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Fiscal Studies (1996) vol. 16, no. 3, pp.40-54 Income, Expenditure and the Living Standards of UK Households RICHARD BLUNDELL and IAN PRESTON1 I. INTRODUCTION Despite the widespread use of income as a measure of household welfare, there is much to recommend the use of consumption. Indeed, standard economic arguments suggest that consumption expenditure will better reflect expected lifetime resources and many economists have been unequivocal in advocating its use. Slesnick (1993), for example, suggests that ‘From a theoretical perspective it is more appropriate to evaluate poverty using a consumption based measure of household welfare’. Cutler and Katz (1992) state that ‘Economic theory suggests that permanent income or consumption is a more accurate measure of the distribution of resources than is current income’. Poterba (1989) argues that `If households base their spending plans on their expected lifetime income, then consumption provides a more accurate measure of resources than does annual income’. 1 University College London and Institute for Fiscal Studies. The authors are grateful to James Banks, Ian Crawford, Angus Deaton, Paul Johnson, François Laisney, Costas Meghir, Sarah Tanner, Ian Walker, Steven Webb and an anonymous referee for advice and comments. This study is part of the programme of research of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy at IFS. The financial support of the ESRC is gratefully acknowledged. Material from the FES made available by the CSO through the ESRC Data Archive has been used by permission of the Controller of Her Majesty’s Stationery Office. The authors alone bear responsibility for the analysis and interpretation of the data reported here.