Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

IFS reports falls in average income and inequality

by
30th Mar 2005
Save content
Have you found this content useful? Use the button above to save it to your profile.

Tax increases in the 2002 Budget saw average take-home incomes fall in real terms in 2003/04, but there was also a "big drop" in income from self-employment, according to the Institute for Fiscal Studies.

New and more generous tax credits helped "nudge inequality down" for a third successive year, the IFS said, but child poverty did not fall as sharply as expected. This suggests that the Government is now "more likely than not" to miss one of its child poverty targets for 2004/05.

Poverty and Inequality in Britain: 2005 is an analysis by IFS researchers of the latest annual 'Households Below Average Income' data, released today by the Department for Work and Pensions.

The DWP said more pensioners and more children were "lifted out of poverty" during 2003/04. It said: "Between 1996/97 and 2003/04 the median income of the bottom 20% of the population grew by 19% in real terms for income Before Housing Costs, and 25% for income After Housing Costs."

Work and pensions secretary Alan Johnson said: "These figures show that the £11bn extra we are spending on pensioners is making a huge difference.

"A big increase in child tax credit rates - combined with further increases in take-up - will show up in next year's figures, keeping us broadly on track to hit our targets, on our way to eradicating child poverty within a generation."

IFS analysis
Andrew Shephard, one of the authors of the IFS research, said: "In 2003/04, the incomes of poorer households were boosted by new and more generous tax credits, while the better off were hit by rises in income tax, national insurance and council tax.

"Not surprisingly, this redistributive package has nudged inequality lower although the government cannot yet claim that it is definitely on a downward trend."

His colleague Jonathan Shaw said: "The Government will have been disappointed by the latest child poverty figures, which do not show the big drop that we and they were expecting.

"To meet the Government's short-term target, the number of children in poverty will now have to fall by 300,000 before housing costs and 500,000 after housing costs in 2004/05.

"The former still looks likely to be achieved, but the latter does not. Having said this, sampling error means that there is always considerable uncertainty around the data in any given year."

Decline
The IFS found that average (mean) household incomes after tax and benefit payments fell by 0.2 per cent in real terms between 2002/03 and 2003/04, dropping to £408 per week in 2003/04 prices. This was the "first decline in any single year since the early 1990s".

It added that almost two-thirds of the population lived in households with incomes below the national average, which is "pulled up" by the incomes of the very well off. The income of the household in the middle of the income distribution - the median - rose by just under £2 a week in 2003/04 to £336 a week. "This 0.5 per cent increase was much smaller than those seen in previous years under this government".

The IFS said the drop in average take-home income (and the very small rise in median take-home income) in part "reflects measures announced in Budget 2002, Mr Brown's biggest tax-raising budget to date".

Those measures included "an uncapped 1 percentage point increase in national insurance rates and the freezing of the personal income tax allowance in cash terms, which pulled more people into the income tax net".

But income growth was low compared to previous years, even excluding the tax changes. This is "explained in part by a big drop in income from self-employment," the IFS said.

There was a smaller fall than expected in child poverty, given the generosity of tax credits. This may be partly explained by administrative problems with the new tax credits, which "meant that many families had lower-than-expected incomes in the first quarter of 2003/04".

Andrew Goodall
Editor, TaxZone

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.