Recession, recovery and the redistribution of income

The BBC have been working with the IFS to study the effects of policies to deal with the recession and with the deficit, on the distribution of income. The results were published yesterday, just ahead of Wednesday’s Budget. Some results are hardly surprising - the richest decile have been hit the hardest - but the bottom decile have taken the next worst effects, and are much less able to deal with them than the richest.

The study concludes that, across the board, real incomes in the UK fell by 1.6% a year between 2008 and 2011, compared with a rise per year of 1.6% during the previous 50 years. However the most important reasons are not so much loss of earnings from unemployment, as loss of investment income due to the historically low interest rates, and low increases in real wages. That loss of income from investments and savings hits pensioner households very hard. However in the fiscal year about to start, the median household income should rise by £120 as a result of tax and benefit changes, the IFS forecast. This “surprising” boost to incomes is a result of changes in personal allowances that have raised net income for many households.

There is much more detail about the findings which is very worthwhile for those studying the distribution of income and the effectiveness of fiscal policy to achieve redistribution. I would suggest starting with Stephanie Flanders’ video report, followed by the BBC news article here and finally back to Stephanie Flanders for her blog about ‘The shrinking pound in your pocket’. It should then be possible to analyse the Chancellor’s announcements in the Budget speech on Wednesday, to consider what further effect his adjustments to fiscal policy will have on.

If you want to extend this a bit further, look at this blog from Richard Young: Macroeconomic objectives: public finances in, income distribution out?