To properly tackle poverty, we must look at the cost of living

First, the good news. Poverty has been on the decline for several years. Since 2007, the proportion of the British population living below the poverty line has fallen from 19 per cent to 16 per cent.

Child poverty is at 17 per cent, down from 23 per cent in 2008, and inequality has fallen to its lowest level since 1986. If the trend of the last five years continues, we will eliminate child poverty by 2024 and abolish all poverty by 2033. We still have a long way to go before we can match the poverty rates of such countries as Bangladesh (14 per cent), Azerbaijan (2 per cent) or Namibia (0 per cent), but we are heading in the right direction.

It’s amazing what a prolonged economic slump can do. Admittedly, the percentage that find themselves unable to meet “unexpected financial expenses” rose from 27 per cent in 2007 to 37 per cent in 2011. Granted, incomes have fallen across the board and now languish at the levels of ten years ago. And, yes, it is true that the decline of poverty and inequality is the result of middle incomes falling during the deepest recession since the 1930s. But never mind any of that. If poverty is relative—as we are assured that it is—then rejoice.

As the statistics above demonstrate, measuring poverty in the rich world can be a counterintuitive business. The conventional poverty line is an income that is less than sixty per cent of average earnings, but this kind of relative poverty has only a tangential relationship to living standards. Relative poverty and real incomes frequently travel in opposite directions, with the poverty rate rising when the poor get wealthier and—as has happened in recent years—falling when the poor get poorer.

The limitations of relative poverty measures are familiar to social scientists and anti-poverty campaigners. It would be an arcane, academic discussion were it not for widespread confusion about the distinction between absolute deprivation, relative poverty and minimum living standards—a confusion which the poverty lobby does little to counter and much to encourage. For example, campaigners sometimes report that GDP has grown by a certain percentage while poverty has stayed at the same level or risen, as if it should be surprising that measures of income equality do not parallel rises in absolute wealth. Relative poverty figures are conflated with descriptions of material deprivation that can only serve to mislead. For example, Save the Children has said that “in the UK, 3.9 million children live in poverty. Many don’t have access to warm winter clothing, nutritious food, decent housing or education.” As the economist Kristian Niemietz points out, some children may indeed not have access to some of these things, “but the relative poverty figures tell us absolutely nothing about the extent to which this is so.”

With the recession and “austerity” coinciding with a downturn in the conventional measures of poverty, some charities have started talking about absolute incomes for the first time in years. For those who seek radical wealth distribution and higher public spending, relative measures have become temporarily redundant, even embarrassing. It was expedient to use the conventional poverty benchmark when the economy was flourishing, but its continued use in harder economic times might give the public the impression that things are getting better. From a strictly relativist perspective, they are, but this is neither useful to the campaigners nor credible to the public.

A poverty measure that has so little regard for how much money people have and what living standards they enjoy deserves to be treated with scepticism, if not contempt, by the man on the Clapham omnibus. Finding a silver bullet for relative poverty is easy: simply bring an end to economic growth and equalise incomes by state force. Some on the ecological far-left have endorsed such a ‘steady-state’ economy as the logical outcome of the war on inequality (which is, by association, a war on capitalism and growth). However, there is scant evidence of widespread support for ending growth amongst the general public—which has experienced the reality of zero growth for the past five years—least of all amongst the poor. The steady-staters are correct in seeing a stagnant economy as the key to eliminating relative poverty and income inequality, but if the answer involves general immiseration, central planning and state socialism, we are asking the wrong question. The arbitrary and misleading measure of relative poverty should be abandoned for good.

Despite there being some questions about the minimum income surveys, there is much to be said for measuring poverty in terms of consumption patterns deemed adequate by a cross-section of the public. It is a method endorsed in two monographs by Kristian Niemietz, whose work has been the foundation for much of this essay. If agreement can be reached about what items to place in an adequate basket of goods, what comes next? Does the state have a responsibility to provide a minimum, or comfortable, standard of living? The right to a certain standard of living naturally places an obligation on others to pay for it. Few would argue that we do not have a moral duty to help those who are hungry, cold, sick or homeless. The welfare state currently provides such assistance on our behalf as a form of nationalised charity. But whilst we may have a moral obligation to help those in dire and mortal need, it is more questionable whether we have a similar duty to provide strangers with an annual holiday or a Sunday roast.

And yet there can be no denying that there a problems of poverty in Britain that should not exist in one of the richest country in the world. Looking only at symptoms that are more or less comparable over time, we see that nine per cent of households say they cannot afford to heat their home adequately—up from three per cent in the 1990s. Twenty-six per cent say they cannot afford to repair or replace broken electrical equipment—up from 12 per cent in 1999. Whether one’s politics are liberal, conservative or socialist, it seems likely that not having a suit in which to attend job interviews will hold an individual back. Similarly, a child who does not have access to the internet at home is educationally disadvantaged and socially marginalised. Regardless of whether they can be considered necessities in the literal sense, it would be better if everyone had them. The question is how this can be done without bankrupting the country and further reducing incentives to work.

In his 2012 monograph, Redefining the Poverty Debate, Niemietz proposes an anti-poverty strategy based on lowering the cost of living. Among his recommendations are the following:

Housing

Britain’s restrictive planning laws artificially raise the cost of rents and mortgages. In 2011, the government spent £23 billion on housing benefit, almost double the sum paid out ten years earlier. By limiting the supply of new homes and subsidising rents through housing benefit, government policy benefits landlords and a minority of homeowners (those looking to sell up or downsize) at the expense of the poor, for whom housing costs make up more than a quarter of outgoings. Liberalisation of our planning laws would allow construction companies to build houses where demand exists, lowering housing costs, reducing housing benefit payments and helping prevent boom and bust in the property market.

Childcare

It is no accident that Britain has the least affordable childcare— and the largest number of children living in workless households—in Europe. Under the last government, childcare became a highly regulated industry with significant costs and barriers to entry. As Niemietz notes, “the Labour government was caught between two conflicting objectives: it was trying to make childcare more affordable while also trying to turn it into an instrument for social engineering. The first objective has been torpedoed by the cost increase which resulted from pursuing the second objective.” Despite a massive increase in public expenditure on projects such as Sure Start, the mountain of bureaucracy crushed informal childcare and resulted in the number of registered childminders falling from nearly 100,000 to just 57,000 under the last government. Fewer facilities with higher operating costs naturally resulted in higher prices. Childcare should be deregulated.

Indirect taxation

Listening to some left-wing intellectuals, one would think that Britain does not have a progressive income tax. In fact, direct taxation in the UK is highly progressive, with the top one per cent of earners paying 27 per cent of all income tax while more than half the population receives more in benefits than they pay in income tax. However, the progressive nature of the income tax system is severely undermined by the regressive nature of stealth taxes, sin taxes, green taxes and VAT which take a much larger portion of income from the poor than from the rich. In 2011/12, the poorest fifth of households spent 29 per cent of their disposable income on indirect taxes, compared with 14 per cent paid by the richest fifth. All told, the poorest households pay 37 per cent of their gross income in direct and indirect taxes. In other words, the single biggest expenditure for people in poverty is tax. It is, at the very least, morally dubious to be taxing the poor at such a rate. The most important thing the government can do to make the poor richer is to stop taking their money.

The burden of indirect taxation receives less attention than it should from poverty campaigners, perhaps because they share the ostensible aims of those who promote taxation on products such as alcohol, tobacco and petrol. Many would like to go further by introducing patently regressive policies such as minimum pricing of alcohol and taxes on sugary drinks. Two per cent of the disposable income of the poorest fifth of households is spent on alcohol taxes; 3.7 per cent is spent on tobacco taxes; 2.6 per cent is spent on motor fuel taxes. These figures do not include the cost of the product itself, only the tax. The high cost of petrol and diesel is particularly pernicious since it increases the price of other essential goods, including food, that are transported by road. It also raises the price of transport to and from work, thereby reducing the incentive to find employment or change jobs. Irrespective of whether the paternalistic objectives behind these taxes are compatible with a free society, the use of regressive taxation to achieve them is clearly not commensurate with a war on poverty. Sin taxes and green taxes should be reduced to the point at which they cover the cost of negative externalities (eg. excess healthcare costs) and relevant infrastructure (eg. road maintenance). VAT—which reduces the poor’s disposable income by more than ten per cent—should be reduced to the EU minimum of 15 per cent.

Energy

As noted in the latest PSE report, the rise in the number of people who are unable to adequately heat their homes is largely due to rising fuel costs. This price inflation is, in turn, due to government initiatives to subsidise inefficient “green” energy schemes. The gas and electricity bills of the average household are inflated by £185 per annum to pay for subsidies to renewable energy companies. This is expected to rise to £329 by the end of the decade. For the poorest income quintile, these sums represent 1.6 per cent and 2.9 per cent of disposable income respectively. They should be scrapped.

Income tax

Despite recent increases to the threshold at which income tax must be paid, it remains too high. Income tax should not be levied until workers have earned enough to pay for necessities. As we have seen, there is some dispute about what constitutes a “necessity”, but even a conservative interpretation of that term suggests that the current threshold of £9,440 is too low. The income of a full-time worker who earns the minimum wage is just over £12,000. The threshold should be set no lower than that. These are just some of the ways in which the government could tackle poverty by reducing the cost of living. Most are revenue neutral or cost-saving, but some—notably lowering the income tax threshold and reducing indirect taxes—will hit government finances, at least in the short term. This can be more than compensated by reforms in other areas, such as abolishing wasteful government departments, closing down quangos and legalising (and taxing) drugs. In Sharper Axes, Lower Taxes (2011), the Institute of Economic Affairs laid out an extensive blueprint that would, if followed, reduce government spending by £242 billion per annum and allow the nation to finally live within its means. Moreover, an approach that lowers the cost of living and dismantles the vast leviathan of the bureaucratic state will stimulate the kind of economic growth that provides employment and boosts wages.

Rather than giving with one hand and taking with the other, we should leave money in the pockets of those who have the greatest need for it and who are most likely to spend it. Generation after generation, economic growth has been the most reliable way of making the poor richer. It remains our best chance for progress and prosperity.

This article originally appeared on Conservative Home here.

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