The Problem Of Poverty

Relative povertyThis type of poverty is related to the average incomes of people in an economy. This is where an income is less than the average income by a certain amount, for the UK this is 60%. So a household is considered to be in relative poverty if their household income is below 60% of the UKs average household income.

Absolute poverty This type of poverty is again adjusted to different countries. Anyone who earns an income below a certain threshold necessary to maintain minimum standards of living. For example, having enough money to buy the necessities; food shelter and heat. For many third world countries this would be about $1-$2 a day. However, the cost of living is much higher in the UK so the threshold would be much higher.

Causes of poverty

In the UK poverty is mostly relative rather than absolute. There are three main causes of relative poverty in the UK:

  • Old age and poverty many old people rely on a state pension rather than a private one. Before the 1980s the state pension rose according to the rise in annual earnings, meaning that pensioners shared the increase in national prosperity coming from economic growth and overall higher real earnings. However, this moved to a different system where the pension rose in accordance to inflation(RPI) this meant that while peoples incomes where rising at a faster rate than inflation the pensioners where becoming increasingly worse off in comparison to them, effectively keeping their incomes at the same as it was in the 80s. this changed in 2011 to a system in which the pension rises in relation to Earnings, inflation or 2.5% whichever is highest.
  • Unemployment and poverty Unemployment benefits are generally lower than the wages that people earn prior to losing their job, so an increase in unemployment would therefore bring about an increase in relative poverty. In an effort to reduce government spending the government have put a limit on the amount of benefits a person aged 16-64 can claim, this could also result in a rise in relative poverty. However, this can be helped with the fall in unemployment that we are experiencing. With absolute poverty this can be it can best be combated through fast and sustained economic growth.
  • Low wages and poverty there is a correlation between low waged and relative poverty and the unwaged and absolute poverty. There is a mass amount of low waged people in the UK who are in unskilled jobs whether it is due to a lack of education or its due to a closure in their industry such as the coal miner’s or its due to their being a shortage of skilled jobs. The low waged poor are almost always relatively poor rather than absolutely poor. The National minimum wage was brought in in order to reduce poverty in the low waged people.

 

Effects of poverty in the UK

  • Educational deprivation The Child Poverty Action Group(CPAG) believes that children who come from a poorer background are behind at all stages of education with the gap increasing as they grow older. They believe that at:

-The age of 3 a child from a poorer background is estimated to be on average 9 months’ behind

– At the end of primary school pupils receiving free meals are almost 3 terms behind their wealthier peers.

– This grows to 5 terms at the age of 14

– By 16 the children on free school meals are achieving 1.7 grades lower at GCSE on average.

  • Health deprivation the CPAG also argues that poverty is associated with a higher risk to illness and premature death.

–         children born in the poorest areas weigh on average 200grams less than those born in the richest areas

–         children born into low income families are more likely to die at birth or in infancy.

–         More likely to suffer a chronic illness during childhood or to have a disability.

–         All this has an impact on life expectancy. Professionals live on average 8 years longer than unskilled workers.

 

  • The effect of poverty on communities children living in poverty are twice as likely to live in bad housing which can have significant effects on physical and mental health. With parents having to make choices between heating and food. As well as children poverty also effect other parts of society. For example fuel prices are ensuring that pensioners can’t afford to heat their homes which leads to an increase in illness, this coupled with the UKs aging population results in an overcrowding in hospitals and therefore a strain on the NHS. This would lead to an increase in government spending to compensate for the extra demand resulting in the deficit in the budget increasing
Advertisements

Government policies

Income Inequality

One method that the UK government uses in order to create a more equal society is to have a progressive tax system. Currently in the UK the highest earners are being taxed 45% of their income, this is for people earning over £150,000. People who earn under £11000 are not taxed at all. In my opinion this is a good system but could be improved upon. I believe that income is so unevenly distributed due to the top 1% of earners. There is however no special tax rate for these people they simply pay the same percentage of their income as people who are earning £150,000+. So in my opinion in order to fight against income  inequality there should be more tiers to the tax system. With the likes of CEOs and Footballers being taxed at a rate of around 60%-70% with yearly incomes of millions of pounds taxing the highest earners most would therefore increase the amount of tax collected massively and therefore decrease the budget deficit. However, if these taxes are implemented it could be argued that the amount of taxes collected would actually go down as currently there are many ways in which rich people avoid tax and find ways to not pay it. So in order for the changes in income tax to produce benefits there would need to be strict regulation on taxes and the government would have to find ways to make people pay their taxes. Economists who would agree with this strategy are interventionists. Apposed to interventionists are pro free market economists, as they believe that in the drive to reduce inequality these changes worsen labour market incentives, competitiveness and economic growth.

Slide1

Wealth inequality

One of the key reasons why the UK has such vast and vulgar wealth inequality is low rate of inheritance meaning rich families from generations of aristocrats and the gentry have accumulated large amounts of wealth to pass down through their name. This allows inequality to be inflicted on you from the tender age of zero, for instance some children are placed into private education and are feed correctly whereas there were 3.9 million children living in poverty in the UK in 2014-15. That’s 28 per cent of children, or 9 in a classroom of 30. This innate inequality does resemble a meritocracy in the slightest it simply gives the impression that some are born to be rich and successful and others are born to be poor and commit crime. This class system creates huge social problems as people are often angry at the fact they weren’t born into wealth and live life with less morality, this leads to the upper class stereotyping them and not wanting to associate with them and a complete divide. The UK has higher wealth inequality than income inequality which is the wrong way if the UK wants to be seen as a meritocracy. To address this inheritance should be taxed much more vertically and this money should be placed into national public services and jobs for the unemployed to give people purpose and make them feel like they have a country that works for the many not the elite few.

Unemployment traps

Some fiscal measures, used to try to reduce poverty and narrow inequalities in the distribution of income, have resulted in the development of poverty and unemployment traps. These arise when there is no incentive for someone who is unemployed to start working because of a greater combined loss of benefits received from welfare benefits.

Horizontal equity- This implies that we give the same treatment to people in an identical situation. E.g. if two people earn £15,000 they should both pay the same amount of income tax. Therefore, horizontal equity makes sure we don’t have discrimination on the grounds such as race / gender / different types of work.

 

Vertical Equity: Implies that people with higher incomes should pay more tax. Vertical equity seeks to tax in a proportional or progressive way – People with more ability to pay should pay more tax. Vertical equity is important for redistributing income within society.

Conclusion

Therefore, in my opinion in order to fight against inequality the government should take a vertical equity approach an introduce a progressive tax system with more tiers than it currently has. This in my opinion would help stop the huge gap between the wealth of the top 10% and the bottom 10% of the UK. My approach would be to have tax tiers continue after the current highest tier of £150,000, where income tax is 45%. In my opinion this should continue to tiers of £500,000 receiving a tax of 55% and finally for people who earn over £1,000,000 a tax rate of 65%. In my opinion this would ensure the UK is receiving much more tax income and the people who are earning the most are being taxed the most. It’s not as if this tax is going to ruin the people earning this type of income as they are earning so much already, however if taxes where raised all round it could have disastrous effects of the people on lower incomes. So to conclude tax the rich and then inject the money back into the economy to stimulate growth. This can be done by spending on education which would therefore shift the LRAS to the right, consequently creating sustainable growth in the long term.

LRAS

 

The distribution of income and wealth

The distribution of income measures how personal or household income is distributed among different income groups in society. The term is also use to measure other forms of distribution such as regional, race, gender and generational. It can also be extended to the international distribution of income between countries

The distribution of wealth also measures how personal or household wealth is distributed among different groups in society. The main difference between income and wealth is that income is a flow and wealth is a stock.

Much like any other country there has always been income and wealth inequality. Hypothetically if the UK seen huge economic growth and full employment, the incomes of the rich would rise at a faster proportionate rate when in comparison of the poor. Fast economic growth widens the inequality gap even though the poorest groups in society are absolutely better off.

cc

 

This graph displays the income inequality in the UK and the government intervention put in place in an attempt to tackle this. The net income is a less steep elevation of inequality due to tax credits and other welfare measures working alongside a progressive tax system. The graph above does not show the full extent of the difference between the richest and the rest of society. This is because the top 1% have incomes substantially higher than the rest of those in the top 10%. In 2012, the top 1% had an average income of £253,927 and the top 0.1% had an average income of £919,882.

Wealth in Great Britain is even more unequally divided than income. The richest 10% of households hold 45% of all wealth. The poorest 50%, by contrast, own just 8.7%.

l

This pie chart displays the huge inequality when regarding wealth in the UK. This wealth as well as being concentrated within a small minority of people, is concentrated in certain regional areas.

As demonstrated below.

k

 

The gini coefficient is a statistical measure of the degree of variation represented in a set of values. The higher the Gini coefficient the higher the inequality.

g

The UK was considerably more equal before the industrial revolution where the only real trade was agricultural. After the revolution, money was made but most of it was for managers or people in corporate positions. The UK seen real economic growth but like I mentioned earlier it widens inequality. This inequality continued until after the world wars where there was a post war consensus which saw the dawn of the welfare state and the national health service. This consensus was treated with complete disregard by prime minister Thatcher, who favoured a free market approach and privatised UK state industries. Her time in office 1979 to 1990 displays a huge rise in inequality in the UK. Which has been difficult diminish to this current day.

 

There are multiple factors of income inequality in the Uk such as rising property price due to scarcity of housing in the uk means landlords have benefited as they have the ability to charge a higher price as there is huge demand and little supply. Also jobs at the top end of the employment ladder have seen huge pay rises widening the gap from lower skilled workers. Bankers who failed to protect the Uk from the credit crunch have seen huge bonuses whilst the rest of the country faces austerity measures. Also as long as we remain in the EU free movement of labour has created much more competition for low paid, low skilled workers, leading to more unemployment.

 

In my opinion an even more concerning gap is the wealth inequality in the uk. Once you become rich it’s easier to make money and more rewarding to save money. Whereas if you less money it’s harder to profit from capital gains and save money as income is almost all necessary for survival. The rich may own lots of land or the most expensive houses which rise in price whereas the poor might rent which leaves them no capital gains from their property. Inheritance means families stay rich and wealthy throughout generations and promotes conservatism with their money. This creates inequality from birth as you are born into either wealth or poverty. As well as that inheritance and wealth is lightly taxed in comparison to income.

The uk faces many social problems there’s huge political apathy, drug abuse, xenophobia just to name a few. A more equal society is proven to lead to a happier nation with less crime.