For too long the government has been pushing up living costs through over-regulation and taxation. The poverty lobby has failed to tackle this basic cause of poverty in the UK, instead focusing on redistribution through the welfare system.
This new report from the IEA shows that by eliminating government interventions in areas such as planning, energy markets and childcare; living costs can be reduced dramatically, taxes could be cut, and the welfare state could be reformed to meaningfully address poverty in Britain. The research in Redefining the Poverty Debate: Why a War on Markets is No Substitute for a War on Poverty. estimates that these reforms could make some families up to £750 a month better off.
Poverty in Britain
- The UK currently spends a greater proportion of national income on transfers than many Germanic and Scandinavian countries. Also, the extent of redistribution through state welfare systems is as great as that in Sweden. Furthermore, we have now reached the position where at least 68 per cent of all households with children in Britain are in receipt of one form of major transfer payment other than universal child benefit.
- The UK is an outlier in terms of the failure of employment and family policy. Nearly 30 per cent of British children live in households with no adult in full-time work. Britain spends more on family benefits than virtually any other country in Europe. Furthermore, Britain is unique in Europe with its combination of high levels of single-parent families and high worklessness among single-parent families. The poverty lobby argues that there are high levels of poverty among those in work. While this is true for households where parents work part-time, poverty rates among families where one or two parents work full-time are low for single-parent families and negligible for two-parent families.
- These problems require a multi-pronged attack. The government’s much-trumpeted ‘universal credit’ will not address the underlying issues. Instead, employment protection legislation – which tends to entrench long-term unemployment – should be liberalised; a new benefits system should remove penalties against family formation; effective marginal tax rates should be significantly reduced; and specialist assistance to those with weak labour market attachment should be managed and financed at local level.
- Over the last 50 years, incomes before housing costs for the least well off have doubled whereas incomes after housing costs have risen by only 60 per cent because housing costs have risen so substantially. The evidence suggests that high housing costs are largely policy driven.
- The poverty lobby’s response to this problem is to propose the extending of housing benefit. It seems oblivious to the huge problems that this policy would cause. Increasing housing benefit would exacerbate the already very serious poverty traps as the benefit is withdrawn and increase housing demand (and therefore prices). It is a myth that our population density justifies the UK’s restrictive approach to land-use planning. Reforming the planning system should be the focus of policy.
- Liberalisation of the planning system could reduce housing costs by around 40 per cent. However, planning reform needs to run with the grain of the market so that development decisions reflect the value of environmental amenities. This would involve localisation of planning responsibilities and tax-collecting authority.
- Food prices in the UK are considerably higher than in comparable EU countries. Again, restrictions on building are an important aspect of this as they reduce the productivity of the retail sector and reduce competition. Further reductions in food prices could be achieved by liberalisation of the Common Agricultural Policy. A conservative estimate suggests that policy changes could bring about a reduction in food costs of about 25 per cent.
Childcare and energy
- Policy reforms in other sectors could also bring about considerable benefits for the least well off. Specifically, childcare costs are very high in the UK compared with other European countries despite high levels of government subsidy, and energy prices are raised by incoherent environmental policies. It would be perfectly feasible to pursue the government’s carbon reduction policies in ways that increased energy bills by much less.
Alcohol and tobacco
- The political elite campaign successfully for increases in taxes on alcohol and cigarettes without thinking about the effect on the least well off. Tobacco and alcohol taxes cost the least well off between 5% and 10% of their income. This is not because the poor smoke or drink especially heavily but because these fixed costs are a high proportion of the much smaller incomes of the poor. When it comes to raising low earners’ living standards, cutting sin taxes substantially should be seen as low-hanging fruit. For example, cutting alcohol and tobacco duty by half would be equivalent to increasing low earners’ income by around 5 per cent.
Commenting on the report, Prof. Philip Booth, Editorial Director at the Institute of Economic Affairs, said:
“These stark figures reveal just how hard life is for many families. If the government wants to tackle poverty it must address living costs. It is absurd that, because of regulation and taxes, politicians are pushing up the price of basic goods and then they are using the welfare system to help people to afford to live.
“The UK's welfare system has focused on providing ever-higher levels of income transfers to the less-well-off, financed by taxation. This has meant that work and family formation have been strongly penalised with disastrous results. We need a welfare system where families pay much lower levels of taxes but are not reliant on benefits. Many of the government’s reforms in this area – such as selectively removing child benefit from families based on the income of the highest earner in the household – are exacerbating rather than improving a totally dysfunctional system.”
Notes to editors
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This report, Redefining the Poverty Debate: Why a War on Markets is No Substitute for a War on Poverty, can be downloaded from www.iea.org.uk.
Kristian Niemietz, author of the report, joined the IEA in 2008 as Poverty Research Fellow. He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca. In 2007, he graduated as Diplom-Volkswirt (MSc in Economics), with a dissertation on the privatised pension system in Chile. During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). After graduating, he went on to work for the Berlin-based Institute for Free Enterprise (IUF). Kristian is currently a PhD student in Public Policy at King's College London, where he also teaches economics. He is a regular contributor to various journals in the UK, Germany and Switzerland.
This report follows on from a monograph released by the IEA in 2011 A New Understanding of Poverty:Poverty Measurement and Policy Implications. This can be downloaded here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.