The Scottish Government

There are a variety of sources of income data [1]. The official source for income statistics for Scotland is the Department for Work and Pensions' ( DWP) Family Resources Survey ( FRS). For low income analyses the DWP derive the Households Below Average Income ( HBAI) dataset.

The FRS is an annual survey which provides snapshot ('Total') income estimates and is usually published in the Spring by the DWP. Since 2002/03 the Scottish Executive have paid for a doubling of the FRS sample for Scotland to around 5,000 household interviews. This has enabled more detailed analysis of the Scottish data, and in particular more robust low-income estimates.

The FRS derived HBAI dataset is used to provide income analysis under all the various income measures and for the official snap shot low income estimates for individuals, children, working age adults and pensioners in Scotland.

Income definitions

Net disposable income Before Housing Costs ( BHC)
Total/gross income (as above) but after deductions for income tax, National Insurance distributions, council tax, pension contributions and maintenance payments.

Net disposable income After Housing Costs ( AHC)
Net disposable income (as above) but after deductions for housing costs - i.e. rent / mortgage interest payments, structural insurance premiums, water charges, ground rent and service charges.

Before and After Housing Costs

Net disposable household income is often quoted on both a BHC and an AHC basis. This is because some people choose to spend more of their income on housing costs. An after housing costs only measure would understate the relative standard of living of those individuals who were actually benefiting from a better quality of life by paying more for better quality accommodation. Conversely, any income measure which does not deduct housing costs (i.e. BHC) will overstate the living standards of individuals whose housing costs are high relative to the quality of their accommodation.

Although each person's income contribution to overall household income is measured by the FRS, it is the overall household income that is more commonly used in poverty analyses. This provides a more meaningful proxy for the living standards of individuals by taking into consideration the sharing of resources with other household members.

Households of different size and composition will require a different level of income to achieve the same standard of living, it is therefore necessary to adjust the household income to take this into account and allow comparisons across varying household size and composition. For example, a one adult household clearly does not require as much income as a two adult household in order to attain an equivalent standard of living, but the income required would not be half that of the two adult household.

Equivalence scales are therefore constructed and used to adjust incomes by the household composition characteristics to arrive at 'equivalised household income'. This equivalised net disposable household income is then assigned to every individual in the household.

There are a number of different equivalence scales that can be used to adjust the net disposable household income. The HBAI dataset uses both the McClements scale and the Modified OECD scale. From March 2007 the Modified OECD scale will be the main scale used to bring the methodology in line with Europe. Trends are broadly similar whichever scale you choose, although children and pensioners are known to be particularly sensitive to the choice of scale.

For further information please see Appendices 2 and 3 in 'Households Below Average Income 1994/95-2004/05' [2]. This is a DWP publication and provides further details on the equivalisation methodology.

The low income threshold

In order to determine if an individual is in low income their equivalised net disposable household income before and after housing costs must be calculated and compared with the average for the whole population. Individuals are then defined as being in low income poverty if their equivalised household income is below a specified threshold.

Please note again that it is household income rather than individual income that is used because the living standard of an individual may depend on the income of other members of the household (say for example a non-working person may live with a high earning partner, with both having a high standard of living). A key assumption therefore is that all individuals in the household benefit equally from the combined income of the household.

The most commonly used low income threshold for being in low income is 60% of the median (although we do publish figures using the 50% and 70% of the median).

To define and measure those living in low income over time there are two headline measures - relative and absolute low income households.

The relative low income measure compares against the median in the same year.
The absolute measure compares against the median in a baseline year, adjusted to remove the effects of inflation.

In essence, the absolute measures whether individuals in the lowest income households are seeing their incomes rise in real terms. The relative measures whether those in the lowest incomes are keeping up with the growth of incomes in the the economy as a whole.

In 1999, the Prime Minister announced that the UK Government was committed to eradicating child poverty within a generation. The Scottish government share's this vision.

In response, the DWP launched the 'Measuring Child Poverty consultation' in order to bring together current research into what it means to be 'in poverty' and how to measure it, in order to set a sensible long term child poverty target. The details of this consultation were published in December 2003 [3].

The new measure forms the basis of a joint DWP / HM Treasury Child Poverty Public Service Agreement Target of halving child poverty by 2010 and eradicating (be amongst the best in Europe) by 2020 (a generation).

Essentially there is recognition that poverty is multifaceted but the DWP were keen not to develop lots of indicators - preferring to boil it down to three that were considered to capture poverty in a simple, easy to understand way.

This resulted in a 3 tiered approach. These are independent of each other, although it is possible that children who are in poverty under one of the tiers may also be in poverty under another tier:

For further details on the child poverty Public Service Agreement target, please see the DWP 'Public Service Agreement Technical Note 2004 [4].

Currently only the first two tiers have so far been published as part of the HBAI Statistics Publication Notice as the definition for the third is yet to be finalised by DWP/ HM Treasury.

The key poverty estimates presented in the Scottish Households Below Average Income publication are derived from the Family Resources Survey, which is a sample survey. About 4,500 households in Scotland are interviewed and the results are assumed to be representative of all households in Scotland. Because not every single household is interviewed there is inevitably some level of uncertainty that surrounds the estimates. This level of uncertainty can be quantified and is presented in the attached paper: Confidence Intervals Surrounding Key Poverty Estimates.

References

[1] Scottish Executive Office of the Chief Economic Adviser (2004),
'A guide to income statistics for Scotland',
Scottish Economic Statistics 2004 (article 3),
http://www.scotland.gov.uk/Publications/2004/10/20075/44987

This article provides a summary guide, covering the main sources and definitions of income statistics in Scotland.

[2] Department for Work and Pensions (2006),
'Households Below Average Income 1994/95-2004/05' (appendices 2 and 3),
http://www.dwp.gov.uk/asd/hbai/hbai2005/appendicies.asp

These two appendices from the DWP HBAI publication go into more detail about low income methodologies (appendix 2) and show details about the different equivalisation scales (appendix 3).

[3] Department for Work and Pensions (2003),
'Measuring Child Poverty',
www.dwp.gov.uk/consultations/consult/2003/childpov/final.pdf

This document sets out the UK Government's final conclusions to its consultation Measuring child poverty.

[4] Department for Work and Pensions (2004),
'Public Service Agreement Technical Note 2004',
http://www.dwp.gov.uk/publications/dwp/2004/psa/tech_note_2005_2008.pdf

This Technical Note underpins the Public Service Agreement for the Department for Work and Pensions for the period 2005 to 2008. It sets out how each performance target will be measured and the criteria against which it can be judged to be met.

Other useful resources

Scottish Executive websites:

Income and Poverty statistics website:
www.scotland.gov.uk/stats/incomepoverty

High Level Summary of Statistics (Chapter 12, Social and welfare):
http://www.scotland.gov.uk/Topics/Statistics/About/HighLevelTrends

High Level Summary of Equality Statistics (Chapter 12, Social and welfare):
http://www.scotland.gov.uk/Topics/Statistics/About/HighLevelTrends

Scottish Economic Statistics (Household Sector chapter):
http://www.scotland.gov.uk/stats/ses/ses-00m.asp

For further information on all Scottish Executive statistics:
www.scotland.gov.uk/topics/statistics/

Department for Work and Pensions' websites:

Households Below Average Income (methodology and GB estimates):
http://www.dwp.gov.uk/asd/hbai.asp

Family Resources Survey
http://www.dwp.gov.uk/asd/frs/