Reading time ~ mins

Methodology

The Women’s Budget Group partnered with Landman Economics, an economic research consultancy, on a series of projects to assess the cumulative distributional impact of changes to personal taxes, social security benefits and spending on public services between 2010 and 2020. Initially these projects focused on impact at a household level. Our most recent projects have also examined impact at an individual level.

These used data from several different large-scale government household surveys to give us a representative sample of households of varying composition (by age, gender, disability and ethnicity) as well as information on the incomes of household members, their spending, use of public services.

This information was used to estimate a household or individual entitlement to certain social security benefits, liability to personal income tax, indirect taxes, and the use by the household of various public services. We could then allocate the impact of spending cuts and tax changes to each individual or household, and thus perform a distributional analysis of the impact of different policy changes. Our most recent analysis has also included the impact of increases to the National Living Wage (the government’s term for the UK minimum wage for those aged 25 or older).

We constructed a ‘baseline’ for each person and household of the net income that they would have at the end of the period, in our case April 2020, taking account of inflation if the policy changes announced over the period (since June 2010) had not taken place. That is, as if the policies that had existed at its beginning had continued as planned, taking account of inflation. The ‘reform’ scenario estimates the income of people and households at the end of the same period after all the policy changes have been put in place, also taking account of inflation. The difference between the two incomes at the end of the period represents the cumulative impact of policy changes over that period for that person or household.

Here’s an example. If an individual has a net income of £10,000 a year in April 2010, and the system stays the same, assuming inflation runs at 2% a year they would have an equivalent net income of £12,190 in April 2020. This is what we call that person’s ‘baseline income’.

Let’s say a tax change in 2013 gives them £200 a year (at 2020 prices) and another change in 2015 cuts their social security by £1200 per annum (in 2020 prices). Their net income after these policy changes would be:

£12,190 + £200 - £1200 = £11,190. This is their ‘reform’ income.

That’s a net cut of £1000 a year. Relative to their baseline income, this is a cut of 8.2%.

Making such comparisons allowed us to simulate the impact of a number of different policy changes. We could then look at the average impact for different groups of individuals and households, divided by gender, income, race and disability or a combination of these characteristics.

Allocating the impact of changes to households is relatively straightforward since it is clear to which households cash transfers are paid. When looking at impacts on individuals, cash transfers that are paid jointly need to be allocated to individuals in multi-adult households. We have assumed equal splitting of jointly received benefits. Research has shown that while households do share some resources they are not always equally shared, but neither are incomes individually retained by each adult member. However, we do individual-level distributional analysis to focus on changes to income receipt, rather than what happens to the income after it is received. This gives some measure of financial autonomy, how much access individuals have to money of their own.

For cuts to public services we calculated the impact on ‘household living standards’, which we defined as the value of household disposable income plus the use-value of public services as measured by the cost of delivery of those public services. Since public services tend to benefit other members of a household as well as the direct recipient (for example, childcare services benefit parents as well as children) we do not allocate public services to individuals and therefore examine the impact on living standards only at the household level.