Annex B: Notes on Forecasting Income Distributions
The IFS and Resolution Foundation projections are highly uncertain. They build on macroeconomic forecasts produced by the Office for Budget Responsibility (OBR) and demographic projections from the Office for National Statistics (ONS), which are themselves subject to much uncertainty.
Both sets of projections were produced before the publication of official statistics on the income distribution for 2016/17, in DWP's Households below average income release. The projections do not take account of more recent economic or demographic forecasts (including those made by the OBR at the time of the March 2018 Spring Statement) or subsequent policy announcements.
Instead, the projections offer an estimate of the future path for inequality in a scenario where policy remains unchanged. They do not account of possible behavioural responses to forthcoming tax and benefit changes, which could alter the shape of the income distribution.
The projections also assume a single UK wide policy in relation to taxation. In reality continuing devolution of powers means that tax policy differs in Scotland:
- The higher rate threshold will increase only in line with inflation. In 2017-18 this will mean a threshold of £43,430 while in the rest of the UK it will be raised faster than inflation to £45,000. National Insurance contributions are unaffected meaning that the income at which NI rates change and the income at which income tax rates change will become decoupled in Scotland.
- The structure of council tax will be changed slightly from April 2017 such that those in the most expensive properties (bands E-H) will pay more.
- Accompanying this, the Council Tax Reduction system will be made more generous for eligible families with children. It has also been previously protected from cuts made in most of England.