The Green Book

DISTRIBUTIONAL IMPACTS

ANNEX

INTRODUCTION

‘Distributional impacts’ is a term used to describe the distribution of the costs or benefits of interventions across different groups in society. Proposals might have differential impacts on individuals, amongst other aspects, according to their:

	Income;
	Gender;
	Ethnic group;
	Age;
	Geographical location; or
	Disability.

It is important that these distributional issues are assessed in appraisals.

DISTRIBUTIONAL ANALYSIS

Any distributional effects identified should be explicitly stated and quantified as far as possible. At a minimum, this requires appraisers to identify how the costs and benefits accrue to different groups in society. If, for example, the costs of a government action fall largely upon one ethnic group this impact should be detailed in the appraisal.

It follows from this that a rigorous analysis of how the costs and benefits of a proposal are spread across different socio-economic groups is recommended. Where it is considered necessary and practical, this might involve explicitly recognising distributional effects within a project's NPV.

ANALYSIS OF IMPACTS ACCORDING TO RELATIVE PROSPERITY

The impact of a proposal on an individual’s well-being will vary according to income; as income grows, the satisfaction derived from an additional unit of consumption declines.

The relative prosperity of a household affected by a proposal is determined not only by its income, but also by its size and composition. For example, a single person on £100 a week is better off than a couple on £100 a week. Table 5.1 adjusts for varying costs of living for some specimen family types through a process called equivalisation. These calculations use the McClements scale¹ that takes account of the number of adults and the number and ages of children in the household.

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TABLE 5.1: INCOME RANGES BY QUINTILE OF EQUIVALISED NET INCOME

£ per week	Single with no children	Couple with no children	Single with child aged 5-7	Couple with child aged 5-7	Single with two children aged 5 & 11	Couple with two children aged 5 & 11	Single with Pensioner	Pensioner Couple
Quintile of equivalised net income
1	0 to 114	0 to 184	0 to 154	0 to 224	0 to 199	0 to 269	0 to 114	0 to 184
2	115 to 154	185 to 254	155 to 209	225 to 309	200 to 274	270 to 369	115 to 154	185 to 254
3	155 to 204	255 to 339	210 to 274	310 to 409	275 to 359	370 to 494	155 to 204	255 to 339
4	205 to 284	340 to 469	275 to 384	410 to 564	360 to 499	495 to 684	205 to 284	340 to 469
5	285 plus	470 plus	385 plus	565 plus	500 plus	685 plus	285 plus	470 plus

Table 5.2 provides the same rankings for specimen family types in terms of equivalised gross income.

TABLE 5.2: INCOME RANGES BY QUINTILE OF EQUIVALISED GROSS INCOME

£ per week	Single with no children	Couple with no children	Single with child aged 5-7	Couple with child aged 5-7	Single with two children aged 5 & 11	Couple with two children aged 5 & 11	Single with Pensioner	Pensioner Couple
Quintile of equivalised net income
1	0 to 129	0 to 214	0 to 174	0 to 259	0 to 224	0 to 309	0 to 129	0 to 214
2	130 to 89	215 to 314	175 to 254	260 379	225 to 334	310 to 459	130 to 189	215 to 314
3	190 to 269	315 to 444	255 to 364	380 to 534	335 to 474	460 to 644	190 to 269	315 to 444
4	270 to 394	445 to 644	265 to 529	535 to 779	475 to 689	645 to 939	270 to 394	445 to 644
5	395 plus	645 plus	530 plus	780 plus	690 plus	940 plus	395 plus	645 plus

Appraisers should assess how the costs and benefits of each option are spread across different income groups, such as the income quintiles provided in Table 5.1 or Table 5.2.² A proposal providing greater net benefits to lower income quintiles is rated more favourably than one whose benefits largely accrue to higher quintiles.

Further analysis can then be undertaken, using distributional weights, to recognise the identified impacts within the cost-benefit analysis. A benefit or cost accruing to a relatively low income family would be weighted more heavily than one accruing to a high income family.

In principle, each monetary cost and benefit should be weighted according to the relative prosperity of those receiving the benefit or bearing the cost.³ However, in practice, this information is most unlikely to be available at acceptable cost for many applications. The decision on whether an explicit adjustment is warranted should be informed by the:

	Scale of the impact associated with a particular project or proposal;
	Likely robustness of any calculation of distributional impacts; and,
	The type of project being assessed.

If appraisers decide not to use distributional weights to make an explicit adjustment, this decision must be fully justified.

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Deriving distributional weights

One approach to deriving the weights used is the concept of an underlying social welfare function that links personal utility (or satisfaction) to income.

Broadly, the empirical evidence suggests that as income is doubled, the marginal value of consumption to individuals is halved: the utility of a marginal pound is inversely proportional to the income of the recipient. In other words, an extra £1 of consumption received by someone earning £10,000 a year will be worth twice as much as when it is paid to a person earning £20,000 per annum.

BOX 5.1: THE MARGINAL UTILITY OF CONSUMPTION

	Welfare Weights, by Cowell and Gardiner (1999) concluded that “most [studies] imply values of the elasticity of marginal utility of just below or just above one”.⁴ Pearce and Ulph (1995), in their survey of the evidence, estimate a range from 0.7 to 1.5, with a value of 1 being defensible.⁵
	Assuming a value of 1 implies a utility function of the form
	U = log C
	where C is consumption.
	The marginal utility of consumption is then given by i.e. 1/C.
	This implies that if consumption doubles, the marginal utility of consumption falls to one half of the previous value.

Box 5.2 provides an example of how distributional weights might be calculated from the equivalised income quintiles in Table 5.1 or Table 5.2. The weights provided are merely illustrative. Despite this uncertainty it is important that appraisers, where deemed appropriate, attempt to adjust explicitly for distributional implications. The assumptions underpinning the chosen distributional weights should be fully explained.

BOX 5.2: DERIVING ILLUSTRATIVE DISTRIBUTIONAL WEIGHTS

The marginal utility of each quintile in Tables 5.1 and 5.2 can be calculated by dividing 1 by the median income of each quintile (U’ = 1/C). Distributional weights can then be derived by expressing the marginal utility of each quintile as a percentage of average marginal utility (1 divided by the median income). The table below provides the illustrative weights as ranges, reflecting uncertainty in the utility function and the assumed income quintiles.

Quintile	Range (Net)	Range (Gross)

Bottom	1.9 – 2.0	2.2 – 2.3
2nd	1.3 – 1.4	1.4 – 1.5
3rd	0.9 – 1.0	1.0 – 1.1
4th	0.7 – 0.8	0.7 – 0.8
Top	0.4 – 0.5	0.4 – 0.5

It will often be the case that neither net nor gross incomes of those affected by a proposal are known directly, so as to allow the distributional adjustment to be calculated. However, if the family or other circumstances of a group affected are known, an adjustment may be calculable indirectly using whatever is known about the relative incomes of those in the relevant category.

For example, it may be that a particular proposal will disproportionately provide additional employment for people on probation in a particular area. If it is known that probationers in that area are predominantly in the lowest income quintile, it will be reasonable to use the adjustment factor calculated for that quintile.

The regional impact of policy may assist the analysis: the income impact of a proposal may be estimated indirectly by determining its geographical impact and taking note of small-area indices of deprivation.⁶ However, care must be taken to assess whether the beneficiaries of a proposal are representative of the geographical area from which they come.

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ANALYSIS OF OTHER DISTRIBUTIONAL IMPACTS

UK discrimination law currently covers gender, marriage, disability and race. In addition, the government is bound by European law, which currently covers discrimination on the grounds of gender, marital status, pregnancy and maternity only, but is likely to be extended in due course.

The scope of racial discrimination law in the UK has recently been significantly extended with the Race Relations (Amendment) Act 2000. It now requires certain listed public authorities to comply with a new general duty to promote racial equality.⁷ This aims to ensure that the listed bodies give due regard to racial equality when carrying out their functions, including policy-making.

The UK is also a signatory to various international treaties and conventions with anti discrimination provisions. These do not provide the right of individual complaint against the UK, but should inform the development of policy. Box 5.3 details the relevant legislation and the more important conventions.

BOX 5.3: RELEVANT ANTI DISCRIMINATION LEGISLATION,TREATIES AND CONVENTIONS

	ANTI DISCRIMINATION LEGISLATION
		The Sex Discrimination Act 1975 (as amended)
		The Employment Act 1989 & The Employment Rights Act 1996
		The Equal Pay Act 1970 (as amended)
		The Race Relations Act 1976 (as amended)
		The Disability Discrimination Act (1995)
		Pregnant Workers Directive
		Article 119 of the Treaty of Rome, and Equal Treatment and Equal Pay Directives made under the Treaty. EC Law on free movement of workers, services and capital, and freedom of establishment.
	CONVENTIONS
		The UN Convention on the Elimination of All Forms of Discrimination against Women
		The UN Convention on the Elimination of All Forms of Racial Discrimination
		The UN International Covenant on Civil & Political Rights
		The UN International Covenant on Economic, Social and Cultural Rights
		The UN Standard Rules on Equalisation of Opportunities for People with Disabilities
		The Council of Europe European Convention on Human Rights

Analysis of distributional issues should not be limited to assessing compliance with discrimination law, and international treaties and conventions. Unless appraisers consider the impact a particular proposal has on different groups in society, they cannot be sure the action is having the intended affect.

There are three steps when considering equality during appraisal:⁸

1.	Analyse how the proposal will affect different groups of people (e.g. gender, ethnic group, age, disabled, location).
2.	Consider whether there are any adverse differential impacts on a particular group. If so, are these impacts unfair or unlawful, or do they contradict overall Government policy.
3.	If the action is not permissible in the above senses, remedial action is necessary. If, however, it is permissible, appraisers must decide:
		If alternative action could meet the objectives without the same adverse consequences; or
		Whether there are any measures that can be taken to reduce the predicted adverse impact.

Following is a list of useful organisations when considering equality in appraisal:

	Equal Opportunities Commission (EOC)
	Commission for Racial Equality (CRE)
	Women and Equality Unit – Cabinet Office
	Race and Gender Mainstreaming Team – Home Office
	Disability Rights Commission


1	DWP, Households Below Average Income, (2000/01)
2	Where a household being assessed is not defined by one of the categories in Table 5.1 or Table 5.2, appraisers should use the closest specimen family.
3	Generally, non-monetary costs and benefits (eg life, health, time savings, etc) are not adjusted as they are considered to be independent of income. For example, the DfT’s valuation of non-working travel time savings is averaged across all income groups, so has already been implicitly equity weighted. If values are not standard and are calculated for a specific project an adjustment might still be required.
4	Cowell and Gardiner (1999) page 31
5	Pearce and Ulph (1995) page 14
6	‘Where does public spending go? A pilot study to analyse the flows of public expenditures into local areas’, by the former DETR (now ODPM).
7	See Section 71 of the Race Relations Act 1976 (as amended by the Race Relations (Amendment) Act 2000)
8	See Policy Appraisal for Equal Treatment, issued to all departments in 1998 by the Cabinet Office, Home Office, and the (then) DfEE