Discuss the Meaning of Poverty in the Uk Today and Critically Assess the Means by Which Government Would Tackle the Problem.
“The poor are always with you” (Matthew 26:11)
Discuss the meaning of poverty in the UK today and critically assess the means by which government would tackle the problem.
There are two identifiable types of poverty; there is Absolute Poverty whereby human existence itself is challenged, like the famine of Somalia and other central African states. But there is also Relative Poverty in which people cannot sustain a minimum lifestyle in relation to what is a generally accepted standard in a society. This latter type can change according to the time and place, but is currently experienced by 13.5 million people in the UK, that’s 22% of the population.
However, defining exactly when a household is in poverty is not cut and dry. Currently the system is to use the Households Below Average Income Survey (HBAI) to determine how many households earn 60% or less of the average (median) British household income in that year. If a household falls below this amount then they are classed as in poverty.
Before the government brings in policies to try to reduce the number of people in poverty they must first identify the causes.
Due to labour market forces there is a large inequality of wages in the UK. Those with high levels of skills and qualifications will be in higher demand than those with lower skills. Therefore they will be able to earn a higher wage, and those without the high skills and qualifications will have low paid jobs or even be unemployed. Recently a variety of factors have increased wage differentials. These include:
• De-industrialisation, leading to more service sector jobs which tend to be lower paid.
• Public sector jobs have had low increases in wages compared to that of the private sector.
• Growth in part time and temporary jobs which tend to be low paid.
• Decline in trade unions leaving many workers unable to bargain for higher wages.
• Increased demand for highly skilled workers.
As state benefits are linked to inflation their relative value falls as wage values increase faster than inflation. Therefore those reliant on benefits lag behind those earning a good wage. Because those who are unemployed are dependent upon state benefits, unemployment has become the biggest cause of poverty in the UK.
A further cause of poverty is a regressive tax system which has been employed over recent years. Since the changes in the 1980s and 90s a higher burden of tax has been put onto the poor. There has been a shift from the progressive income taxes to the indirect, regressive taxes such as VAT, and therefore causing inequality. For example the top marginal rate of income tax has fallen from 83% in 1979 to present day figure of 40%, whereas VAT started at a simple 10%, increasing to 20% today. Some income tax has more than halved, yet VAT has doubled. VAT is a tax on essentials like food and clothing; no matter what one’s wealth is they must still buy these essential goods. This means sales taxes on essentials amount to a greater percentage tax on those with lower income.
But what can the government do to ameliorate the problem of poverty and inequality in the UK?
Seeing as unemployment is the greatest cause of poverty in the UK then the government must firstly go about creating more jobs for those workers who are not in high demand in the labour market, i.e. without higher qualifications.
This could be done by creating a number of construction projects, such as the building of new roads or hospitals. This would not only be of benefit to those in poverty as it would provide “low skilled” construction work which would provide more income than the state benefit system. It would also provide benefits to the rest of society. For example, the construction of roads would ease the problem Britain’s congestion and hospitals would lessen the strain on the NHS whilst creating more jobs in that sector. These projects would also benefit Britain on a macroeconomic level; the money earned by the construction workers would contribute to the multiplier effect, boosting overall GDP in the long run.
However, these government funded projects would come with problems. The main problem is because they are funded by government, which ultimately comes from taxation or government borrowing. In order to generate the required funds to pay for these schemes they have to either increase borrowing or set tax rates higher. The former is not a viable option as borrowing is already at an all-time high and the last thing the government can afford to do is borrow more money in the current economic situation. Despite this looking possible in theory (Pecorino’s revised Laffer curve shows optimum tax take to be at 70% (see appendix 1)) this is not a better option than generating the money by borrowing. The public would not react well to tax increases in a state where there is already a lot of tension leading to strikes, demonstrations and even riots.
Interestingly however, a study by an American economist Y Hsing, placed the revenue-maximizing tax rate (the point at which another marginal tax rate increase would decrease tax revenue) between 32.67% and 35.21. This would mean that with a slight decrease in the rate of tax would theoretically generate more revenue for the government and mean that ‘Keynesian’ style government schemes would be a viable option to create jobs and prosperity.
Another problem with government schemes in order to create jobs is that the type of construction projects don’t last forever and after they are completed all of those employed will be out of a job again. It has to be hoped that having worked once, this will give them a larger incentive to find work again.
Another option would be to increase the minimum wage. Paying those who are a part of the work force more would make them able to live comfortably above the poverty line and helping to bridge the gap of inequality.
However, it would be a policy that is more politically popular than effective. It would really act as an artful dodge of solving real problems of poverty. It would seem that the politicians are making the poor better off at expense of the rich, allowing them to take credit for welfare that they force businesses to pay for; thus creating a sort of welfare without taxation. As aforementioned due to the increase in part-time and temporary employment, this would most directly affect younger workers doing a weekend job which would not address the issue of Britain’s relative poverty.
The other problem is that an increase in the minimum wage increases the price of labour (as shown in appendix 2). This means that firms may have to lay people off in order to afford the price of labour. So despite those in work being able to live above the poverty line the overall effect would be an increase in unemployment, which would lead to an increase in those below the poverty line as they’d be unemployed.
A third option would be for the government to reform the welfare system. Many people on benefits perceive the financial risks of entering the work-force as too great. For some groups the gains to work, particularly at low hours and low pay are small and they can be easily nullified by in-work costs such as transport. Reforming the benefit system aims to make it fairer and affordable to tackle poverty, unemployment and welfare dependency. The two main areas that have been identified by the Coalition Government are: low work incentives and an overly-complex system.
There are over fifty different ways to claim benefits and/or other payments from the state. It is estimated that £5.2bn a year is wrongly paid out due to fraud and error. The idea is to merge income-related jobseeker's allowance, housing benefit, child tax credit, working tax credit, income support and income-related employment support allowance - into a single universal payment – known as Universal Credit.
The government estimates that around 2.7 million households will have a higher entitlement as a result of Universal Credit. This will help to close the gap between these households in relative poverty and the rest of Middle Britain.
However, in the long-run 1.7 million households will have notional lower entitlements. In time, these people will not see their Universal Credit entitlement increased each year in line with inflation, this is known as uprating.
However, integrating all these different types of benefit into one is not simple. One reason is that the circumstances of claimants, ranging from lone parents to the newly unemployed to those on incapacity payments, vary greatly. Any government will tread carefully in clearing a path through this minefield. And furthermore the reform would cost a further £3.6bn. It is universally believed that in the long-run a reform would save money but with the Treasury drowning in red ink the costs is likely to be put down as actual and the long run benefits as notional.
In conclusion the government has a number of options at their disposal to try to alleviate the problem of poverty in the UK. In the short run I believe that they should take a risk in spending money to generate jobs in order to help people work themselves away from the poverty trap whilst helping the UK to grow its way out of recession. Whilst the employment figures are higher then a welfare reform would not be as huge job as before, meaning it would cost less to the state. The reform should occur whilst the construction schemes are at their peak. As for a change in the minimum wage, I believe the drawbacks outweigh the benefits and any change shouldn’t be implemented.
Discuss the meaning of poverty in the UK today and critically assess the means by which government would tackle the problem.
There are two identifiable types of poverty; there is Absolute Poverty whereby human existence itself is challenged, like the famine of Somalia and other central African states. But there is also Relative Poverty in which people cannot sustain a minimum lifestyle in relation to what is a generally accepted standard in a society. This latter type can change according to the time and place, but is currently experienced by 13.5 million people in the UK, that’s 22% of the population.
However, defining exactly when a household is in poverty is not cut and dry. Currently the system is to use the Households Below Average Income Survey (HBAI) to determine how many households earn 60% or less of the average (median) British household income in that year. If a household falls below this amount then they are classed as in poverty.
Before the government brings in policies to try to reduce the number of people in poverty they must first identify the causes.
Due to labour market forces there is a large inequality of wages in the UK. Those with high levels of skills and qualifications will be in higher demand than those with lower skills. Therefore they will be able to earn a higher wage, and those without the high skills and qualifications will have low paid jobs or even be unemployed. Recently a variety of factors have increased wage differentials. These include:
• De-industrialisation, leading to more service sector jobs which tend to be lower paid.
• Public sector jobs have had low increases in wages compared to that of the private sector.
• Growth in part time and temporary jobs which tend to be low paid.
• Decline in trade unions leaving many workers unable to bargain for higher wages.
• Increased demand for highly skilled workers.
As state benefits are linked to inflation their relative value falls as wage values increase faster than inflation. Therefore those reliant on benefits lag behind those earning a good wage. Because those who are unemployed are dependent upon state benefits, unemployment has become the biggest cause of poverty in the UK.
A further cause of poverty is a regressive tax system which has been employed over recent years. Since the changes in the 1980s and 90s a higher burden of tax has been put onto the poor. There has been a shift from the progressive income taxes to the indirect, regressive taxes such as VAT, and therefore causing inequality. For example the top marginal rate of income tax has fallen from 83% in 1979 to present day figure of 40%, whereas VAT started at a simple 10%, increasing to 20% today. Some income tax has more than halved, yet VAT has doubled. VAT is a tax on essentials like food and clothing; no matter what one’s wealth is they must still buy these essential goods. This means sales taxes on essentials amount to a greater percentage tax on those with lower income.
But what can the government do to ameliorate the problem of poverty and inequality in the UK?
Seeing as unemployment is the greatest cause of poverty in the UK then the government must firstly go about creating more jobs for those workers who are not in high demand in the labour market, i.e. without higher qualifications.
This could be done by creating a number of construction projects, such as the building of new roads or hospitals. This would not only be of benefit to those in poverty as it would provide “low skilled” construction work which would provide more income than the state benefit system. It would also provide benefits to the rest of society. For example, the construction of roads would ease the problem Britain’s congestion and hospitals would lessen the strain on the NHS whilst creating more jobs in that sector. These projects would also benefit Britain on a macroeconomic level; the money earned by the construction workers would contribute to the multiplier effect, boosting overall GDP in the long run.
However, these government funded projects would come with problems. The main problem is because they are funded by government, which ultimately comes from taxation or government borrowing. In order to generate the required funds to pay for these schemes they have to either increase borrowing or set tax rates higher. The former is not a viable option as borrowing is already at an all-time high and the last thing the government can afford to do is borrow more money in the current economic situation. Despite this looking possible in theory (Pecorino’s revised Laffer curve shows optimum tax take to be at 70% (see appendix 1)) this is not a better option than generating the money by borrowing. The public would not react well to tax increases in a state where there is already a lot of tension leading to strikes, demonstrations and even riots.
Interestingly however, a study by an American economist Y Hsing, placed the revenue-maximizing tax rate (the point at which another marginal tax rate increase would decrease tax revenue) between 32.67% and 35.21. This would mean that with a slight decrease in the rate of tax would theoretically generate more revenue for the government and mean that ‘Keynesian’ style government schemes would be a viable option to create jobs and prosperity.
Another problem with government schemes in order to create jobs is that the type of construction projects don’t last forever and after they are completed all of those employed will be out of a job again. It has to be hoped that having worked once, this will give them a larger incentive to find work again.
Another option would be to increase the minimum wage. Paying those who are a part of the work force more would make them able to live comfortably above the poverty line and helping to bridge the gap of inequality.
However, it would be a policy that is more politically popular than effective. It would really act as an artful dodge of solving real problems of poverty. It would seem that the politicians are making the poor better off at expense of the rich, allowing them to take credit for welfare that they force businesses to pay for; thus creating a sort of welfare without taxation. As aforementioned due to the increase in part-time and temporary employment, this would most directly affect younger workers doing a weekend job which would not address the issue of Britain’s relative poverty.
The other problem is that an increase in the minimum wage increases the price of labour (as shown in appendix 2). This means that firms may have to lay people off in order to afford the price of labour. So despite those in work being able to live above the poverty line the overall effect would be an increase in unemployment, which would lead to an increase in those below the poverty line as they’d be unemployed.
A third option would be for the government to reform the welfare system. Many people on benefits perceive the financial risks of entering the work-force as too great. For some groups the gains to work, particularly at low hours and low pay are small and they can be easily nullified by in-work costs such as transport. Reforming the benefit system aims to make it fairer and affordable to tackle poverty, unemployment and welfare dependency. The two main areas that have been identified by the Coalition Government are: low work incentives and an overly-complex system.
There are over fifty different ways to claim benefits and/or other payments from the state. It is estimated that £5.2bn a year is wrongly paid out due to fraud and error. The idea is to merge income-related jobseeker's allowance, housing benefit, child tax credit, working tax credit, income support and income-related employment support allowance - into a single universal payment – known as Universal Credit.
The government estimates that around 2.7 million households will have a higher entitlement as a result of Universal Credit. This will help to close the gap between these households in relative poverty and the rest of Middle Britain.
However, in the long-run 1.7 million households will have notional lower entitlements. In time, these people will not see their Universal Credit entitlement increased each year in line with inflation, this is known as uprating.
However, integrating all these different types of benefit into one is not simple. One reason is that the circumstances of claimants, ranging from lone parents to the newly unemployed to those on incapacity payments, vary greatly. Any government will tread carefully in clearing a path through this minefield. And furthermore the reform would cost a further £3.6bn. It is universally believed that in the long-run a reform would save money but with the Treasury drowning in red ink the costs is likely to be put down as actual and the long run benefits as notional.
In conclusion the government has a number of options at their disposal to try to alleviate the problem of poverty in the UK. In the short run I believe that they should take a risk in spending money to generate jobs in order to help people work themselves away from the poverty trap whilst helping the UK to grow its way out of recession. Whilst the employment figures are higher then a welfare reform would not be as huge job as before, meaning it would cost less to the state. The reform should occur whilst the construction schemes are at their peak. As for a change in the minimum wage, I believe the drawbacks outweigh the benefits and any change shouldn’t be implemented.