Causes for the Increase in Poverty and Income Inequality in the UK - Case Study Example

What has caused the observable increase in poverty and income inequality in the UK over recent decades? Table of Contents Introduction 3 Present scenario in UK 3 Income inequality in United Kingdom 3 Poverty in UK 7 Causes underlying Poverty and Inequality in UK 10 Long-term unemployment 10 UK Tax Structure 12 Low Adult Literacy Rates 13 Conclusion and Recommendations 13 References 15 Seymour, J. (2000) Poverty in plenty: a human development report for the UK. London: Earthscan Publications. 16 United Nations (May, 2010) ‘Labor in UK’ [Data]. Available at http://data.un.org/Data.aspx?q=unemployment&d=IFS&f=SeriesCode%3a67 [Accessed: October 13, 2010]. 16 United States Department of Agriculture (May, 2010) ‘Real per capita income (Historical)’ [Data] Available at http://www.ers.usda.gov/Data/Macroeconomics/ [Accessed: October 12, 2010]. 16 Zhang, W. (2005) Economic growth theory: capital, knowledge, and economic structures. Hampshire: Ashgate Publishing. 16 Introduction Poverty and income inequality are regarded as the most perturbing of all social malice prevalent throughout the globe as of date. In contrary to previous opinions about their incidence in the less developed nations, poverty and income inequality are rife even in highly-developed nations like the United Kingdom. Poverty is usually defined as a lack of resources necessary to meet subsistence needs, which might owe due to over-population, inefficient allocation of resources, lack of employment opportunities or due to certain inevitable external calamities. Brunts of these causes vary from one place to another depending upon the degree of vulnerability of the economy. Though none of these causes seem quite in line with the features of a high income nation, there are instances of recession during which all these elements penetrate within the economy. In fact, recent traits of poverty observed in the UK are cited as the consequences of an unending phase of recessions striking the economy in a cyclical pattern. On the other hand, income inequality could be treated as yet another upshot of all the aforementioned factors. Surprisingly, UK renowned to be one of the most powerful and financially affluent of all economies around the world, suffers from the twin most malevolent outcomes of recession, thus stimulating misgivings about a not-so-thriving fundamental. The present paper attempts to explore into the reasons which actually account for the recent ill-performance of the economy on these grounds, and the national authority’s inability to wipe out these evils. Present scenario in UK Income inequality in United Kingdom UK has had quite an impressive history of financial and social trends prior to the advent of the millennium. However, since the Labour Party took charge of the government, the traits came to a halt, with the average growth in UK income fringing at 0.099% in 2008 compared to 3.41% in 2000. In addition, the trend in the annual average growth in income has been recorded to be largely downward sloping beginning from 2000 till date. The decennial growth in income has also been found to be depreciating as well, from 2.5% in 1981-1990 to 2.13 in 1991-2000 to a meagre 0.92% in 2001-2010 (United States Department of Agriculture, 2010). Given the receding income level, an appreciating rate of income inequality could be predicted as well. A theoretical explanation underlying such anticipation could be inferred from the fundamentals of the Kuznet’s curve which depicts the association between the two through an inverse-U shaped curve. According to the concepts of the Kuznet’s curve, the association between level of per capita income (PCI) and the rate of income inequality in an economy depends upon the present financial status of the latter. A high-income earning nation is observed to be having an inverse relation between the two factors, while the association becomes a direct one for a poor nation (Zhang, 2005, p. 182). UK is ranked among the high-income earning nations of the world, with its latest (2009) IMF ranking at 22 and per capita income standing at US$ 35,257 (International Monetary Fund, 2010). Following obvious line of reasoning, the nation could be supposed as lying over the downward sloping region of the curve, indicating the existence of an inverse relationship between per capita level of income and rate of income inequality. Income inequality, ordinarily measured with the help of Lorenz curves and Gini coefficients, has been recorded to be quite high in the UK for some time. Latest records for the year 2005-2006 show almost 64% of the people residing in UK to earn an average salary that is considerably less than the national average. The diagram depicting a Lorenz curve on the basis of the latest income traits of UK show the median income to be lower than the mean per capita earnings, implying that a majority of the population earn the median income. Records show that out of a household population of 57 billion, only 1.8 million (close to 0.0032%) earned somewhere near £ 1,100 per week – the highest PCI of an English household (Brewer, Goodman, Muriel & Sibieta, 2007, p. 5). In addition, there also exist half a million population who earn between £ 0 and £ 10 a week, thus depicting the presence of a social discrimination; in fact, the lower margin at times are negative as well, since disposable household incomes being included here are only net and not gross accounts. A comparison of the trends in income distribution shows an increasing difference between the mean and median levels of income being earned by the nationals, since 1979. A significant difference existing between the two measures imply the preponderance of income inequality among the sample units, thus suggesting a similar phenomenon to loom over the economy of UK. In addition, there had been a significant fall in the growth of real income in the nation as suggested by the vertical bars in the adjoining diagram. An extension to the above conclusion could be projected through an assessment of change in the levels of income of the Britons over the last few years. Researches have revealed a consistent increase in the levels of real income being earned by different income groups in UK, over the last decade. However, a closer analysis reveals that the increase had actually been a continuous one only for the richer stratum, rather than the poorer lot who underwent depreciation in their real income between 2004-05 and 2005-06, evident enough of a burgeoning income disparity (Brewer, Goodman, Muriel & Sibieta, 2007, p. 8). Real income of the richer 20 percent Britons had been found to be almost 6.5 times what is being earned by the bottom 20 percent of the society, at the beginning of the decade (Seymour, 2000, p. 35). Gini coefficient calculated over a period of five years between 2001 and 2006 correspond the highest figure with the latest year. The adjoining diagram shows the trends in Gini coefficient to be consistently high over the period 1989-2007 for UK, with the average value lurking around 0.35. In fact, inequality in the distribution of income, as depicted by Gini coefficients indicates a rising trend of the same since late 1980s (Jones, 2008, p. 1). Hence, it could be concluded that there had indeed been an increasing inequality in the distribution of income over UK since the last two decades, prior to which the disparity had not been a substantial one between the richer and the poorer strata. Poverty in UK Poverty could almost be synonymised with inequality existing in per capita income, in economic terms. UK too is not spared from the same, with the official records for the year 1995-1996 showing 1 out of every 5 Britons to be dwelling below the line of poverty, in contrast to 1 out of every 10 in 1979 (Burgess & Propper, 1999, p. 260). As far as Human Poverty Index is concerned, the nation ranks 16 out of 18 OECD nations in terms of poverty, suggesting a huge incidence of the same (Seymour, 2000, p. 35). Devoid of an officially demarcated line of poverty, UK considers relative poverty as its formal indication about the prevalence of the same. Relative poverty identifies the number of people living below the mean level of income as the headcount of poor in the nation (Burgess & Propper, 1999, p. 260). According to this measure of relative poverty, the number of poor Britons rose from 12.1 million in 2004-2005 to 12.7 million in 2005-2006. Even if poverty is assumed to fall with a growth in GDP, which UK experiences with every passing year, economic features of UK contradict the fact where a positive correlation could be observed between the two factors between 1961 and 1994. Trends in the number of people living in poverty in the UK have been found to be on a rise since 1979 when the rate having reached its peak in the year 1992 when almost 37% of the people in the nation were found to be earning lower than 70% of the median income (Source: Brewer, Goodman, Muriel & Sibieta, 2007, p. 19). Though the traits of poverty had been found to follow a declining trend henceforth, it did not manage to recede significantly over the years. In addition to relative poverty, there are other measures as well, which show either a consistent rise or a constant prevalence of poverty in UK. The adjoining table briefs about the extent of poverty in UK as calculated by a variety of statistics, which make up for the single disadvantage of calculating the degree of poverty through head count ratio; headcount of poverty does briefs only about the number of poor rather than indicating towards the gap in their income as well. Though the table does not depict the latest available data, an uninterrupted trend could be anticipated from the discussion in the previous paragraph. Despite a high growth in GDP, the nation suffers from a considerable amount of poverty thus arousing curiosities about the potential causes behind the same. Causes underlying Poverty and Inequality in UK Poverty and inequality are two sides of the same coin which is the reason why both of them are caused by similar factors. These factors could largely be classified under the heading of recession which happens to be the most singular reason behind economic discrepancies. Recession leads to some obvious vices prevalent in a society, viz., unemployment and fall in the level of per capita income, both of which are reasons enough to invite poverty and income inequality. In fact, the decades which have been depicted as the ones submerged under recession are also found to be the ones when poverty and income inequality had been at their worst in UK. The following diagram clearly shows the middle-most years to be featured by the deepest depression, which coincides with the prevalence of the aforementioned social vices in the economy. However, efforts will be made to delineate the specific reasons which have led UK towards a seemingly unending phase of sufferance. Long-term unemployment One of the most influential as well as notorious of all reasons underlying poverty and income inequality in UK is the presence of long-term unemployment. UK is a nation which went through long durations of recession throughout its history and thus, the plights which come along with it (Seymour, 2000, p. 45). The graph depicted alongside display the fluctuations in the employment index measured for UK between 1970 and 2009. The figure clearly suggests a cyclical phase of employment prospects faced by Britons in UK between the given time-span. Sharp downfalls during 1982, 1993 and 2009 suggest extensive unemployment throughout the economy (United Nations Statistics Division, 2010). Hence, the claims made by observers regarding the preponderance of a long termed unemployment could not be slighted. One of the worst impacts that unemployment can bestow is a reduction in the real wages, which hamper the lower strata of the society more than the capitalist employers. Hence, there is a rising disparity in income as could be evaluated from the graph depicted alongside that shows a modest rise in income for the lower 50% of the British society. However, one enlightening point is that the discrepancy seems to have reduced between 1998 and 2005 than what it had been between 1992 and 1997, as the difference seems to be receding for the higher income group. But, the recent recession transformed the scenario substantially with many youths being left jobless (Fitzner, 2006, p. 13). If the above two figures are to be corresponded with one another, it would reveal that the nation underwent more cumbersome phases of unemployment prior to 1996, compared to post-1996. Hence, it might be cited that unemployment prevailing in UK produces large-scale inequality in the distribution of income. So, it could well be anticipated that the global financial recession that hit every other economy around the world, produced an appalling impact over the income distribution in UK. On the other hand, researches have also revealed the presence of a complex but positive correlation between rate of poverty and unemployment in UK. The diagram alongside depicts poverty to be increasing vigorously post-1982, on account of a hike in the rate of unemployment in the nation. Given the existence of such an association between the two elements, the present situation in UK in an era of economy-wide unemployment, could be anticipated clearly. Moreover, there had been a 1.1% increase in poverty index in UK between 1996-97 and 2005-06 which also could be regarded as a phase of joblessness throughout the nation (Brewer, Goodman, Muriel & Sibieta, 2007, p. 28). UK Tax Structure Tax in UK is mainly imposed on income generated out of employment or self-employment, jobseeker’s allowance, pensions, property, interest payments and dividends earned from equity shares (Adam & Browne, 2009, p. 5). The tax structure prevailing in UK also has been claimed by many researchers to have an impending impact upon the appreciating rates of poverty and income inequality. There had been amendments in income tax laws during the 1980s which made room for many loopholes, allowing the wealthy to defer tax by means of showing a poor income. Such an attitude posed by many Britons along with ignorance showed on part of the UK legislature to correct the evil, created a significant gap in the distribution of income. The outcome was that the wealthier had an incentive to earn more and more since they already had invented methods of tax evasion. On the other hand, the poorer section of the population, who generally are afraid to employ such illicit means, lost any interest to earn more and more (Lenz, 2003, p. 5). The national administration sets a target that it determines to acquire as tax revenues; the latest target for the fiscal year 2008-09 had been ₤ 156.7 billion (Adam & Browne, 2009, p. 5). Though the government uses these revenues to accomplish public works, most of the people lack such an expansive view. The only fact that people view in such acts is that a chunk out of their incomes are slashed out by the Treasury; this very factor hampers their intentions of earning more. Lack of incentives to yield a better income naturally leads them to a life of depravity and destitution. Low Adult Literacy Rates United Kingdom suffers from a high rate of illiteracy, which is also found to be the lowest among almost all of its OECD co-members. UK ranks 17 out of 18 OECD nations in terms of literacy with Ireland as its only successor. Most of the Britons have been surveyed to be incapable of reading instructions on a medicine bottle. Net enrolment in schools in UK is lower than 92%, which is much lower than most of the European nations. Government incurs a meagre 11.6% out of its total expenditure to improve the quality of education in UK; this figure constitutes of a sheer 5.3% of the nation’s Gross National Product (GNP) (Seymour, 2000, p. 35). A low rate of literacy is bound to have long-lasting blots on a nation’s economic image. With a majority of the nationals incapable of bagging better job opportunities, it gets tougher for them to support their subsistence needs and thus, disparity in the distribution of income rises. Conclusion and Recommendations UK being one of the most powerful nations of the world is expected to be beaming high on grounds of equality in the distribution of income as well as low rates of poverty. However, in contrast to common anticipations, the nation is found to be plummeting quite low in them. The primary reasons behind such characteristics are the national government’s inability to take care of an unending phase of unemployment, poor rates of literacy and an unattractive tax structure. Though improving the rate of literacy and tax structure of the nation are solely in the hands of the government, it is not so with the rate of unemployment. Unemployment had remained as a pestering problem for the national government ever since the era of globalisation which has left the nation vulnerable towards external repercussions. But, even though correcting a world wide economic shock is out of control of one UK government, it can well implement measures to dilute their effects. Thus, the national government must make its tax structure more lenient, so as to patronise the poorer section of the population. Though unemployment is inversely related to inflation in a nation, the national administration must attempt to ration commodities required to meet the bare minimum. The analysis conducted above reveals that the economy of UK indeed has quite loose fundamentals which make it highly susceptible to social evils. Though the nation maintains a high rate of exchange, which is indicative of a robust economy, an innate study exposes a vivid description of the actual scenario underlying UK. Hence, it could be expected that the national government poses serious follies in tackling its economic policies, which must be taken care of immediately. Unless an instant action is taken, the nation is bound to suffer serious economic implications in near future. Thus, a relevant study in this segment could be an evaluation of the policy revisions necessary to save the country’s future. References Adam, S. & Browne, J. (April, 2009) ‘A survey of the UK tax system’, The Institute for Fiscal Studies, 2009 [PDF] Available at http://www.ifs.org.uk/bns/bn09.pdf [Accessed: October 13, 2010]. Brewer, M., Goodman, A., Muriel, A. & Sibieta, L. (2007) ‘Poverty and inequality in the UK: 2007’, Institute for Fiscal Studies, 2007 [PDF] Available at http://www.ifs.org.uk/bns/bn73.pdf [Accessed: October 12, 2010]. Burgess, S. & Propper, C. (1999) “Poverty in Britain” in P Gregg and J Wadsworth (eds) The State of Working Britain. Manchester: UP. Fitzner, G. (2006) ‘How have employees fared? Recent UK trends’, Department of Trade and Industry, Employment Relations Research Series No. 56 [PDF] Available at http://www.berr.gov.uk/files/file27472.pdf [Accessed: October 13, 2010]. Lenz, G. (2003) ‘The Policy-Related Causes and Consequences of Income Inequality’ [PDF] Available at http://www.russellsage.org/programs/main/inequality/050516.755142/ [Accessed: October 13, 2010]. National Institute of Economic and Social Research (September, 2009). ‘Estimates of monthly GDP: First three month rise in GDP since May, 2008’ [PDF] Available at http://www.niesr.ac.uk/pdf/110909_94903.pdf [Accessed: October 12, 2010]. Office for National Statistics, UK (2010) ‘Poverty in UK’ [Data] Available at http://www.statistics.gov.uk/CCI/SearchRes.asp?term=poverty&x=0&y=0 [Accessed: October 12, 2010]. Osberg, L. (2002) ‘Trends in Poverty: The UK in International Perspective - How Rates Mislead and Intensity Matters’, ISER Working Papers, Number 2002-10 [PDF] Available at http://www.iser.essex.ac.uk/publications/working-papers/iser/2002-10.pdf [Accessed: October 12, 2010]. Seymour, J. (2000) Poverty in plenty: a human development report for the UK. London: Earthscan Publications. United Nations (May, 2010) ‘Labor in UK’ [Data]. Available at http://data.un.org/Data.aspx?q=unemployment&d=IFS&f=SeriesCode%3a67 [Accessed: October 13, 2010]. United States Department of Agriculture (May, 2010) ‘Real per capita income (Historical)’ [Data] Available at http://www.ers.usda.gov/Data/Macroeconomics/ [Accessed: October 12, 2010]. Zhang, W. (2005) Economic growth theory: capital, knowledge, and economic structures. Hampshire: Ashgate Publishing. Read More