Helping all – UK’s distribution of public funding

Helping all – UK’s distribution of public funding

by | 11 Sep, 2016 | consumption, economics, Europe, income, public funding, social issues, social security, tax

Redistribution of funds through tax can happen in one of two main ways:

  • you collect more from the rich than the poor and give everyone an equal share, or
  • you collect the same amount from everyone and distribute more to those in most need.

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But how much is the UK doing of either?

In short, relatively nothing on the first type of distribution, and not a lot on the second.

I say relatively nothing as households across the UK pay roughly the same percentage of their income on tax, no matter what their income. Obviously, those with higher incomes pay larger amounts, but as a proportion, it is not greater than what the poor pay.

On the second type, while the Government does provide greater benefits to the poorer sections of the community, the difference between benefits to the poor and rich is not way near as large as many would have you believe.

 

Collecting more from the rich

As discussed in a previous post, the amount of tax paid across the community is pretty much the same, relative to their income. So, while the rich contribute the most, they contribute the same percentage of their income that the poor do (when including income tax and indirect taxes).

 

Are we distributing more to the poor?

According to the latest UK Budget papers, the UK Government will spend roughly “£772 billion in 2016-17”[1].

The budget gets spent as follows:

  • £517 (67%) on services consumed by individuals, e.g. health, education, social security
  • £168 (22%) on untargeted national stuff, e.g. defence, paying debts, public order
  • £87 (11%) on services which may or may not support some over others, but it’s harder to ascertain its distribution, e.g. agriculture, industry, employment, transport

For the purposes of this post, I will ignore the 11%, as I can’t find reasonable distribution analysis, and what’s 11% anyway.

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So, how do targeted services get dispersed across the income groups?

Health

Health accounts for 19% of all UK Government expenditure, with the average household in 2013/14 consuming around £4,200 in services.  While obviously not every household consumes the same amount, the difference across income groups is surprisingly small.

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That’s to say, households from across the various income groups in the UK consume just over £4,000 worth of health services. Those with the lowest and highest incomes appear to consume slightly smaller amounts.

 

Education

Consumption of education services does vary. In 2013/14, the poorest 3 deciles consumed just over double what the richest 10% of households did.  This difference, however, appears to be largely driven by the number of students in the house, rather than their income.  Students (from primary school to university) are twice more likely to live in the poorest 30% of households than in the richest 10%.  After adjusting for number of students per household, education expenditure is remarkably similar across the income ranges.

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(As student estimates are rounded to 1 decimal place, the estimates graphed include an unrounded range, e.g.: the poorest households have 0.7 students per house, but are graphed from 0.65 to 0.75)

 

Social Protection & Personal social services

Unlike health and education, social protection and personal services are targeted based on income. But even these payments are possibly less lopsided than is expected.

The poorest half of the community receives 80% more than the bottom half. While the average household receives £6,000, the 2nd and 3rd poorest received the most, at £9,000. The richest and second richest deciles, on the other hand, received £2,400 and £3,500 per year respectively.

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When you add it all up

Other than social security, which is mostly targeted at the lower middle class, the majority of government spending is spread out quite evenly across the income groups. The end product, being one that while leaning towards supporting the lower middle class, provides a relatively equal distribution.

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*not including 11% spent on Agriculture, Transport, Industries, etc.

 

Sources

[1] https://www.gov.uk/government/publications/budget-2016-documents/budget-2016

http://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datalist?filter=datasets

Parliament photo by : luxstorm – https://pixabay.com/en/users/luxstorm-1216826/

Equality: what progressive income taxes giveth, consumption taxes taketh away

Equality: what progressive income taxes giveth, consumption taxes taketh away

by | 29 Aug, 2016 | consumption, economics, Europe, income, politics, social issues, tax

There are two broad types of taxes: direct and indirect.

Direct taxes are charged directly by governments, usually on income. This facilitates progressive targeting, taking more from high earners and alleviating the  burden on the poor.

Indirect taxes (e.g. VAT, GST, fuel and tobacco levies) are charged by anyone providing a good or service upon consumption. And the 7–Eleven down the street doesn’t know whether you are rich or poor. So a chocolate bar will incur a 20% tax, whether you earn £10,000 or £100,000.

 

How much does this matter?

The impact of indirect taxes depends on how much you earn. Unfortunately, the less you have the more it impacts.  While income tax progressively increases as your income increases, consumption taxes are regressive. As a result the poorest 10% of UK’s households spend a third of their income on indirect taxes.  The richest 10% on the other hand only spend £1 of every £10 they earn in indirect taxes¹.

Indirect Tax UK 1

The impact of these regressive indirect taxes are such that they cancel out the progressiveness of the income taxes.  That is, once both sets of taxes are considered; households across the UK’s income spectrum contribute the same amount relative to their income. In fact, the poorest 10% of households contribute 10 percentage points more than any other income group.

This trend grew drastically from the late 70s till 2002, and appears to have plateaued since. But it does not appear to be disappearing.

Indirect Tax UK 2

 

But, what if…

…  the UK got rid of indirect taxes. What if it raised the same revenue as it does today entirely through income taxes, using its current progressive pattern?

Using this ‘what if’ scenario, some measures of inequality would be almost halved:Indirect Tax UK 4

To put the Gini value in perspective, the estimated 0.26 value would put the UK among the most equal countries, alongside Norway, Finland (based on UNDP figures²).

 

Indirect Tax UK 3

Removing the VAT by itself would make a significant impact, as it accounts for almost half of all indirect taxes.

 

Reality check

Granted, moving to an entirely direct revenue raising system is neither likely nor simple. But this ridiculous scenario does highlight just how unequal the indirect taxing system is, and what impact it has on equality.

It also suggests that every new or increased indirect tax implemented continues to drive a wedge between the haves and the have-less. This includes the increases in VAT from 15% to 17.5% to 20% over the past 25 years, and any additional levy.

Similarly, if a key aim over the coming years is to decrease inequality, then there may be worse places to start than by lowering VAT, and compensating where necessary with increased income taxes.

 

Sources:

[1] http://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/averageincomestaxesandbenefitsbydecilegroupsofallhouseholds

[2]  http://hdr.undp.org/en/content/income-gini-coefficient

UK auto disqualified after poor lifting

UK auto disqualified after poor lifting

by | 10 Aug, 2016 | Europe, income, Inflation, politics, social issues, social security, tax

In the aftermath of Brexit, the pointy finger of blame has fallen squarely on the rise of conservative patriotism, racism and the stench of economic stagnation among the working poor.

But when analysing the economic situation of UK’s households over the last few decades, it’s hard to see what Brexiters are complaining about.

While American working class wages got stuck in the 1970s, the UK’s have been rising steadily, especially since 1990. In fact since Thatcher lost office, the poorest 40% of households have seen their disposable income increase at twice the rate of the rest of the country.

PoorPoms1

(I use disposable income as it’s a more complete measure of a household’s situation than wages.  It includes all income (private and government cash benefits) and removes direct taxes (income tax).  It’s the money which lands in people’s pockets.)

After adjusting for inflation, household disposable income grew by 71% for the poorest 20% of households, and 59% for the 2nd poorest since 1990.  The rest of the UK only grew by 34%.

The poor are not only getting richer in absolute terms, but also in relative terms.

PoorPoms2

Firstly, absolute growth

The poorest quintile has seen their disposable income increase from £7,200 in 1990 to £12,300 in 2014/15 (after inflation). The second poorest quintile increased from £12,400 to £19,800. No matter how hard life is today for poor households, it would be a lot worse with £6,000 less a year.

To put this growth in perspective, we can compare today’s poor households to that of people in the past.  Today’s 2nd poorest quintile earns the same as the middle quintile earned in 1990. And going back a bit further, they earn the same that the 2nd richest quintile did in 1977, just before Thatcher took office. So, the economic situation of the working class today is similar to that of the upper middle classes when the (Royal variety) Queen celebrated her Silver Jubilee, and Queen (of the Freddy Mercury variety) released “We are the champions”.

 

Secondly, relative growth

As the poor households’ earnings grew faster than the rich ones, the relative gap has decreases considerably. The disposable income ratio of richest to poorest was 7 at the end of the Iron Lady’s regime. Today that figure is 5.4. Likewise, the ratio between the 2nd richest and 2nd poorest quintiles dropped from 2.4 times to 2.0. Of course, the ratio is still too large, but a 23% drop is worth noting.

 

Since GFC

The figures above look at the UK since the departure of Lady Thatcher in 1990, but what about a more recent focus?

Well, the picture is even rosier (relatively speaking) for the lowest quintile over the past 7 years.  While the richest 2 quintiles dipped between 5-10% around 2011-12, and have only just returned to pre-crisis levels, the poorest quintile now earns 11% more than they did in 2007/08, and never went behind pre-crisis levels over the period.  The 2nd lowest earners hovered steadily, but over the past 2 years increased to a small increase over pre-crisis levels.

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A historical lens

A longer search shows that this was not always the case. The last dark age for the lower classes was clearly under Thatcher.  During Margaret’s 11 year regime, the disparity between rich and poor climbed steeply.  While the richest households in the UK experienced a 46% increase in real disposable income, the poorest 2 quintiles only increased by 11 and 13%. This resulted in the income ratio of richest to poorest to rise from 4.9 to 7 in an 11 year period.

PoorPoms4

It’s taken the following 25 years to bring this disparity back to pre-Thatcher levels for 2nd richest to 2nd poorest, but the Richest to poorest ratio is still much higher than it was in the late 70s.

PoorPoms5

Show me the money

Here’s where it gets super interesting. It would be easy to assume that seeing as the end of Thatcherism marked the turning point for income distribution; government handouts would be somewhat responsible for the change. But that is far from the truth. The income growth for the poorest has been largely driven by increases in private income. Since 1990, private income for the poorest has increased by 168%, while Government support only increased 22%! The opposite was surprisingly true under Thatcher, when the bulk of the poor’s income increases came from government benefits.

PoorPoms6

Since 1990, Government support has increased the least for the poorest quintile, in relative AND absolute terms.  While the government now gives the poorest quintile £1,400 more than they did in 1990 (after inflation), they also give middle income earners an extra £3,400, and the richest quintile an extra £1,700 per year, after inflation.

PoorPoms7

Brexit due to a lack of jobs available

Yeah, nah. Unemployment has not been lower than current rates since the mid-70s. Sure there was a momentary blip from the 2008 crisis, but not only did that not reach the unemployment levels seen in the 80s and 90s, it also finished a year ago. People should be high on finding employment at the moment.
PoorPoms8

It’s not you, it’s tax

Even income tax hasn’t been lower in the last 40 years. The poorest households now pay 5 percentage points less in tax than they did 25 years ago, and the middle and upper middle classes have dropped around 3 percentage points. The only section of the community paying more tax (per household) are the richest 20%, and even they only pay less than 1 percentage point more than they used to.

PoorPoms9

So, what the heck are Brexiters complaining about?

Overall the economic situation in the UK has been favourable across the community, and in particular the poorest sections.

  • Income is considerably up
  • Inequality is slightly down
  • Unemployment is at its lowest point in the last 40 years, and
  • Brits have not paid less in taxes in at least 40 years.

Furthermore, the government is increasingly supporting the middle and upper classes through direct cash benefits, so they can hardly complain about the support being handed out to those (arguably) more deserving.

What’s that leave us with

If Brexit was a vote of discontent at the current economic situation, it was a result of perception more than reality. More likely, it was a vote from fear. A xenophobic reaction to the constant hysteria bombarded at the populous, misleading on the current situation. The world is not getting worse. Neither from within, economically, nor from outside evils.

Time for more reasoned responses, from a better informed community.

 

 

Sources

All data is sourced from the Office of National Statistics (ONS) UK.

http://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2015

http://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms