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How does UK welfare spending impact households?
Transfer spending plays a crucial role in income redistribution. Earlier, we discussed how progressive direct taxes mean that higher earners face a higher tax burden. Through transfer spending, the government transfers this income from richer to poorer households.
The outcome of this transfer is that income inequality is significantly reduced:
“The average household income of the richest fifth of people, before taxes and benefits (£107,600) was 13 times larger than the poorest fifth (£8,200). However, this reduced to 4 times larger (£79,200 and £21,400, respectively) after taxes and benefits.” (ONS)
Since poorer households pay less tax and receive more benefits than richer households, they have a higher net position than richer households (after accounting for tax and benefits). Let’s explore this in the chart below: