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  • Author or Editor: Holly Sutherland x
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One of the legacies of the Thatcher years was the marked shift towards greater inequality. While average incomes grew rapidly during the 1980s, the benefits were spread very unevenly. Between 1979 and 1996/97, the median income of the richest 10% increased by over 60% in real terms, but that of the poorest 10% rose by just 11% (or fell by 13% if incomes are measured after housing costs). Although inequality did stop rising during the recession of the early 1990s, it started to rise again in the mid-1990s. When Labour came to power in 1997, the distribution of incomes in Britain was more unequal than at any time in recent history. The increase in inequality over the preceding twenty years was also exceptional in international terms.

Previous research suggests a number of factors contributed to rising inequality (Hills, 2004a, ch 4):

  • a dramatic rise in the dispersion of earnings between low- and high-skilled workers, which is widely attributed to technological changes favouring those with greater skills;

  • a large increase in the proportion of workless households, even after individual employment rates returned to the levels they were at in the late 1970s;

  • the increasing importance of other sources of income, such as occupational pensions and income from savings and self-employment, which are even more unequally distributed than earnings; and

  • tax and benefits policies that did not dampen the rising inequality in market incomes: uprating benefits in line with prices, rather than earnings, meant that a growing minority fell gradually further behind the rest of the population, while discretionary changes in taxes during the 1980s favoured the rich.

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This article examines the resilience (or otherwise) of the United Kingdom social protection system in the face of increasing unemployment. It explores the extent to which benefits protect the household incomes of unemployed people both in relative terms and in comparison with an absolute income threshold. It finds that for the people most likely to become unemployed in the first phase of the current downturn most of any protection they have comes from the earnings of other household, members. In the case of sole-earner households, the benefit system fails to maintain household income above the poverty threshold in most cases and the relative drop in income for this group is very high by international standards.

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This chapter sets the scene for the rest of the book by examining the evidence on income poverty and income inequality. The assessment includes the results of micro-simulation, which allows one to separate the effects of tax-benefit policy from the effects of demographic and labour-market changes, addressing the tricky question of the counterfactual: what would have happened in the absence of policy changes? The chapter also looks at the distributional impact of public expenditure on benefits in kind such as health and education. Inequality measures generally exclude benefits in kind, but as public spending tends to be higher on poorer households, increases in spending can make a significant difference to the state’s overall redistributive impact.

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This chapter examines changes in social security and direct tax policies, spending levels and their redistributive effects in the period since 2007. It discusses the importance in particular of the protection of the real values of benefits and tax credits in the years immediately after the crisis, but then the divergence between the favourable treatment of pensions compared to working-age benefits. Real spending on pensioner benefits grew under both Labour and Coalition governments, but those related to children started to fall under the Coalition. The combination of generous increases in tax-free personal allowances for income tax and selective cuts in working-age benefits under the Coalition was regressive. The policies adopted by the incoming Conservative government will continue and intensify these effects. The effects of the Coalition’s major Universal Credit and ‘pension freedom’ reforms remain uncertain

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The ways benefits, tax credits and income tax and National Insurance contribution thresholds are uprated each year have major long-term consequences for the relative living standards of different groups. Continuing current practice for 20 years, other things staying the same, could result in substantial increases in poverty, including a near doubling of the child poverty rate, alongside a substantial gain to the public finances. At the same time, pensioners are largely protected by the earnings indexation of pensioner benefits. We illustrate the distributional implications of alternative targeted policy reforms, financed by part of the resources that would be released through continuing current uprating practices.

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This chapter explores the role of child benefits in protecting European children from financial poverty. By ‘child benefits’ we mean regular cash payments made to parents or other carers on behalf of children who are dependent on them. These benefits can take many forms. They may be taxable or non-taxable, income-and/or wealth-tested or universal, contributory or non-contributory. They may vary by the age or parity of the child, or be the same value for all children. The simplest benefit – a universal unconditional flat-rate benefit for all children – can be seen as having many functions in addition to reducing the rate of child poverty (Brown, 1988). For example, it performs a similar role to child tax allowances in contributing to horizontal equity in the net taxation of families of different types. It helps secure some degree of lifetime re-distribution by enhancing family incomes during a period of additional need. It has the potential to redistribute resources towards mothers, which is likely to improve the welfare of their children (Lundberg et al, 1997). A particular design of benefit will reflect the balance of priorities given to each objective. A benefit that is means tested can be seen as prioritising short-term income maintenance with a lesser regard for the possible adverse consequences of this form of targeting. These include negative effects on work incentives, a reduction in horizontal equity at higher income levels, inequities introduced due to the stigma associated with means testing, and the ‘unfairness’ of high effective marginal tax rates (see Atkinson, 1998a).

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