New research shows that government attempts to tackle poverty are fundamentally flawed. The current focus on redistribution comes at a high fiscal cost and is trapping people in long-term dependency. These policies are driven by meaningless child poverty targets and are a major barrier to the government cutting the welfare bill.
The UK now spends £193 billion (13% of GDP) per year on welfare. Notably, 6.3m households are now in receipt of tax credits, costing the taxpayer £24bn annually (1.6% of GDP), while 4.6m households are in receipt of housing benefit, which costs the taxpayer £20bn annually (1.3% of GDP).
Nevertheless, despite pouring ever increasing amounts of money into the welfare budget, actual poverty is still not being addressed. The relative and absolute measures currently used to measure poverty are deeply flawed as they focus on income rather than issues such as the price of housing (more details on current poverty measures are included in the notes to editors).
A New Understanding of Poverty, an IEA report released today shows why current poverty measures and the redistributive policies built around them should be scrapped. They should be replaced by a radical new measure looking at poverty in terms of what people can afford to buy, rather than their level of income relative to others.
Poverty fighting strategies should then be implemented that are focused on reducing the price of those goods and services, removing obstacles to work and fostering economic growth, not around redistributing income.
Introduction of new poverty measure needed
Based on flawed poverty targets, governments have focused on the redistribution of income towards those at the lower end of the income distribution, but this approach leads to long-term dependency and ever-increasing fiscal demands. It also ignores the plight of many who struggle to afford life’s necessities, as it does nothing to help bring down the price of goods and services.
It is largely meaningless to look at someone’s income. Far more important is the price of the products and services they need to be able to buy to enjoy a decent standard of living and this will change over time.
Poverty should be measured by agreeing a basket of goods and services that are necessary to enjoy a decent standard of living, for example items such as housing, heating, adequate food etc. This basket should then be priced at a regional level and people whose expenditure (not income, which is an unreliable measure of living standards) is below this level classified as poor.
Poverty should be measured in a way that takes into account regional differences and the costs of goods and services becoming cheaper or more expensive over time. Making sure someone can afford basic goods is more meaningful than knowing how much money they have to spend compared with someone else or their nominal level of income.
A pro-poor strategy
· Reduce the price of essential goods and services through competition, entrepreneurship and creating more open markets through:
o abolishing agricultural protectionism within the EU;
o liberalising the land-use planning system and
o deregulating the utilities industry.
· Remove poverty traps, by:
o Replacing the hugely complex benefit system by a simple Negative Income Tax (NIT). This is a system in which, instead of paying income tax, low-earners would receive a tax transfer (so their tax liability would be negative) if their income falls below the tax-free allowance. As their income increases, their entitlement to NIT would gradually shrink, until eventually they would start paying ‘positive income tax’.