ChainWhat it assumes · how to break it
Start
Income inequality rises, with real wages for low-paid workers stagnating while top incomes grow.
1
As a result, more working households fall into relative poverty and qualify for means-tested support such as Universal Credit.
in-work poverty · means-tested benefits
in-work poverty · means-tested benefits
Assumes: Low earners live in households that qualify for support.
But: Many low-paid workers are second earners in households with a higher-earning partner, so their household does not qualify.
2
Consequently, welfare spending rises as the state tops up low wages through in-work benefits.
transfer payments
transfer payments
Assumes: Benefit rates keep pace with need.
But: If benefits are frozen in cash terms, as from 2016 to 2020, spending does not rise in step with need, though poverty deepens.
3
In addition, worse health and weaker skills in poorer areas raise spending on the NHS and other services, while low earners pay little income tax.
public expenditure · tax revenue
public expenditure · tax revenue
Assumes: Inequality itself causes worse health and skills.
But: The link may reflect low income rather than the gap, so policies that raise low pay could reduce these costs even if top incomes keep rising.
4
Therefore, the budget deficit widens as spending rises faster than revenue.
budget deficit
budget deficit
Best link to attack
Assumes: Higher revenue from rising top incomes does not offset the extra spending.
Assumes: Higher revenue from rising top incomes does not offset the extra spending.
But: Under a progressive income tax, rising top incomes bring in much more revenue, since the highest earners pay a large share of all income tax.
End
Spending on welfare and public services rises, and the budget deficit may widen unless revenue from top earners keeps pace.
Evaluation chain
- E1However, the effect on the fiscal balance depends on whether higher tax receipts from top earners offset the extra welfare spending.
- E2Because income tax is progressive, with a 45% additional rate on the highest incomes, each extra pound earned at the top yields far more tax than a pound earned at the bottom.
- E3As a result, revenue can rise strongly at the same time as spending on in-work support rises.
- E4So the deficit may widen, stay the same or narrow, depending on how fast top incomes grow and how much of them is taxed as income rather than at lower capital gains rates.
Another way to attack it: Revenue that depends on a small number of very high earners is also more volatile, since bonuses and capital gains fall sharply in a downturn, making the fiscal position less predictable.
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Questions this answers
- Assess the impact of rising income inequality on the public finances.
- Discuss whether in-work benefits are a sustainable response to low pay.
- Explain how the distribution of income affects government tax revenue.
Diagram
No standard diagram. Figures for spending on in-work benefits and the share of income tax paid by top earners make strong evidence.
Reverse and related
Falling inequality with rising low pay → fewer working households need top-ups → welfare spending falls, though revenue from the top may grow more slowly.