Fiscal Policy, Monetary Policy and Inequality in the UK

1 Paul Johnson 19/05/2017 Fiscal Policy , Monetary Policy and Intergenerational Inequality in the UK Output per head only just above 2008Q1 level Institute for Fiscal Studies 90 100 110 120 130 140 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1 2022Q1 2008Q1 = 100 Source: Office for Budget Responsibility GDP per person aged 16+ 2% per year growth 15% gap And forecast growth also weak .. Institute for Fiscal Studies 90 100 110 120 130 140 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1 2022Q1 2008Q1 = 100 Source: Office for Budget Responsibility GDP per person aged 16+ 2% per year growth 18% gap Income and earnings Inequality down recently Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 90:10 ratio for UK Net Equivalised Household income and Gross Weekly Earnings Earnings Source: Family Expenditure Survey; Family Resources Survey.

2 Annual Survey of Hours and Earnings Income and earnings Inequality down recently Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 90:10 ratio for UK Net Equivalised Household income and Gross Weekly Earnings Income Earnings Source: Family Expenditure Survey; Family Resources Survey; Annual Survey of Hours and Earnings 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 90:10 ratio Gini coefficient Gini coefficient 90:10 ratio 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 90:10 ratio Gini coefficient Source: Figures and of Living Standards, Poverty and Inequality : 2016 Having grown sharply over 1980s 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0 1 2 3 4 5 6 7 8 9 10 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Top 1% share 90:10 ratio 90:10 ratio Top 1% share 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0 1 2 3 4 5 6 7 8 9 10 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Top 1% share 90:10 ratio Source: Figure of Living Standards, Poverty and Inequality .

3 2016 Top 1% share continuing to rise until 2008 Median incomes stagnant 85 90 95 100 105 110 115 2007 2008 2009 2010 2011 2012 2013 2014 Median income (Indexed to 100 in 2007) Source: Figure of Living Standards, Poverty and Inequality : 2016 Much worse for the young 85 90 95 100 105 110 115 2007 2008 2009 2010 2011 2012 2013 2014 Median income (Indexed to 100 in 2007) -7% Source: Figure of Living Standards, Poverty and Inequality : 2016 22-30 Much better for the old 85 90 95 100 105 110 115 2007 2008 2009 2010 2011 2012 2013 2014 Median income (Indexed to 100 in 2007) -7% 0% Source: Figure of Living Standards, Poverty and Inequality : 2016 22-30 31-59 60+ +11% The distribution of wealth Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK And concentrated at older ages Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 16-24 25-34 35-44 45-54 55-64 65-74 75-84 85+ All Net household wealth Age group Mean p25 p75 Median Of course the old hold the cash Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ Cash/near cash holdings Age-group 25th percentile Median 75th percentile But it s the young who can t build up savings If you work until 67, die at 90.

4 And have earnings that grow 2% With 4% real interest rate you need to save 10% of income to replace 50% in retirement With 0% real interest rate saving rate needs to be 30% Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK The old also hold the housing wealth 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 16-24 25-34 35-44 45-64 65-74 75+ Percentage of individuals who own their own home Home-ownership rates by age-group 2013/14 Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source: English Housing Survey Much more so than just 15 years ago 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 16-24 25-34 35-44 45-64 65-74 75+ Percentage of individuals who own their own home Home-ownership rates by age-group 2001/02 2013/14 Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source: English Housing Survey Younger cohorts much less likely to be owner occupiers 20% 30% 40% 50% 60% 70% 80% 90% 25 30 35 40 45 50 55 60 Homeownership rate Age 1930s 1940s 1950s 1960s 1970s Early 1980s And DB pensions have collapsed 0% 10% 20% 30% 40% 50% 60% 16 - 21 22 - 29 30 - 39 40 - 49 50 - 54 55 - 59 60 - 64 Age-group of employee Percentage of employee jobs in a defined benefit pension scheme 1997 2016 Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source.

5 ONS Proportion of private sector employees in DB scheme 1997 and 2015 Institute for Fiscal Studies But there is an increasing aggregate deficit of DB schemes Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Assets and liabilities of DB schemes in the Pensions Protection Fund Overall younger cohorts accumulating less wealth Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Loose Monetary Policy supporting tight Fiscal Policy 30% 32% 34% 36% 38% 40% 42% 44% 46% 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Latest outturn and forecast for total Government spending and receipts Spending Receipts Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source: OBR Crucial point: after 8 years of austerity the size of the state is just back at pre crisis levels Institute for Fiscal Studies Budget 2017: the fastest u-turn since Budget 2016?

6 37 38 39 40 41 42 Spending in 2007 08 Pensioner benefits Health Overseas aid Working-age benefits Debt interest Schools Defence Other Public order & safety Spending in 2016 17 Per cent of national income Increases in spending on pensions and health offset cuts elsewhere Institute for Fiscal Studies Budget 2017: the fastest u-turn since Budget 2016? + + + 37 38 39 40 41 42 Spending in 2007 08 Pensioner benefits Health Overseas aid Working-age benefits Debt interest Schools Defence Other Public order & safety Spending in 2016 17 Per cent of national income Tax and benefit changes have hit the bottom half and the very top -5% -4% -3% -2% -1% 0% 1% 2% Percentage change in net household income Income decile Percentage change in net household income as a result of tax and benefit policies implemented under the coalition government Benefits Taxes All Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source.

7 IFS Pensioners protected, those with children hit hardest -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% Percentage change in net household income Income decile Impact of coalition government tax and benefit policies by group Working-age without children Working-age with children Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source: IFS Fiscal Policy has worked with Monetary Policy and underlying trends to protect the old and hit the young lock means basic state pension has grown 9%pts more than average earnings since 2010-11. Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK The triple lock 85 90 95 100 105 110 115 Index of state pension level Growth rate of basic state pension compared to average earnings (2010-11 level = 100) Actual Earnings Double Lock CPI Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source: OBR and author s calculations Policy changes have exacerbated existing trends lock means basic state pension has grown 9%pts more than average earnings since 2010-11.

8 State pension age for men has not kept up with increasing longevity Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Dramatic increase in numbers living longer in recent decades 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 65 70 75 80 85 90 95 100 Proportion of male 65-year-olds surviving to given age 65 in 1987 65 in 2017 Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Source: ONS Life Tables Policy changes have exacerbated existing trends lock means basic state pension has grown 9%pts more than average earnings since 2010-11. state pension age for men has not kept up with increasing longevity Without further rises in the state pension age, pension spending will rise rapidly as a share of GDP, and require other spending cuts or tax rises. Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Even without triple lock, state pension spending will rise as a share of GDP Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK 2016-17 2018-19 2020-21 2022-23 2024-25 2026-27 2028-29 2030-31 2032-33 2034-35 2036-37 2038-39 2040-41 2042-43 2044-45 2046-47 2048-49 2050-51 2052-53 2054-55 2056-57 2058-59 2060-61 2062-63 2064-65 2066-67 Percentage points of GDP Long-term State Pension Spending Projections FSR 2017 central FSR 2017 (No triple lock) FSR 2017 (Only legislated changes to SPA) Source: OBR Fiscal Sustainability Report Policy changes have exacerbated existing trends lock means basic state pension has grown 9%pts more than average earnings since 2010-11.

9 State pension age for men has not kept up with increasing longevity in pensions lifetime allowance have not hurt current pensioners but those who are currently of working age. to public service pensions mostly impact those of working age of housing continues to favour those who already own Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Fiscal attempts to offset have been minimal, counter-productive or ineffective requirement to annuitise pensions response to low interest rates 2. Help-to-buy intended to help first time buyers has likely raised prices to increase housebuilding ineffective on buy-to-let as a third best response Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK Fiscal and Monetary policies together Distributional effects of Fiscal Policy regularly analysed: Increasing focus on impact by age, not just income Impacts of Monetary Policy less easy to define: What is the counterfactual?

10 Would need to know impact of Monetary Policy on asset markets Attitudes matter Changes to asset values seen as act of God Impacts via DB schemes may not be visible Those who already have money notice changes to interest rates But bigger impact on those looking to build savings Fiscal policies reducing entitlements of old seen as retrospective Tax increases/benefit cuts for working age deemed acceptable Institute for Fiscal Studies Fiscal Policy , Monetary Policy and Inequality in the UK