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A2 Markets & Market Systems
Government Policies towards Poverty
In this note we consider the options available to the government if it wishes to achieve a greater degree of equity in the distribution of income and wealth.
Policy options to change the distribution of income and wealth
There are many policy options available to a government if it wants to change the final distribution of income and wealth in a country. The main strategies that the Labour government has chosen to reduce poverty since it was elected in May 1997.
In addition the government already has in place a progressive system of income tax and welfare benefits that helps to reduce the huge differences between original and final disposable incomes between different groups of the population.
Pensioner Poverty in the UK
Income redistribution through the tax and benefit system
What are the effects of the tax and benefit system on the final distribution of income in the UK? This summary table is published each year by the Government and gives us an idea of the progressiveness of the tax and benefits system for households in different income bands.
Original income comes from wages and salaries in work, self-employment income, investment incomes et al. To which we add entitlements to welfare benefits in cash – not that the lowest income households are those most entitled to these benefits, some of which are means-tested. The ratio of the original income of the richest fifth of households to the poorest fifth is nearly 16. By the time that government welfare benefits have been included, that ratio falls to less than 7.1.
Then we include the effects of direct taxation – mainly income tax and national insurance – which acts as a progressive form of taxation – a higher income group pays a higher % of their incomes in tax. This gives us disposable income - the ratio of the disposable income of the richest fifth of households to the poorest fifth is 5.3.
Our final transfer is to include the effects of indirect taxes and estimated benefits in kind from state provision of education, the NHS and housing subsidies to give a figure for final income. The final result is that our ratio between richest and poorest quintiles falls further to 3.6.
Main benefits in kind
Indirect taxes fall most heavily on poorest households. In 2001-02, they accounted for 34% of disposable income whereas for the highest income quintile, the percentage was just 14%. This suggests that indirect taxation overall has a regressive effect on the distribution of income in the UK.
The government has focused its’ policies in the following areas
There has been some limited progress in attacking some of the causes of poverty. For example the number of children living in poor households fell by 200,000 in 2002-03. But the latest official figures for the UK show that, for the year 2002-03, income inequality remains greater under Labour than under the 1979-97 Conservative governments of Margaret Thatcher and John Major.
The main sources of income for different groups in 2003
The reality is that there are powerful forces at work in the British economy (and specifically within our labour market) that are increasing the gap between rich and poor. In particular the incomes of the most affluent households have raced ahead of relatively poorer families. Thus one can argue that the government has through its redistribution policies to run simply to stand still. Without Labour’s commitment to redistribution, the level of income inequality would be even higher than it is now.
Labour fails to stop widening of income gap in the UK
Which policies are most effective in reducing poverty?
A government truly committed to making a serious dent in relative poverty would
Taking the long view
No policies to relieve poverty are risk free. Many are highly expensive and their effects often take many years to show through properly. The consensus among the leading academic researchers is that high employment, and a commitment to raise the skills and potential earnings of people towards the bottom of the pay ladder are the most effective and sustainable policies in the long term.
|Author: Geoff Riley, Eton College, September 2006|
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