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Poverty and Income Inequality: A review of the evidence

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Facts, figures and trends for poverty and income inequality in Scotland 4

1. One of the Scottish Government's National Indicators 5 is to decrease the proportion of individuals living in relative poverty 6. Figure 1 shows that in 2006/07, there were 840,000 individuals living in relative poverty before housing costs. This represented 17 per cent of the population. Of the 840,000 individuals, 210,000 were children, 440,000 were working age adults and 180,000 were pensioners 7, 8.

2. Box 1 provides information on the methodology and terminology utilised when measuring poverty.

Figure 1: Proportion of Scottish population living in relative poverty 2006/07

Figure 1: Proportion of Scottish population living in relative poverty 2006/07

Source: Scottish Households Below Average Income, 2006/07

Box 1 - Definitions of poverty:
In official statistics the UK and Scottish Governments statistics define poverty in terms of household income. A person or household is in relative poverty if their equivalised net household income before housing costs ( BHC) is less than 60 per cent of the UK median. Although this definition is useful for quantitatively measuring poverty and progress against poverty targets, the Scottish Government recognises that low income is only one aspect of experiences of poverty. Poverty is characterised by deprivation of basic needs such as food, health, housing and education that leads to an inability to participate fully in society.
Before housing costs: Net disposable income is equivalised using the OECD 'before housing costs equivalisation scale'. Net income is net of income tax, national insurance and council tax as well as certain other payments such as child maintenance but also including certain incomes-in-kind such as free school meals and free TV licences for over 75s.
After housing costs
: Net disposable income as for BHC but with rent/mortgage payments, water charges, structural insurance premiums, ground rent and service charges deducted. This is equivalised using the after housing costs equivalisation scale.
Equivalised net disposable income: 'Equivalised' income is used to allow comparisons of living standards between different household types. Income is adjusted to take into account variations in the size and composition of the household. This adjustment reflects the fact that a family of three people requires a higher income than a single person in order for both households to enjoy a comparable standard of living, but the additional income required is not three times the income of the single person household. How much larger will depend largely on the ages of the other household members. The key assumption is that all individuals in the household benefit equally from the combined income of the household. There are distinct equivalence scales used for income before housing costs ( BHC) and income after housing costs ( AHC).
Relative low income:
Households are in relative poverty if their equivalised income is below sixty per cent of the UK median income of the same year. This is a measure of whether those in the lowest income households are keeping pace with the growth of incomes in the economy as a whole.
Absolute low income: Households are in absolute poverty if their current real (ie adjusted to remove the effects of inflation) equivalised income is below sixty percent of the GB median in the baseline year, 1998/99. This is a measure of whether those in the lowest income households are seeing their incomes rise in real terms.

3. Figure 2 illustrates the number of individuals living in absolute and relative poverty before and after housing costs 9. Between 1997/98 and 2004/05 both absolute and relative poverty rates fell in Scotland, however absolute poverty rates fell more steeply. This indicates that over this period the incomes of the poorest were increasing in real terms, which was reflected in the decrease in absolute poverty.

4. At the same time, total incomes for the population as a whole were increasing and so a greater income was required to 'keep up' with the rest of society. This meant that the relative poverty threshold increased and so the decrease in relative poverty was less dramatic than the decrease in absolute poverty.

5. Between 2004/05 and 2006/07 both absolute and relative poverty rates remained fairly flat.

Figure 2: All individuals living in absolute and relative poverty before and after housing costs

Figure 2: All individuals living in absolute and relative poverty before and after housing costs

Source: Households Below Average Income 2006/07 dataset

Child Poverty

6. In 1999, the UK Government pledged to halve child poverty by 2010, from a 1998/99 baseline, and eradicate it by 2020 10. The Scottish Government shares this vision.

7. As well as absolute and relative poverty, a third measure 'material deprivation and low income combined' is used when examining child poverty which aims to understand more about what families with children can afford to spend money on. 'Material deprivation' is calculated from a suite of questions in the DWP Family Resources Survey about whether people can afford to buy essential items and participate in leisure or social activities. This measure is applied to households with incomes below seventy percent of median income to create the 'material deprivation and low income combined' indicator. This indicator aims to provide a wider measure of children's living standards 11.

8. Since 1999, Scotland has made significant progress in reducing child poverty. Scottish Households Below Average Income 2006/07 shows that in 2006/07 there were 120,000 children in Tier 1, 210,000 children in Tier 2 and 160,000 children in Tier 3 12.

Figure 3: Child poverty in Scotland 1998/99 - 2006/07

Figure 3: Child poverty in Scotland 1998/99 - 2006/07

Source: Households Below Average Income Dataset 2006/07

9. As shown in Figure 3, despite a significant reduction in child poverty, progress has begun to slow over the past few years 13.

Income Inequality

10. Income inequality is a term used to describe the distribution of income across a population.

11. Reducing income inequality is contained in the Scottish Government's Solidarity Target "to increase overall income and the proportion of income earned by the three lowest income deciles as a group by 2017" 14.

12. Internationally, the most widely used summary measure of the degree of household income inequality is the Gini coefficient. It takes a value between 0 and 1. The higher the value of the Gini coefficient, the more unequally household income is distributed 15.

13. Over the past decade, income inequality has been relatively stable in Scotland. Figure 4 shows that in 2005/06 the Gini co-efficient was 0.31, compared to 0.35 in Great Britain 16. Since 1997/98 income in Scotland has been slightly, but consistently more equally distributed than in GB as a whole 17.

Figure 4: Gini coefficient in Scotland and GB, 1997-2006/07 with 95% confidence intervals18

Figure 4: Gini coefficient in Scotland and GB, 1997-2006/07 with 95% confidence intervals18

Source: DWP Family Resources Survey, Households Below Average Income 2006-07 datasets

14. Income inequality was relatively stable between 1997/98 and 2006/07.

15. In order to understand income inequality it is necessary to understand the characteristics of the people who are at the different ends of the income distribution. In order to do this, the population is split into 10 evenly sized groups (deciles). Decile 1 contains the 10 th of the population with the lowest income, and decile 10 contains the 10 th of the population with the highest income.

16. Figure 5 shows the percentage of total income received by each income decile between 1994/95 and 2006/07 19. Over this period the bottom three income deciles have received around fourteen percent of total income while the top three deciles have received over half. Over the past decade, income inequality has remained largely stable confirming trends demonstrated by the Gini coefficient.

Figure 5: Percentage of total income received by each income decile - Scotland 1994/95 - 2006/07

Figure 5: Percentage of total income received by each income decile - Scotland 1994/95 - 2006/07

Source : DWP Family Resources Survey, Households Below Average Income 2006/07 datasets.

17. Figure 6 shows the distribution of family types across income deciles and shows that single pensioner and single parent families are over-represented in the lower deciles, and that couples without children are over-represented in the higher deciles. Other family types are distributed quite evenly across all deciles.

Figure 6: Family types in each income decile - Scotland 2006/07

Figure 6: Family types in each income decile - Scotland 2006/07

Source: Department for Work and Pensions - Family Resources Survey