But the UK now has one of the largest structural budget deficits in the industrial world. So while the UK has remained in the middle of the industrial countries' league table for government debt since 1996, its position is likely to deteriorate unless fiscal policy is tightened significantly.
  • Labour is planning a fiscal tightening. It wants to increase spending modestly as a share of national income while it expects a larger increase in the tax burden to pay for it and meet its fiscal rules looking forward. The Chancellor believes this will happen without him needing to announce new tax increases; we think he may need to raise another ñ1 billion.
  • The Liberal Democrats propose slightly higher spending and a slightly higher tax burden than Labour. Their tax increases may not raise as much money as they hope, but they have a small reserve built into their plans. Like Labour, they will need to announce new tax increases to pay for their spending plans if revenues undershoot Treasury forecasts.
  • The Conservatives plan to announce tax cuts worth ô billion in their first Budget and after six years to cut spending relative to Labour's plans by ò5 billion in today's terms. By cutting borrowing, they should avoid the need to announce new tax increases (or reverse their own tax cuts) even if revenues are weaker than the Treasury expects. But this assumes that the Conservatives are able to cut spending as quickly and painlessly as they claim. Past experience suggests caution.
  • Whoever wins the election, the tax burden is likely to be higher at the end of the next parliament than at the end of this one. And even the Conservatives' proposed spending cuts would reverse only half the increase in spending seen since 1999. The similarities between the parties are as striking as the differences. ]]> https://www.ifs.org.uk/publications/3355 Thu, 21 Apr 2005 00:00:00 +0000 <![CDATA[Tax and benefit changes: winners and losers]]>
  • Tax and benefit changes implemented by Labour since 1997 will have a net cost to the exchequer of around 2.2 billion in 200506. The average (mean) impact of this small net giveaway is to raise household disposable incomes by 1.69 a week or 0.4%. The biggest proportionate gains are in the 2nd poorest tenth of the population, whose disposable incomes are increased by 11.4%, while the richest tenth fare worst, with a cut in income of 3.7%.
  • Tax and benefit reforms since 1997 have clearly been progressive, benefiting the less well-off relative to the better-off. Reforms in the second term while less generous on average were more progressive than those in the first, with the poorest faring better.
  • Increases in council tax above inflation since 1997 will raise 5.8 billion in 200506, net of council tax benefit. This outweighs the giveaway by central government, and leaves households overall 2.85 a week worse off on average, equivalent to 0.6% of their disposable incomes. The increase in council tax is regressive, except for the poorest fifth of the population, who are partially protected from the rises by council tax benefit. ]]> https://www.ifs.org.uk/publications/3351 Wed, 20 Apr 2005 00:00:00 +0000 <![CDATA[How effective are conditional cash transfers? Evidence from Colombia]]> https://www.ifs.org.uk/publications/3214 Wed, 12 Jan 2005 00:00:00 +0000 <![CDATA[Increasing innovative activity in the UK? Where now for government support for innovation and technology transfer?]]> https://www.ifs.org.uk/publications/3186 Mon, 29 Nov 2004 00:00:00 +0000 <![CDATA[The impact of tax and benefit changes between April 2000 and April 2003 on parents' labour supply]]> https://www.ifs.org.uk/publications/3154 Wed, 17 Nov 2004 00:00:00 +0000 <![CDATA[Offshoring of business services and its impact on the UK economy]]>

    Specialisation within a firm happens when a firm organises an activity in a specialised units, for example, when a firm moves payroll activities out of the back office of a factory, and into a specialised payroll office. Outsourcing is specialisation outside the firm. This occurs when firms opt to 'buy' rather than 'make' in-house. Outsourcing involves greater specialisation as firms switch from sourcing inputs internally to sourcing them from separately owned suppliers. Offshoring occurs when firms move production overseas - either its own specialised unit or outsourced services.

    Business Services are services that are provided to other business, rather than directly to the public. They include Computer Services, Professional Services (Legal, Accountancy, Market Research, Technical, Engineering, Architectural, Advertising and Consultancy), Research and Development, as well as other services such as Labour Placement Agencies and Call Centres.]]> https://www.ifs.org.uk/publications/3078 Mon, 08 Nov 2004 00:00:00 +0000 <![CDATA[Challenges for the 2004 Spending Review]]> The present government's aims include achieving 'world-class public services', eliminating child and pensioner poverty, and increasing the proportion of young people participating in higher education. Achieving these aims is likely to require continued increases in the level of funding for public services. This Briefing Note considers the options for public spending during the years of the forthcoming Spending Review 2004 (2005-06 to 2007-08), in light of what has already been announced and what we know about the government's priorities and past spending decisions.

    ]]>
    https://www.ifs.org.uk/publications/1798 Thu, 01 Jul 2004 00:00:00 +0000
    <![CDATA[The 'fat tax': economic incentives to reduce obesity]]> This Briefing Note looks at the potential for the introduction of a 'fat tax' into the UK in an effort to reduce the growing prevalence of obesity in Britain. There are different forms such a tax could take. One possibility is to tax the nutrient contents of foods such that those containing more fat or salt, for example, are taxed more heavily. Alternatively, particular types of foods, such as snacks or soft drinks, could be subject to a tax, or VAT could be extended to foods that are currently zero-rated but have a high fat content.

    Revenue from a 'fat tax' could be used in various ways, such as financing subsidies for healthy foods or exercise equipment, funding advertising campaigns for healthy eating or in schools. Alternatively, it could form part of general government receipts.

    This Briefing Note will look at trends in UK obesity (Section 2) and examine evidence on eating habits and exercise in order to see whether trends here can account for what we see happening to obesity (Section 3). We will then go on, in Section 4, to review some of the key economic reasons behind why we might be concerned about obesity and why we might consider there to be a case for government intervention. Moving on, we discuss how food is currently taxed (Section 5) and the various ways in which a 'fat tax' might be introduced (Section 6), looking at particular issues the government might need to address should it wish to introduce one. We will finish in Section 7 by presenting some simple analysis of a hypothetical 'fat tax' in terms of how it might impact differently on the rich and the poor. Section 8 concludes.

    ]]>
    https://www.ifs.org.uk/publications/1797 Tue, 01 Jun 2004 00:00:00 +0000
    <![CDATA[Pensions, pensioners and pensions policy: financial security in UK retirement savings?]]>
    1. Is the financial support offered to pensioners by the state in retirement sustainable in terms of the burden it places on the working population?
    2. Are the mechanisms by which the private financial sector helps people save for retirement sustainable in their apportionment of risk between employers and employees?
    3. Is the way in which the state and private systems interact sustainable in the sense that the combination promises people a reasonable degree of financial security without creating unduly powerful disincentives for them to work and save?
    ]]>
    https://www.ifs.org.uk/publications/1796 Tue, 02 Mar 2004 00:00:00 +0000
    <![CDATA[Will the government hit its child poverty target in 2004-05?]]> IFS Briefing Note 41, which was written before PBR 2003.

    We agree with the assessment in PBR 2003 that the government should comfortably meet its target measuring incomes before housing costs (BHC). It also concludes that the government is on course to just hit its target measuring incomes after housing costs (AHC). However, there are uncertainties in making these forecasts, not least because the government uses a survey of around 30,000 households to estimate child poverty in a population roughly a thousand times as large. We should know for sure whether the target has been hit in Spring 2006.]]> https://www.ifs.org.uk/publications/1795 Mon, 01 Mar 2004 00:00:00 +0000 <![CDATA[The Conservative Party's medium-term expenditure strategy]]> https://www.ifs.org.uk/publications/1794 Sun, 01 Feb 2004 00:00:00 +0000 <![CDATA[An analysis of the higher education reforms]]> https://www.ifs.org.uk/publications/1793 Fri, 02 Jan 2004 00:00:00 +0000 <![CDATA[Early evaluation of a new nutrition and education programme in Colombia]]> https://www.ifs.org.uk/publications/1792 Thu, 01 Jan 2004 00:00:00 +0000 <![CDATA[A survey of public spending in the UK]]> This Briefing Note provides an overview of public spending in the UK. It describes the components of public spending and examines trends in expenditure in each of six main areas. Section 2 provides an overview of total public spending in the UK. Section 3 explains how the current government plans public spending. Section 4 describes the current allocation of public spending and then focuses on how the amount received by each of the six main spending areas has changed over time. Section 5 comprises a discussion of recent trends that affect all of the spending areas, such as the advent of the Private Finance Initiative (PFI). Section 6 concludes.

    You can download an accompanying spreadsheet containing long-run spending data by function.

    ]]>
    https://www.ifs.org.uk/publications/1791 Wed, 03 Dec 2003 00:00:00 +0000
    <![CDATA[The UK productivity gap and the importance of the service sectors]]> The UK's poor productivity performance relative to the US has been a focus for government policy and analysis in recent Budgets and Pre-Budget Reports. US business sector labour productivity (value-added per worker) was just over 40% higher than the UK level in 2001, about the same as it was at the beginning of the 1990s. The labour productivity gap fell over the early 1990s, when the UK experienced relatively faster growth in business sector labour productivity than the US, but it has since increased again as productivity growth slowed in the UK and accelerated in the US.

    This aggregate picture hides considerable variation at the industry level. In some industries the gap has narrowed substantially over the past decade, while in others it has widened. As a result, although the total size of the productivity gap did not change very much over the 1990s, the industries that account for the majority of the gap have changed considerably. An understanding of where the productivity gap arises is essential to be able to target policy effectively. Yet to date most work has considered the aggregate performance of the UK, or has focussed on the manufacturing sector despite the fact that most employment is in the service sectors.

    In this briefing note we document changes in the gap over the 1990s and variations within the productivity gap in 2001.

    After documenting these facts we consider some of the reasons that might explain this relatively poor performance. We then outline some of the areas that we plan to investigate over the next three years under the AIM programme. Among other issues, we plan to look at: whether the dispersion in productivity within sectors is unusually high in the UK; how productivity vary across UK regions; whether rates of entry and exit in the UK are lower than in other countries; whether outsourcing has been a significant driver of productivity growth; what the joint impact of management practices and public policies have on productivity.

    ]]>
    https://www.ifs.org.uk/publications/1790 Tue, 02 Dec 2003 00:00:00 +0000
    <![CDATA[What do the child poverty targets mean for the child tax credit? An update]]> The government has a target for child poverty to fall to 3.1 million by 2004-05, measured by the number of children in households with less than 60% median income after housing costs. The latest data showed that 3.8 million children (30% of children in Britain) were in poverty in 2001-02 on this definition. To help achieve the target, increases to means-tested benefits and tax credits need to take effect in April 2004, and therefore need to be announced in the forthcoming Pre-Budget Report.

    New calculations suggest that around £billion of further spending on the child tax credit might be needed to meet the child poverty target. Increases in other benefits or tax credits could also reduce child poverty, but at greater cost. But if the government chooses not to increase support for families with children in 2004-05, then real spending on child-contingent support in the tax and benefit system will still have increased by over 50% since 1997, and child poverty in 2004-05 should be at its lowest level since 1989.

    The government is still deciding what definition of child poverty it wishes to target in the longer term. If it wishes to reduce further child poverty measured under its current definition, then this will require the means-tested benefits and tax credits received by poor families with children to rise faster than the rate of inflation in the absence of helpful economic or demographic changes, such as more parents working. However, continuing to target a poverty measure defined exclusively in terms of incomes may skew the policy response excessively towards tax credit and means-tested benefits changes, and away from improving public services for children which might have a greater impact on their well-being over the longer term. By way of example, the extra spending that we think is needed for the government to meet its target for 2004-05 would pay for the current Sure Start programme - which aims to improve the health and well-being of families and children aged under 5 in disadvantaged areas - to be doubled in size.

    ]]>
    https://www.ifs.org.uk/publications/1789 Mon, 01 Dec 2003 00:00:00 +0000
    <![CDATA[Corporation Tax Reform: A Response to the Government's August 2003 Consultation Document]]>

    The main focus of last years consultation was the calculation of taxable income, in particular with respect to capital assets, the schedular system and the distinction between trading and investment companies. The new consultation deals with these issues again. Much of that is repetition, although proposals have become more specific. Particularly noteworthy is a proposed change to the tax treatment of finance leases. This consultation further includes a new topic - the international and particularly the European context of the UK corporation tax system.

    This briefing note will first discuss in general terms the governments stated objectives for corporate tax reform. It will then cover briefly some areas that were already discussed in last years consultation, focusing on the new developments. The international background to new proposals on transfer pricing and finance leasing is then discussed, followed by a more detailed analysis of these proposals.]]> https://www.ifs.org.uk/publications/1788 Sat, 01 Nov 2003 00:00:00 +0000 <![CDATA[Two cheers for the Pension Credit?]]>

    This Briefing Note is set out as follows. Section 2 describes how the pension credit operates and why the problems that occurred with the Inland Revenues administration of the new tax credits for families with children in April 2003 should not occur with the pension credit. The distributional impact of the reform is shown in Section 3. Section 4 discusses the inevitable problem of incomplete take-up of the new payment. Section 5 discusses the likely impact of the pension credit on saving and Section 6 discusses some of the longer-term issues that it raises. Section 7 concludes.]]> https://www.ifs.org.uk/publications/1787 Wed, 01 Oct 2003 00:00:00 +0000 <![CDATA[Is middle Britain middle-income Britain?]]> https://www.ifs.org.uk/publications/1785 Mon, 01 Sep 2003 00:00:00 +0000 <![CDATA[Understanding the UK's poor technological performance]]> https://www.ifs.org.uk/publications/1786 Sun, 01 Jun 2003 00:00:00 +0000 <![CDATA[Achieving simplicity, security and choice in retirement? An assessment of the government's proposed pensions reforms]]>

    The perceived need for yet more reforms to the UK pension system seems to stem from the governmentҳ belief that Ѱerhaps 3 million people are seriously under-saving (or planning to retire too soon)' and that ѡ further group of between 5 and 10 million people may want to consider saving more or working longer' (DWP Green Paper, 3, 16, 36). In this Briefing Note, we discuss whether or not the proposed reforms are likely to help individuals to make choices about how to provide for their retirement that are appropriate to their circumstances. We focus particularly on whether or not the proposals might prompt those individuals who are not thought to be providing sufficiently for their retirement to save more each year or to retire at an older age than might otherwise have been the case. This would help alleviate concerns about underprovision.

    The structure of our discussion is as follows. Section 2 describes the main proposed reforms. Section 3 discusses whether they are likely help individuals to make saving decisions that are appropriate to their circumstances. Section 4 looks at how the reforms might affect retirement ages. Section 5 concludes.]]> https://www.ifs.org.uk/publications/1784 Wed, 02 Apr 2003 00:00:00 +0000 <![CDATA[The new tax credits]]>

    This Briefing Note looks at:

    • the changes to tax credits that happened in April 2003;
    • why the new tax credits have been introduced;
    • how they work;
    • the cost and distributional impact;
    • the impact on work incentives;
    • what levels of take-up we might expect.
    ]]>
    https://www.ifs.org.uk/publications/1783 Tue, 01 Apr 2003 00:00:00 +0000
    <![CDATA[Submission to the Work and Pensions Select Committee Inquiry: 'How can suitable, affordable childcare be provided for all parents who need it to enable them to work?']]> https://www.ifs.org.uk/publications/1782 Mon, 03 Mar 2003 00:00:00 +0000 <![CDATA[Inequality under the Labour government]]> https://www.ifs.org.uk/publications/1781 Sun, 02 Mar 2003 00:00:00 +0000 <![CDATA[How has child poverty changed since 1998-99? An update]]>

    Although this means that almost one in three children in Britain live in poverty on this definition, this is the lowest level recorded since 1991. Since the Labour government came to power, the total drop in the numbers in child poverty has been around 500,000. In 199899, the government set a target for child poverty in 200405. If the rate of decline in child poverty observed since 199899 continues for three more years, then the government will miss this target. Indeed, it is now further behind schedule than it was based on figures from 200001.

    The rather slow decline in recorded child poverty is due, in large part, to the fact that the government is targeting relative, rather than absolute, poverty. Income growth has been particularly strong across society since 199899, and this means that the poverty line has risen significantly over this time. Although the government is continuing to increase the living standards of low-income households with children, the gap with the rest of society is not closing as fast as the government would like. Rectifying this may require additional resources to be directed to families with children in the forthcoming Budget, on top of measures already announced.]]> https://www.ifs.org.uk/publications/1780 Sat, 01 Mar 2003 00:00:00 +0000 <![CDATA[London's congestion charge]]>

    In 2001, almost 1.1 million people entered central London during the morning peak hours of 7.00a.m.ֱ0.00a.m.,1 of whom around 150,000 (13.7%) used private transport. Whilst the total number of people entering during the morning rush hour has scarcely changed since 1991, there has been a small shift towards public transport: in 1991, 16.8% of people used private transport. Nevertheless, average traffic speeds in central London have fallen slightly over the last decade, with the average morning peak-period traffic speed for 2000ְ3 just 9.9 mph, compared with a peak of 14.2 mph in 1974ַ6. During the evening rush hour, average speeds are even slower, at just 9.6 mph. In evidence to the House of Commons Transport Committee,3 David Begg of the Commission for Integrated Transport argues that around 40% of the total national level of congestion occurs in Greater London. Transport for London suggests that Ѵhere are now no longer any ӰeaksԠor ӯff-peaksԠof traffic volume between 7am ֠6.30pm' and states that there are now on average three minutes of delay for every mile that a vehicle travels inside the charging zone.

    This Briefing Note aims to provide a guide to the workings of the London congestion charge. We begin in Section 2 by describing the economic case for congestion charging, showing why congestion can be thought of as an urban example of the well-known overuse of common resources to which there is free access (the so-called Ѵragedy of the commonsҩ. In Section 3, we move on to look at the details of the proposed charge for London, examining how it fits in with the economic framework we develop and discussing some of the work that has already been carried out to try to predict the likely effects of the charge. Section 4 looks briefly at the issue of what may happen with the projected net revenues from the charge, which are legally bound for the first 10 years to be spent on transport within Greater London. In Section 5, we discuss some of the empirical evidence regarding transport in London and present evidence on the potential distributional effects of the congestion charge, since one of the oft-cited criticisms of charging is that it will impact upon the poorest most severely. Section 6 goes on to look at the experience of congestion charging elsewhere around the world.]]> https://www.ifs.org.uk/publications/1779 Sat, 01 Feb 2003 00:00:00 +0000 <![CDATA[Inequality and living standards in Great Britain: some facts]]> http://www.ifs.org.uk/bns/bn19figs.zip. Both were last updated on 9 March 2004.

    Section I of this Briefing Note starts by setting out some of the issues and conceptual difficulties surrounding the measuring of living standards and inequality. A picture of the income distribution in Great Britain and many of the important trends in living standards is then presented in the sections that follow. In Sections II and III, we choose weekly before-housing-costs household equivalent income1 as our measure of living standards, as well as presenting some results on an after-housing-costs basis. Section IV then considers using weekly equivalent household expenditure (including housing costs) as a comparative measure of living standards.

    Section V cites research tracking the income of individuals across a number of years, while Section VI looks at work that attempts to assess how income status changes across generations. Sections VII, VIII and IX proceed by examining some of the factors responsible for the changes in inequality described, looking at the labour market, demographic changes and the impact of taxes and benefits. Section X concludes.]]> https://www.ifs.org.uk/publications/1768 Sun, 01 Dec 2002 00:00:00 +0000 <![CDATA[Retirement, pensions and the adequacy of saving: a guide to the debate]]>

    The note concludes that:

    • Retirement age changes are integrally linked into the adequacy of saving for retirement. By extending working lives and therefore being less long in retirement individuals would have more time to accumulate savings (both pension and non-pension) and also need less savings.
    • Low retirement income is not necessarily evidence of inadequate retirement saving. Many older households with low incomes will have had low life-time income and it is not necessarily the case that such households should have saved more given their consumption needs and the policy environment through which they have lived.
    • Many unanswered research questions are key to outcomes in the future. These include: Can and will the labour market absorb more older workers? What are the consumption needs of older households? To what extent will individual behaviours (either at the saving or the retirement margin) adjust to meet the pressures of retirement income provision in an ageing population?
    ]]>
    https://www.ifs.org.uk/publications/5 Tue, 01 Oct 2002 00:00:00 +0000
    <![CDATA[Reform of corporation tax: a response to the government's consultation document]]>

    But this consultation goes beyond a mere tidying of the tax system. Underlying the proposals is a clearly discernible direction for reform of the corporation tax system. The aim is to align taxation and company accounts. Although the consultation addresses three topics capital assets, the schedular system and the distinction between trading and investment companies the major issues revolve around the treatment of assets and losses. In the former case, a comprehensive alignment is raised as a possibility. In the latter case, the proposals represent a first step along a road that could eventually lead to taxation on a tax consolidated basis and hence the reduction or elimination of the existing restrictions on how losses can reduce taxable profits.

    This response focuses on these larger issues. It aims to explain the main proposals contained in the consultation, to provide some empirical evidence on the scale of possible changes and to make some comments on the wider policy issues that these proposals raise. At this stage of the consultation process, we retain an open mind on the merits of any final reform package, not least because there is a wide range of alternative packages.]]> https://www.ifs.org.uk/publications/1778 Tue, 01 Oct 2002 00:00:00 +0000 <![CDATA[The tax and benefit system and the decision to invest in a stakeholder pension]]>

    We start with a brief review of the nature and aim of stakeholder pensions. We go on to review how the tax treatment of stakeholder schemes compares with that of the other principal tax-privileged way to invest in financial assets, the Individual Savings Account (ISA). As we explain, individuals who expect to be saving moderate amounts for the foreseeable future may well face a difficult decision in deciding between these two vehicles. For example, they might be best served by initially placing funds in an ISA and subsequently transferring these funds into a pension as they near retirement. Next, we turn to the benefit system. We provide an overview of its structure in the wake of Labourҳ reforms and review how it treats different forms of financial assets. We then determine the specific groups for which the benefit system is especially likely to exert a major influence on the appropriate form in which to save for retirement and, indeed, whether to save at all.

    Taken as given in all this is the current tax and benefit system, along with the current governmentҳ aspirations for how this will evolve over time. One important consideration for people will be that, in reality, governments' policies have tended to change over time. The final section briefly discusses the important issue of whether current policies, such as increasing the basic state pension in line with prices while increasing the minimum income guarantee (and eventually the pension credit) in line with earnings, may or may not prove to be politically sustainable.]]> https://www.ifs.org.uk/publications/6 Thu, 01 Aug 2002 00:00:00 +0000 <![CDATA[Challenges for the 2002 Spending Review]]> https://www.ifs.org.uk/publications/1777 Mon, 01 Jul 2002 00:00:00 +0000 <![CDATA[Measuring UK fiscal stance since the Second World War]]> https://www.ifs.org.uk/publications/1776 Sun, 02 Jun 2002 00:00:00 +0000 <![CDATA[Long-term trends in British taxation and spending]]> https://www.ifs.org.uk/publications/1775 Sat, 01 Jun 2002 00:00:00 +0000 <![CDATA[Budget 2002: business taxation measures]]> https://www.ifs.org.uk/publications/1774 Wed, 01 May 2002 00:00:00 +0000 <![CDATA[A response to the consultative note 'Designs for Innovation']]> Designs for Innovation, on the design of the new credit. This Briefing Note discusses which firms are likely to benefit from the new credit, and the likely costs and effectiveness of the designs under consideration.]]> https://www.ifs.org.uk/publications/1773 Fri, 01 Mar 2002 00:00:00 +0000 <![CDATA[Rewarding saving and alleviating poverty? The final pension credit proposals]]> https://www.ifs.org.uk/publications/1772 Fri, 01 Feb 2002 00:00:00 +0000 <![CDATA[How much would it cost to increase UK health spending to the European average?]]> https://www.ifs.org.uk/publications/1771 Tue, 01 Jan 2002 00:00:00 +0000 <![CDATA[Twenty-five years of falling investment? Trends in capital spending on public services]]>

    Our concern is not just theoretical we know that public investment has shrunk in practice. Public investment recently reached a post-war low as a share of GDP.3 The potential to improve public services depends upon government investment, so it is important that we investigate how we reached this low level of investment and on which public services the axe has fallen most heavily.]]> https://www.ifs.org.uk/publications/1770 Thu, 01 Nov 2001 00:00:00 +0000 <![CDATA[Spending on public services]]> https://www.ifs.org.uk/publications/1749 Tue, 01 May 2001 00:00:00 +0000 <![CDATA[Fiscal reforms affecting households, 1997-2001]]> https://www.ifs.org.uk/publications/1741 Tue, 01 May 2001 00:00:00 +0000 <![CDATA[Labour and business taxes]]> https://www.ifs.org.uk/publications/1735 Tue, 01 May 2001 00:00:00 +0000 <![CDATA[The Conservatives' proposals]]> https://www.ifs.org.uk/publications/1742 Tue, 01 May 2001 00:00:00 +0000 <![CDATA[The main parties' tax and spending proposals]]> This Election Briefing Note looks at the planned levels of borrowing under Labour, the Conservatives and the Liberal Democrats and the differences in terms of tax and public spending for the period up to March 2004. In addition, we analyse differences between the parties in their plans for expenditure in particular fields.

    ]]>
    https://www.ifs.org.uk/publications/1731 Tue, 01 May 2001 00:00:00 +0000
    <![CDATA[Living standards under Labour]]> This Briefing Note examines the changes in living standards, inequality and poverty that have taken place under the Labour government, putting them in the context of the changes over the last two decades.

    ]]>
    https://www.ifs.org.uk/publications/1739 Tue, 01 May 2001 00:00:00 +0000
    <![CDATA[Labour's proposals]]>

    The new credits represent developments of tax֢enefit reforms implemented in the last Parliament, but Labour's manifesto also contains proposals for ѡsset-based' welfare, which would represent more of a new departure. In particular, the party plans to introduce two new policies ֠the Child Trust Fund and the Saving Gateway. Both are targeted towards low-income households and provide financial assistance in the form of assets. This method of asset-based welfare delivery contrasts with (and is intended to complement) the traditional approach of providing social security benefits as income supplements. Section 2 considers some of the arguments for and against the proposed new approach.

    Finally, we consider Labour's approach to income tax.]]> https://www.ifs.org.uk/publications/1737 Tue, 01 May 2001 00:00:00 +0000 <![CDATA[Overall tax and spending]]> This Briefing Note looks at the current government's record on public borrowing, taxation and overall public spending.

    ]]>
    https://www.ifs.org.uk/publications/1748 Tue, 01 May 2001 00:00:00 +0000
    <![CDATA[The Government's fiscal rules]]> https://www.ifs.org.uk/publications/1747 Sun, 01 Apr 2001 00:00:00 +0000 <![CDATA[UK investment: high, low, rising, falling?]]> https://www.ifs.org.uk/publications/1729 Sun, 01 Apr 2001 00:00:00 +0000 <![CDATA[Recent pensions policy and the Pension Credit]]>

    This paper, first, costs the various elements of the government's proposals and analyses who will gain from them. Second, it focuses in on the structural pension credit reform, explaining its rationale and basic workings before outlining the design issues it raises. Finally, it concludes by asking what this package of measures indicates about the longer-term strategy underlying pensions policy.]]> https://www.ifs.org.uk/publications/1767 Thu, 01 Feb 2001 00:00:00 +0000 <![CDATA[Should we let people opt out of the basic state pension?]]>

    For future generations of pensioners, the Labour government has followed the general thrust of reform seen over the previous 20 years by expecting individuals to take more responsibility for their own pension savings through increased use of private pensions.2 While the current generation of pensioners receive 40% of their income from private sources, the policy of the current Labour government is to aim for this to increase to 60% by 2050.3 It is hoped that this can be achieved by continuing to target additional state resources at those on low incomes through the minimum income guarantee, the pension credit and the state second pension, while continuing to price-index the basic state pension. Middle and higher earners are increasingly being encouraged to make their own private pension provision, for example through the introduction of stakeholder pensions.]]> https://www.ifs.org.uk/publications/1745 Mon, 01 Jan 2001 00:00:00 +0000 <![CDATA[The structure of welfare]]>

    Labour was elected with few specific ideas about welfare. Tax credits did not feature in its 1997 manifesto, and there seemed to be early tensions within government, particularly on the balance between ѯld Labour' insurancebased, universal policies and the Ѯew Labour' policy of Ѵargeted support for those that need it mostҬ as Frank Field's departure showed. But after four years of reforms, it is easier to discern consistent trends in welfare policy. This Election Briefing Note looks at some important principles about the way parties are approaching the tax and benefit system. In particular, it looks at:

    • the generosity of government transfers;
    • the use of means testing, and tax and benefit integration;
    • family ֠rather than individual ֠assessment of taxes and benefits;
    • policies for managing workless benefit claimants.
    ]]>
    https://www.ifs.org.uk/publications/1736 Mon, 01 Jan 2001 00:00:00 +0000
    <![CDATA[Issues in the design and implentation of an R&D tax credit for the UK]]>

    This Briefing Note reviews some of the major issues in the design and implementation of R&D tax credits. In Section 2, we briefly discuss the existing tax treatment of R&D in the UK. In particular, we outline the new Research and Development Allowance which is an allowance for expenditure on plant, machinery and buildings for use in scientific research and which is available to firms of all sizes and the tax credit for R&D that is available to small and medium-sized enterprises (SMEs). We then discuss, in Section 3, some of the main design features of tax credits that have been implemented in other countries. The discussion mainly concerns the question of how to target new or incremental R&D so as to keep down the total exchequer cost. We discuss problems that arise in defining incremental R&D and how these can be tackled. In Section 4, we provide estimates of the amount of new R&D and the exchequer cost that would be likely to result from implementing different designs of R&D tax credit in the UK. Section 5 concludes. Some technical details are dealt with in the Appendix.]]> https://www.ifs.org.uk/publications/1766 Mon, 01 Jan 2001 00:00:00 +0000 <![CDATA[The Liberal Democrat proposals]]> https://www.ifs.org.uk/publications/1750 Mon, 01 Jan 2001 00:00:00 +0000 <![CDATA[Public spending: what are the options beyond March 2004?]]> https://www.ifs.org.uk/publications/1746 Mon, 01 Jan 2001 00:00:00 +0000 <![CDATA[A survey of the GB benefit system]]> This paper describes all the main benefits in the GB system, giving details of rates and allowances, as well as numbers and types of claimants and levels of expenditure.

    ]]>
    https://www.ifs.org.uk/publications/1718 Wed, 01 Nov 2000 00:00:00 +0000
    <![CDATA[How important is business R&D for economic growth and should the government subsidise it?]]>

    In order to achieve the optimal level of R&D investment, government policy should aim to bring private incentives in line with the social rate of return. The first part of this note considers current estimates of the private and social rates of return to R&D. These estimates suggest that the gap between private and social rates of return is quite large. A comparison of the levels of R&D intensity in the business sector is then made across countries. The UK has the lowest R&D intensity of the G5 countries and, perhaps more worryingly, the trend has been flat while in other countries R&D intensity has been increasing over time. This is reflected in lower productivity levels in the UK (although there is much debate over the measurement of productivity and the size of this gap).

    What then can and should the government be doing to increase the amount of R&D done in the UK? There are a large range of policy instruments that could affect the share of GDP that is invested in R&D. Indirect policies such as competition policy and regulation may be important. Direct policies include direct funding of R&D, investment in human capital formation, extending patents protection and tax credits for R&D. R&D tax credits have become a popular policy tool, with many countries offering subsidies of this form. Recent empirical evidence suggests that R&D tax credits are an effective instrument, although there are many remaining questions about their desirability. Do they increase the total amount of R&D or is their main impact to reallocate R&D between countries, i.e. is the increasing use of R&D tax credits one form of tax competition between countries for a mobile activity? In a world with multinational firms, one issue that arises is whether it is R&D in the UK or R&D by UK firms that we are concerned with. Does an increase in R&D expenditure lead to increases in the knowledge stock, or does it simply lead to higher wages for R&D scientists, as has been suggested by recent work in the US? Is it possible to provide subsidies to the extent needed to raise R&D intensity in the UK to the level in other G5 countries, without creating other distortions to economic activity?

    It is difficult to design and implement an effective subsidy to R&D without taking a view on the answer to at least some of these questions.]]> https://www.ifs.org.uk/publications/1720 Tue, 03 Oct 2000 00:00:00 +0000 <![CDATA[The distributional effects of the proposed London congestion charging scheme]]>

    Different households will have differing liabilities to the charging scheme accordingto the many and varied factors that together determine their travel patterns where they live, where they work, where their children go to school, whether they have a car or van, the number of members in the household and so on. And one thing that can be guessed about the final effects of the scheme on households is that these effects willbe extremely heterogeneous. Many households will be, on the face of it, unaffected by the charge. Many others, if their present travel patterns persist, may be faced withvery large bills.

    The aim in this study is to analyse the potential progressivity or regressivity of the scheme in other words, to look at the link between the level of charges thathouseholds are likely to face and their ability to pay those charges.

    The plan of the note is as follows: it first discusses the way in which the distributionaleffects of a tax or charge can be measured; it then describes the data used to make thiscalculation; finally it presents the results with a discussion.]]> https://www.ifs.org.uk/publications/1765 Mon, 02 Oct 2000 00:00:00 +0000 <![CDATA[Vehicle Excise Duty discounts in rural areas]]> Vehicle excise duty (road tax) is an annual fixed tax on vehicle ownership. From 1985 to 1991, the rate on private vehicles was £100, and it has since been increased in successive Budgets to its current level of £155 for vehicles over 1,100cc. From 1 June 1999, vehicles of 1,100cc and below are liable for a reduction of £55. In response to the recent fuel protests, recent press speculation has suggested that motorists in rural areas could be offered a discount on their vehicle excise duty (VED). One of the frequent objections to the high tax rate on road fuels in the UK is the effect it has on certain groups of the population. The idea behind cutting VED for those living in rural areas is to compensate one of the groups that we might be concerned about.

    ]]>
    https://www.ifs.org.uk/publications/1764 Sun, 01 Oct 2000 00:00:00 +0000
    <![CDATA[Fiscal reforms since May 1997]]> https://www.ifs.org.uk/publications/1723 Sun, 01 Oct 2000 00:00:00 +0000 <![CDATA[The petrol tax debate]]> https://www.ifs.org.uk/publications/1725 Sat, 01 Jul 2000 00:00:00 +0000 <![CDATA[The employment effects of the Working Families Tax Credit]]> https://www.ifs.org.uk/publications/1769 Sat, 01 Apr 2000 00:00:00 +0000 <![CDATA[The role of information in saving decisions]]> https://www.ifs.org.uk/publications/1727 Tue, 01 Feb 2000 00:00:00 +0000 <![CDATA[A survey of the UK tax system]]> This document provides an overview of the UK tax system, describing how each of the main taxes works and setting their current state into a historical context going back to 1979.

     

    ]]>
    https://www.ifs.org.uk/publications/1711 Sat, 01 Jan 2000 00:00:00 +0000
    <![CDATA[UK annuitants]]> In this briefing note we add to the current debate on UK annuity markets by providing some simple descriptive analysis from household survey data. In particular, using data from recent waves of the Family Resources Survey, we consider how the current population of (elderly) annuitants differs from the elderly population at large, and describe differences in the characteristics of the group holding voluntary, as opposed to mandatory annuity policies.

    ]]>
    https://www.ifs.org.uk/publications/1703 Wed, 01 Dec 1999 00:00:00 +0000
    <![CDATA[The revenue effect of changing alcohol duties]]> https://www.ifs.org.uk/publications/1724 Mon, 01 Nov 1999 00:00:00 +0000 <![CDATA[Family Credit and the Working Families Tax Credit]]> https://www.ifs.org.uk/publications/1763 Sun, 03 Oct 1999 00:00:00 +0000 <![CDATA[Measures on charity taxation in the Pre-Budget Report]]> https://www.ifs.org.uk/publications/1762 Sat, 02 Oct 1999 00:00:00 +0000 <![CDATA[Stakeholder pensions]]>
    • minimum standards;
    • employer access;
    • clearing arrangements;
    • regulation, advice and information;
    • governance;
    • the tax regime.

    This note assesses each of these discussion papers in turn, summarising their main conclusions and critically appraising the proposed stakeholder reforms.]]> https://www.ifs.org.uk/publications/1761 Fri, 01 Oct 1999 00:00:00 +0000