ChainWhat it assumes · how to break it
Start
The government raises its spending, for example on infrastructure and public services, without raising taxes.
1
As a result, more is spent on public services that are free at the point of use, such as healthcare, state schools, early years provision and social housing.
benefits in kind · merit goods
benefits in kind · merit goods
Assumes: The extra spending goes on services used by households, rather than on areas such as defence.
But: Spending on defence, roads or debt interest does little directly for low-income households.
2
This means low-income households receive services worth a large share of their income, because a free service of the same value is a bigger proportion of a small income than of a large one.
benefits in kind · final income
benefits in kind · final income
Best link to attack
Assumes: Low-income households use the services at least as much as high-income households.
Assumes: Low-income households use the services at least as much as high-income households.
But: Better-off households make more use of some services, such as university education and rail travel, and can buy homes near the best state schools.
3
Consequently, final income, after taxes and benefits in kind, is shared more evenly than original income.
distribution of income · Gini coefficient
distribution of income · Gini coefficient
Assumes: Inequality is measured using final income.
But: The Gini coefficient is usually reported for disposable income, which leaves out benefits in kind, so the headline measure may not change at all.
4
In addition, better schooling and healthcare raise the human capital of children from poorer families, raising their future earning power.
human capital · social mobility
human capital · social mobility
Assumes: The spending closes the gap in outcomes between poorer and richer children.
But: Attainment gaps open before children start school, and richer parents can add private tutoring, so gaps in outcomes can persist.
End
Inequality of final income narrows, and in the long run inequality of opportunity may narrow too.
Evaluation chain
- E1However, the effect on inequality depends on who actually uses the services the money is spent on.
- E2If the extra spending goes on services used heavily by better-off households, such as university places, rail subsidies or schools in expensive catchment areas,
- E3then a large share of the benefit goes to middle- and high-income households, so the gap in final income narrows very little.
- E4So higher government spending narrows inequality most when it is targeted at services used mainly by low-income households, such as early years provision, social housing and primary care.
Another way to attack it: The effect also depends on how the spending is paid for. If it is financed later by VAT rises, which take a larger share of poorer households' income, part of the gain to low-income households is clawed back.
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Questions this answers
- Assess the extent to which higher government spending on public services reduces inequality.
- Discuss whether government spending or taxation is the more effective way to redistribute income.
- Evaluate the impact of an increase in spending on healthcare and education on the distribution of income.
Diagram
Lorenz curve: the curve for final income lies closer to the line of equality than the curve for original income, so the Gini coefficient for final income falls.
Reverse and related
Cuts to public services → poorer households lose services worth a large share of their income → inequality of final income widens.