Ben Chu: We’re singing the blues today but our incomes will be different in future

Incomes fluctuate over a lifetime for a variety of reasons - but the sun will shine soon

Click to follow

A common misconception about that great American musical art form known as the blues is that the songs are all drones of self-pity. Not so. Take the 1920s standard “Trouble in Mind”. The song’s main refrain actually ends on an optimistic note: “Troubled in mind, I’m blue/But I won’t be blue always/’Cos the sun’s gonna shine in my back door some day”.

The message is that circumstances can change over time. It’s certainly true of people’s economic circumstances. 

What is your income today? Do you expect it to be dramatically higher in the coming years? If you’re currently a penniless student racking up big debts to pay for your £9,000-a-year university tuition, you doubtless hope so. Likewise, if you’ve just been made redundant and have mortgage payments to meet, you’ll be banking on better days ahead. Perhaps you’re on maternity leave and will go back to your regular salary when you return to the office.

But then again perhaps your income will be quite a bit lower in the future. Maybe you’re coming up to retirement. Your pension will be considerably smaller than your salary (although you’ll also have fewer financial demands such as the high cost of the commute to work). Maybe, though hopefully not, you’ll be rendered unable to work through ill health.

Incomes fluctuate over a lifetime for a variety of reasons – and much more than we tend to assume. They say a picture is worth a thousand words – but sometimes a picture can mislead. A snapshot of the income distribution of the population today shows that about 64 per cent of people pay more in taxes than they receive in benefits, while 36 per cent receive more in benefits than they pay in tax.

At face value this looks like a significant population of spongers being supported by a larger number of grafters. This is the kind of picture that gets some commentators steamed up and generates talk of our “culture of dependency”. But we need to look at how pictures of people’s incomes change over time to observe the true state of affairs.

Some fascinating new research from the Institute for Fiscal Studies (IFS) examines the distribution of incomes across the population over a typical lifetime, rather than in a single year. And it shows that 93 per cent of the population are net contributors to the tax system. 

People receive an income from the state when in retirement, but they contribute during their working years. They are net recipients of welfare when they have young children, in the form of child benefit, but they are net contributors when the kids leave home. And so on. Most redistribution is not between a class of givers and a large class of takers, but between the same set of people at different stages of their lives. 

Politicians talk about wanting to help “working families”, implying that “non-working families” are undeserving of assistance. But here again statistical snapshots are misleading. Every month, the Office for National Statistics reports the number of people out of work. There’s a tendency to assume the unemployed from one month to the next are the same bunch. But that’s a big mistake. Less publicised data from the ONS show there are vast flows of people into and out of work each month. In the three months to June 2015 alone, 472,000 people left unemployment and found jobs, while 346,000 people left employment and became unemployed. Up to a quarter of the 1.85 million jobless population turns over every three months. 

The idea that the unemployed are a fixed class of shirkers is a figment of the right-wing imagination. And George Osborne’s decision to cut the dole in real terms over the next five years, on the grounds this will “ensure that it pays to work”, suggests he shares this delusion. For the vast majority of the unemployed, the dole is a temporary safety net, not a “lifestyle choice”.

Yet it’s not only the right which is misled by snapshots. Labour MPs often complain that VAT is a highly regressive tax because it appears to take a bigger share of the income of the poor than of the rich. On a snapshot view that’s true. But the IFS’s work suggests that on a lifetime view, the tax is hardly regressive at all. Why? Because people who are temporarily hard-up carry on spending as if their circumstances hadn’t deteriorated, incurring the levy. And they often go on to earn more in later life.

Indeed, the IFS’s work shows inequality also looks lower over a lifetime, too. The famous Gini coefficient – a snapshot of inequality – for gross income is 0.49 in a single year (where 1 equates to absolute inequality and 0 absolute equality). But for gross income over a lifetime it is just 0.28. It turns out a lot of the inequality in any given year is temporary.

There are lessons for the left here – the life-cycle view matters. It’s also important to look closely at who gains from welfare policies on a lifetime basis.

It’s worth noting, too, that the Coalition’s tax and benefit reforms look a lot less regressive on a lifetime basis than they do on a snapshot one. Under the previous government’s reforms, all deciles in the population lost 1 per cent of their income, rather than the losses being concentrated among the poorest. It’s surprising that the Treasury has not made more of this finding to argue that we’re “all in it together”.

Yet there’s a health warning that needs to be attached to some of these calculations. The IFS’s estimates are based on the lifetime income patterns of the “baby boomers” (those born between 1945 and 1954). Future generations might have different, less fortunate, patterns. The generation which graduated in the wake of the financial crisis has certainly had it very hard in recent years relative to previous cohorts. If that bad luck continues, we certainly won’t be all in it together.

And none of this means snapshot views of income distribution don’t matter. Do we want the gap between the temporarily unfortunate and the most prosperous to be so large? Do we want to see the incomes of those who are only temporarily poor fall through the floor? 

It’s likely that the safety net of benefits for people in unemployment, or on low incomes, helped them to increase earnings later in life by giving them resources with which to get their lives back on track. And it’s well established by empirical studies that a prolonged spell of unemployment for young people starting out in their working lives can create long-term economic “scarring”, meaning they are held back economically ever after.

Tomorrow matters. But one can take a fixation on the long view too far. As John Maynard Keynes remarked, in the long run we’re all dead. 

Now there’s an idea for a blues lyric…