Scottish Government

To increase overall income and reduce income inequality

DESCRIPTION:

Scotland’s Economic Strategy identifies the Government's aims of increasing competitiveness and reducing inequality.  The Scottish Government has a Purpose target to increase overall income and reduce income inequality by 2017.

There are two parts to the Solidarity target:

· To increase the total income (adjusted for inflation) of all households in Scotland;

· and to reduce income inequality by decreasing the ratio of income to the top 10% of households compared to the bottom 40%.

SOURCE:

Two data sources are used to measure the Solidarity target.

For the income inequality part of the target the data source is the Family Resources Survey (Households Below Average Income dataset). The unit of measurement is the individual.

Note that this year there was a minor methodological change in the way income was calculated.  The inflation measure used has been changed from the Retail Price Index (RPI) to the Consumer Price Index (CPI).  Inflation indices are used to deflate incomes to a common point in the year so that respondents interviewed at the start and end of the year have their incomes evaluated on a consistent basis.  The time series has been revised in line with this change.

Once all households have been taken into account however, the overall effect on the income inequality measure is small, with most years seeing either no change or a change within 0.1 or 0.2 percentage points.

Households Below Average Income is a National Statistics dataset owned by Department for Work and Pensions.

For the "increasing total income" part of the target the data source is the Gross Disposable Household Income series, published by the Office for National Statistics.

The Gross Disposable Household Income (GDHI) series published, and owned, by the Office for National Statistics

Data for 2014/15 and previous years are available on the Poverty Statistics website ( http://www.scotland.gov.uk/Topics/Statistics/Browse/Social-Welfare) and on Scotland Performs (http://www.gov.scot/About/Performance/scotPerforms/purposetargets/solidarity).

Future figures will be published annually in summer in "Poverty and Income Inequality in Scotland", on the Income and Poverty Statistics website: http://www.scotland.gov.uk/Topics/Statistics/Browse and on Scotland Performs.

The Family Resources Survey is a sample survey including approximately 3,500 households in Scotland. The responses of these households are weighted and grossed up to be representative of all private households in Scotland.

Incomes are equivalised (to take into account household composition) using the modified OECD equivalence scale: http://www.gov.scot/Resource/0048/00480301.pdf (Annex 2 gives more detail)

Once equivalised, weighted and grossed, the total income of every individual is summed to arrive at the total equivalised income figure.

The equivalised, weighted and grossed data are ranked and split into ten evenly sized groups (deciles). The total equivalised income of the highest decile is summed and divided by the sum total of  the income of the lowest four deciles, to arrive at the “Palma” ratio: the ratio of income to the top 10% of households compared to the bottom 40%.  This is expressed as a percentage, i.e. a Palma ratio of 112% means that the top decile has 12% more income than the bottom four deciles combined.

This is the first year that the Solidarity purpose target has been updated using the Palma ratio. The old Solidarity purpose target (2007-2016) can be found on the following page: http://www.gov.scot/topics/archive/About-Archive/scotlandperforms/07to16solidarity

As the data are from a sample survey all estimates are subject to sampling error. Due to the complex sampling framework the confidence intervals are difficult to calculate and are not currently available.

The Office for National Statistics Gross Disposable Household Income data is the source used to monitor the "increase total income" part of the Solidarity target and is calculated from National Accounts data. GDHI is calculated by adding the balance of "primary income" - essentially income from working or from the ownership of property, minus housing costs; to the balance of secondary income - essentially social benefits received in cash, less taxation.

DEFINITIONS:

The income measure used to measure the income inequality part of the target is equivalised net disposable income before housing costs. This measure estimates income from all sources (including earnings, benefits, tax credits, pensions, and investments) after deductions for income tax, national insurance contributions, council tax, pension contributions and maintenance payments but before deductions for housing costs such as rent and/or mortgage payments. The data will be adjusted for inflation and presented in the most recent year's prices.

Equivalisation sums the income of all householders, adjusts it to reflect the composition of the household, and applies the resulting income to all householders. This is an adjustment made to household incomes that attempts to adjust for the fact that larger families require larger, but less than proportionally larger, incomes to achieve similar standards of living. For example a couple would need a larger income than a single person to achieve a comparable standard of living, but they would not need double the income of the single person. The aim of equivalising household incomes is be able to make meaningful comparisons of household incomes for households of different sizes and compositions.

Deciles are created by ranking all individuals in private households by their equivalised incomes, then splitting them into 10 evenly sized groups. The total equivalised income of the highest decile is summed and divided by the sum total of  the income of the lowest four deciles, to arrive at the “Palma” ratio: the ratio of income to the top 10% of households compared to the bottom 40%.  This is expressed as a percentage, i.e. a Palma ratio of 112% means that the top decile has 12% more income than the bottom four deciles combined.

The income measure used to measure the "increasing total income" part of the target is Gross Disposable Household Income (GDHI) which is published by the UK Office for National Statistics. This is deflated by the Consumer Prices Index to produce a series which reflects "real" (i.e. taking inflation into account) increases in total households income.

BASELINE AND PAST TRENDS:

The baseline is the 2006/07 figure for the proportion of income bit of the target and the 2006 data point for total income. These are the last data points before the start of the first term of the current administration. This is in line with what has been applied to the vast majority of the indicators in the framework. The baseline figure is 122.3 for the Palma ratio and 64.7 billion pounds for total income.

Gross Domestic Household Income (billion pounds):

Ratio of income to the top 10% divided by the bottom 40%, expressed as a percentage (the Palma ratio):

CRITERIA FOR RECENT CHANGE ARROW:

The evaluation is based on:

• The position is improving if the ratio of income to the top 10% compared to the bottom 40% decreases by 5 percentage points or more and the total income does not fall.

• The position is worsening if the ratio of income to the top 10% compared to the bottom 40% increases by 5 percentage points or more, or if total income falls.

For more information on the general methodology applied on Scotland Performs:

General methodological approach

FUTURE ISSUES OR REVIEWS:

No issues.

ASSOCIATED TARGET:

Target:

· To increase overall household income in Scotland, and

· To reduce income inequality, by decreasing the ratio of income to the top 10% of households compared to the bottom 40%.

End point: 2017/18 data point for the income inequality part of the target and 2017 data point for total income.