Poverty Reform in the UK - Essay Example

Poverty Relief 1.0 Chapter 1 1.1 Introduction In UK and other EU countries, more recent “smart” transfers include stipends for poor children conditional on school attendance (e.g., Skoufias, 2001)1. The British Government has been trying to help the poor in many different ways. Traditional poverty alleviation programs include inter alia consumption subsidies (for example, on food, public utilities or transportation) and low-wage public works or other forms of relief for the unemployed. These transfers are said to be smart because, beyond their immediate impact on poverty, they are supposed to help achieve long-term poverty reduction through a positive impact on human capital (by the conditionality component). Even programs, which are not explicitly designed to alleviate poverty, may have significant impacts on the poor, and should therefore be taken into account in an overall poverty reduction strategy. To estimate the impact of such programs on poverty and to suggest reforms to them, analysts often either resort to a comparison of some summary poverty measures with and without the programs, or analyze the programs' “targeting errors” and how they vary with program reforms. A weakness of both approaches is their sensitivity to the choice of (necessarily somewhat) arbitrary poverty lines and of peculiar value judgements regarding the social welfare objectives of the government—for instance, that the government cares equally for all the poor, regardless of how far from the poverty line they may be. For instance, the analysis of targeting errors focuses typically on sharp 0/1 indicators, and arguably tends to differentiate too drastically between the poor and the non poor, in particular between those in similar circumstances but who just happen to lie on opposite sides of some poverty line. The working tax benefit is available to anybody aged 25 or over who works sixteen hours a week or more. There is a basic element and a range of additional elements for single parents and couples, for people who work for thirty hours a week or more, and for people with a severe disability; there is also an element to contribute towards the costs of child care. A person earning below a threshold level of income (5,060 per year in 2003/4) receives the full benefit. For earnings above that, benefit is withdrawn at a rate of 37 pence per pound of earnings. Benefit is normally awarded on an annual basis; thus an increase in earnings, unless large, will not lead to a reduction in benefit until a person is reassessed. Other difficulties in the assessment of program changes come from their differential effects on average deadweight losses. Such differential effects can occur when the programs are funded from different revenue sources: differences in the cost of public funds that arise from differences in those revenue sources must then be taken into account (Slemrod and Yitzhaki, 1996)2. Differences in the effects on average deadweight losses can also arise from the differential behavioural changes that different program reforms can generate among program beneficiaries. These differential behavioural changes can in general also affect the direct disaggregated welfare impact of program reforms. None of these categories can readily be dealt with by private insurance; and none except the first can be helped by raising national-insurance benefits or by extending their coverage. Much poverty is associated with children and/or high housing costs, neither of which is an insurable risk. Two conclusions emerge: private insurance is not possible in most of these cases; nor is extending national insurance a complete answer. The state could, of course, do nothing, and let people face the risk of starvation, but, even ignoring equity arguments, this has a range of efficiency costs, including social unrest/ crime among those facing starvation; the death by starvation of dependants including children (the future labour force); and the fact that malnutrition causes poor health, thereby raising health-care costs and lowering time capacity of adults to work and of children to absorb education. 2.0 Chapter 2 2.1: Discussion Income-Tested Benefits There are several tools and techniques being adopted by the UK government in order to combat poverty. Targeting is one of them. Targeting is concerned with both horizontal and vertical efficiency. Horizontal efficiency refers to the eligibility rules for income support are broad, reflecting its status as a benefit of last resort. However, a sizeable proportion of eligible recipients do not receive benefit—that is, take-up is incomplete. On the supply side, some eligible applicants might not be awarded benefit: an official may impose a harsh interpretation on regulations or be unaware of certain entitlements. Such difficulties cannot entirely be avoided, but there is little evidence of systematic discrimination in the enforcement of rules (e.g. by race) in the award of benefit. those without national-insurance cover because they have exhausted their entitlement or because they never had any (e.g. a school leaver, or a recently divorced woman with no recent contributions). Finally, there are those whose reason for poverty is not covered by national insurance—for example, the parent of a large family in low-paid work, who has to rely on working tax credit, child tax credit, and child benefit. Take-up can be incomplete also for demand-side reasons, in that an unknown number of eligible people do not apply for benefit. Three sets of theories seek to explain why: ignorance, inconvenience, and stigma. It is not surprising that many people are ignorant of their entitlement tinder the benefit system, notwithstanding considerable efforts to make information more available and easier to understand. According to Coleman (2001)3, “What I mean by poverty relief in the raising of children is the norms, the social networks and the relationships between adults and children that are of value for the child growing up. Poverty alleviation techniques exists within the economy, but also outside the UK, in the EU, etc. in the interest, even the intrusiveness, of one adult in the activities of someone else’s child.” Education, for Coleman, is the strongest expression of the resources generated by the relationships, values, and trust that constitute poverty relief. These resources include obligations and expectations, information channels, norms and effective sanctions that constrain or encourage certain types of behaviour in children. Tax credits to cover the costs of childcare have a particular importance. Because they offset (wholly or in part) one of the major costs of moving into work, they unambiguously improve both poverty relief and participation. Some analysts see the concept of poverty relief as underpinned by a modified version of rational action theory, although they vary in the extent to which they perceive this as problematic. Here, people are conceived as social entrepreneurs, consciously investing in relationships of trust and the creation of norms in anticipation of reciprocity and tangible benefits (Ostrom & Ahn, 2003)4. Through such relationships assets can be transformed and traded, livelihoods strategically constructed (Ellis, 2000)5. Drawing heavily on new institutional economics, great faith is placed in institutions as the mechanisms for uncovering latent shared values, for sanctioning antisocial behaviour and for channelling individual action in collectively desirable directions. Child tax credit can be thought of as an income-tested addition to child benefit (discussed below); saying the same thing in a different way, all families get some support to reflect the costs of bringing up children, but poor families receive additional, income-tested support. The analysis of tax credits for families with children directly parallels previous discussion. Working Tax Credit Vertical efficiency and horizontal efficiency are both important in order to maximize efficiency and welfare for the poor. According to Maskell (2000)6, poverty relief also facilitates the ‘low-tech’ learning and innovation that takes place when firms in traditional industries are innovative in how they handle and develop resource management, logistics, production, organization, marketing, sales, distribution, industrial relations, and other tasks and activities Does income support—the benefit of last resort—offer benefits high enough to relieve poverty? With an absolute definition of poverty the answer is generally yes: nobody starves; and the level of income support in 2003/4 was over twice the real value of its 1948 predecessor. Concerns remain, however—about hypothermia among the elderly, about rising numbers of people sleeping on the streets, and about rising numbers of people suffering multiple deprivations. The problem was serious enough for the government to introduce a Social Exclusion Unit in the late 1990s, chaired by the Prime Minister, to coordinate policy across departments. The social fund, which makes single payments to cover specific emergencies, has been criticized (Howard 2003): it works within a fixed budget; most of the payments are loans; and most awards involve local discretion. Though the last aspect is, up to a point, inevitable in a scheme designed to meet exceptional needs, the former two are not. As a result, it is argued, the social fund fails in a significant number of cases to meet the poverty-relief objective, in that take-up is well below 100 per cent. Family Support As discussed above, income support has a 100 per cent rate of benefit withdrawal. As a result, an increase in earnings, being wholly offset by a decline in benefits, has no effect on a family’s living standards and, as a result, constitutes a major labour-supply disincentive. The same problem arises for people who do not receive income support, but a variety of other benefits. Thus someone earning an extra pound could face income tax, national- insurance contributions, a loss of working tax credit/child tax credit and a loss of housing benefit, the cumulative total facing the person with a very high implicit tax rate. Having children is highly correlated with poverty and is thus a good indicator. This is no accident. Parents are typically in the younger segments of the population, and thus at a relatively low part of their lifetime earnings trajectory; and the arrival of children frequently reduces second-earner income. For both reasons, family income tends to be low precisely at the time when the demands on that income are high. For life-cycle reasons, families with children systematically have low income relative to needs, an argument borne out by the empirical evidence in the literature studied above. It is, of course, possible to point to specific high-income families with children; that merely makes the point that child benefit is not perfectly targeted. Pointing to exceptions is analogous to arguing that heavy smokers who live into their nineties disprove the ill-health effects of smoking. Poverty and Unemployment Traps A separate but equally important issue is whether benefits are high enough not just to relieve immediate poverty but to prevent it in the longer term (cf. preventive medicine). Again, there is a question mark. Spending cuts in the mid-1990s affected relief to people caring for Alzheimer sufferers. Such benefits, by keeping families together, have obvious social benefits; they are also much cheaper than paying for residential care. Benefits for lone parents are similarly cost effective if, by keeping families together, they keep young people out of (very costly) jail. Empirical Issues and Evidence How many people face the poverty trap? It is not enough to analyse the case of a ‘typical’ family. To assess the impact of the poverty trap we also need to know how many families face such rates—-that is, how many families of different sizes and types there are at each income level; which benefits they actually receive (the take-up question); and which margin we are discussing, that for the primary or a secondary earner. 3.0 Chapter 3 3.1: Conclusion The economy of UK is unlikely to sustain human needs without some analogue of collective provision for employment, welfare, and public services to protect the populations from clientism, mafia welfare, and neo-liberal priorities. Structural adjustment and reformist poverty reduction have not delivered economic or social justice to the majority of the peoples of UK. This paper discussed the various differences in poverty relief stocks may be explained by differences in governments’ commitment to the facilitation of poverty relief building and by the possibility of multiple equilibrium that create poverty traps in poverty relief formation. The paper also demonstrated that the failure of private economic agents to internalize the poverty alleviation and the poverty relief creation might be addressed by a tax and subsidy scheme. A complete analysis, however, must take account of the complexity of the benefit formulas. The more benefits are introduced, the greater the variation in implicit tax rates and the greater the complexities when different benefits interact. The structure of implicit tax rates facing any particular family will depend on both its size and composition, and on the precise mix of benefits it receives. 4.0 Endnotes 1. Skoufias, 2001 E. Skoufias, PROGRESA and its impact on the human capital and welfare of households in rural Mexico: a synthesis of the results of an evaluation by IFPRI, International Food Policy Research Institute, Bristol (2001). 2. Slemrod and Yitzhaki, 1996 J. Slemrod and S. Yitzhaki, The cost of taxation and the marginal efficiency cost of fund, International Monetary Fund Staff Papers 43 (1996), pp. 172–198. 3. Coleman, 2001 J. Coleman, Equality and Achievement in Education, Westview Press, Boulder, CO (2001). 4. Ostrom and Ahn, 2003 In: E. Ostrom and T.K. Ahn, Editors, Foundations of poverty relief, Edward Elgar, Cheltenham (2003). 5. Ellis, 2000 F. Ellis, Rural livelihoods and diversity in developing countries, Oxford University Press, Oxford (2000). 6. Maskell, 2000 P. Maskell, Poverty relief, innovation and competitiveness. In: S. Baron, J. Field and T. Schuller, Editors, Poverty relief: Critical Perspectives, Oxford University Press, London (2000), pp. 111–123. Read More