Contribution of Welfare State to Poverty Reduction - Coursework Example

Economics and Government Contribution of welfare to poverty reduction Introduction According to the definition in the Collins English Dictionary (2000), a welfare state has been defined as “A system in which the government undertakes the chief responsibility of providing for the social and economic security of its population, usually through unemployment insurance, old age pensions and other social security measures” (Cousins, 2005). A close analysis of this definition shows that there are three important agendas. The first one relates to responsibility of the government in taking care of the social and economic problems of the people. The second one relates to methods in which this goal is to be achieved; according to the definition, this goal is to be achieved through unemployment insurance, pensions and other social measures. The third one relates to the fact that any government which adopts these measures can be argued to be using the “welfare approach” to deal with challenges of the state. It has been observed that among various countries of the European Union, United Kingdom had adopted highest number of reforms in the last two decades in an attempt to reduce the prevailing level of poverty. Considering the history of welfare state in U.K., it can be said that welfare state follows a liberal model (Atkinson, 1995). The main characteristics of the programs of the welfare state include low government expenditure and rise of means-tested welfare programs in U.K. The purpose of this paper is to discuss effectiveness of the welfare state programs of the government in lowering the level of poverty. The essay will elaborate on various reforms that have been introduced by the U.K. government in the latest decade and the empirical evidence of poverty reduction through such programs. Finally, this paper encompasses the current reforms in this sector. Welfare State in UK The general trend that has been witnessed in various countries in the world suggests that the level of inequality among countries is directly proportional to the level of poverty. While on the other hand, countries that are characterized by welfare state have lower incidence of poverty and inequality. Different countries had adopted different variations of the welfare state concept. It has been observed that the major share of public spending in U.K. from time immemorial can be attributed to three major sectors of the economy; education, health and pension (Pawson and Tilley, 1997). In fact, it was observed that U.K. has the highest public spending in these three sectors compared to other countries of the European Union. The share of expenditure of the government in the health sector has fallen in last few years of the new millennium compared to the early 2000; yet, it remains on the top in spending list of the government (Keohane, 2001). The principle factor that had driven the concept of welfare state in U.K. from the post-war period was the fact that State is the most important factor that can reduce the level of poverty (Beherendt, 2000). This rationale strongly ignores effectiveness of the labour market and other factors, which can be effective as well in alleviation of poverty. The modern welfare state is based on development of the eight main factors, which have propelled their progress in the due course of time. They are (Andersen, 2002): Full employment Insurance based benefits Non-contributionary universal benefits Means tested benefits Provision of health and education benefits Provision of subsidized or free goods Care and preventative services Social housing The beginning of the modern welfare state in present times can be traced back to the post-war period. During this time, the government had proactively taken measures to establish a welfare state in U.K. From 1942-1979, success of the Labour Government was formidable. Though overall performance of the economy was better under welfare programs introduced by the government, they were not free from criticism. It was argued that the role of trade unions was restrained and industrial relations were becoming dysfunctional (Le Grand, 1997). The government was of the view that the low productivity problem of U.K. could only be resolved through weakening of the trade union. As far as impacts on poverty level are concerned, it was found that the level of poverty in U.K. had fallen considerably from 1974 to 1977. This fall in the level of poverty was attributed to income policy of the government, which had positively impacted earnings of the lowest income earners of the country. The policies of the government regarding disabled people and employment generation were also helpful in improving the level of poverty (Cebulla and Walker, n.d.). However, this trend was not permanent and right after 1978, it had reversed itself. After 1978, living standards of the middle-class were put under huge pressure, which had garnered adverse political view against the government (Atkinson, 1999). The opposition had argued that over-generous policies of the government were largely responsible for the lack of enterprising nature among the public and created too high dependency on the state. The overall level of poverty during this period reduced due to policies undertaken by the government like, investment in housing, spending more on education and introduction of social security nets (Daly, 2000). The period following this was marked with dramatic changes in the welfare policy of the new government. The government was of the belief that the level of public spending (essence of the welfare state) was too high and immediately took measures to lower the same. A few external factors were also responsible for the paradigm shift in attitude of the government, namely the oil shocks and financial crisis of the 70s (Hutton, 1995). The austerity measures of the government were, however, unsuccessful in reducing the level of poverty during this period and it was observed that rising level of inequality in income had accelerated. The period of 80s had casted a long shadow on poverty alleviation scheme of the government (Hills, 1998). The rise in the level of poverty was strongly attributed to reduction in public expenditure of the government. It can be argued that during this period, structure of the overall welfare state remained unaltered; but, there was a marked diminution in the level of spending incurred by the government and higher reliance on the market forces. The attempt of the government on labour market deregulation was mainly responsible for rise in incidence of poverty. Although different countries had different versions of the welfare state, a cross-country comparison of UK with other countries had revealed that level of poverty abolition was still the weakest in UK, in comparison to other countries (Caminada and Goudswaard, 2009). The latest phase of the study in this paper considers the time period from 1997-2010. This period was once again marked with rapid rises in level of public spending of the government so as to rectify the situation in the previous decade. During this period, basic responsibility of the welfare state was to reduce child poverty and raise the level of equality in income through introduction of national minimum wage and a new structure of taxes imposed by the government (Joyce, et al., 2010). The programs of the government were geared in the direction of higher investment in fields of education and health. The first and foremost policy of the Labour Government was to increase public spending, which was curtailed by the previous government. Welfare state nature of the government expanded its functions towards concepts of social exclusion and child poverty. As far as impact on poverty alleviation was concerned, it was observed that the level of poverty had reduced from 1999 to 2004. Nevertheless, policies of the government had failed to address the problem of social inequality (Huber and Stephens, 2010). Evaluation of hikes in the public spending and other measures introduced in this period is difficult as different researchers have dissimilar opinions regarding effectiveness of the policy. Based on the data that has been collected from various sources like, government publications and journal articles, certain deductions are made about impact of the policies of the U.K. government in the past decade. National Minimum Wage (NMW) This was one of the most important tools that were used by the government to reduce the level of poverty. The impact of national minimum wage on poverty mitigation is highly contested by various scholars. Research conducted in this area has revealed that the poor in general have more or less benefitted from this scheme. The study conducted by Dickens and Manning (2003) had confirmed that national minimum wage has marginally brought down the level of poverty prevailing in U.K. and falsified the fears of rising unemployment due to increasing rates of the NMW. The system of progressive taxation followed in U.K. was expected to lower the level of inequality (Andress and Lohmann, 2008). However, it has been observed that this scheme had particularly benefitted people who were in the second quartile of the income distribution. As a result of this scheme, percentage of the poor households engaged in work has improved. Income inequality Figure 1: Level of Inequality (Source: Palmer, 2014) The above figure reflects the level of income inequality in U.K. It can be clearly seen from the graph that level of income inequality has consistently been increasing in United Kingdom, over last thirty years. The slope of the curve is steeper during the decade of 80s and this could be directly related to spending cuts of the government. This trend has continued even in the latest decade though intensity of the impact has lessened, compared to previous decade. According to a report published in the Financial Times in 2008, the richest of the lot in U.K. had grown richer at a rate that is twice than that of the previous government. The following graph shows the following graph shows the level of top 10% of income of the population in U.K. Figure 2: Income trend of top 10% of wage earners (Source: Cribb, Joyce and Phillip, 2012) The trend in this graph shows that share of income of the top 10% of the population has continued to rise since 1978, which in turn implies rise of inequality in a nation. This represents an unequal distribution of the income. Child Poverty The policies of the government have been quite successful in lowering the level of child poverty in U.K. The following graph shows the level of child poverty alleviation in U.K., over the last few years. Figure 3: Level of child poverty (Source: Crown Copyright, 2012) It can be clearly seen from the graph that the target of reducing child poverty is consistently following a downward trend over the last decade. Scholars have criticized the redistributive policy of the government by mentioning that the policy of redistribution can only be partially successful in easing the level of poverty. When the government had slackened the use of credits obtained from tax, it was witnessed that levels of poverty had begun to rise (Palmer, 2014). Pensioner poverty The impact of policies of the welfare state on poverty reduction was quite robust, showing that pensioner poverty had fallen considerably. The impact of pension programs undertaken by the U.K. government was evident throughout the 90s as the level of pensioner poverty had dropped consistently (Mills, 2009.). Even though the overall level of poverty was seen to fall, yet it was observed that percentage of pensioners with very low income (lesser than 40% of the median income) remained almost unaltered. The pensioner households in the higher income group had mostly witnessed a rise in the level of their incomes, which was mostly attributable to the fall in rates of poverty (Cribb, Joyce and Phillip, 2012). The following graph shows the level of pensioner poverty as a percentage of the median over various time periods. Figure 4: Pensioner poverty according to median (Source: Cribb, Joyce and Phillip, 2012) In the latest decade, the renewed vigour of Labour Government to establish welfare state has yielded certain positive results for U.K. The redistributive policies followed by the government through child and family benefits and progressive taxation have brought down poverty levels. The poverty reduction strategy of the government in the present decade has mostly concentrated on transfers through benefit system. As a result of these schemes, the level of poverty in United Kingdom had fallen in the latest decade and by 2010, level of poverty was comparable to that in 1980s. Nonetheless, critics are of the opinion that results obtained would have been better if the labour market was engaged in the process of poverty eradication (JRF, 2014). Reforms for future development The present government in UK has gone to great lengths for reforming policies of the welfare state that had been in practice for the last fifty years. The rationale behind this change is that the government considers the system to be very complex and considerably fraudulent and that they focus on benefit provision, rather than employment provision (Garrett and Lange, 1991). In this regard, Welfare Reform Act of 2012 was introduced, which incorporated various changes in the existing policies. The main aim of this act is to reduce the welfare costs of U.K. in the next five years by 18 billion pounds. The key points of the recent reforms to better the present condition include: Introduction of Universal Credit: With exception of Jobseekers Allowance, Disability Living Allowance and Employment and Support Allowance, all other welfare benefits have been clubbed in the Universal Credit program so as to enhance efficiency of the system. The rationale behind doing this is to reduce administrative costs and frauds that have found way into the system. In order to make the process more transparent, income of the individuals has been considered as one of the major determinants in extent of provision of universal credit (Crown Copyright, 2014). Housing Benefits: The separate provision of the housing benefits has been scrapped and is included as a part of the Universal benefit scheme. The major change to raise efficiency of this program has been introduction of a criterion on size, termed as “bedroom tax”, in the rented social sector. This was introduced to impose a penalty on people under-occupying their property (McGrew, 2010). The Work Program: The government is giving maximum stress on this area as their main objective in the present years has been to generate employment opportunities for the public. In this regard, it can be said that Jobcentre Plus will continue to provide employment support; but, individuals will be directed to a prime contractor in the work program when they cross a particular point in out of work benefits. The government expects that introduction of this measure will help those who have been unemployed for longer time periods and are under grim situation (Muller, 2013). With changes in the above-mentioned policies, the government is looking forward to improve its goal of poverty alleviation in U.K. It is too early to comment on effectiveness of these changes that are introduced in the system. Conclusion This essay had critically discussed effectiveness of U.K. as a welfare state in alleviating poverty and reducing inequality in the nation. To do this, impact of the policies on the post-war period has been studied. During the first phase that continued from 1942-79, it was observed that the level of poverty had fallen considerably due to a host of new policies introduced by the government in form of health and education, social security and full employment. During this phase, policies undertaken by the government had been highly debated as the focus was on providing high benefits based on insurance; this led towards concerns over affordability. The next phase had continued from 1979-1997, which was marked by a rapid fall in the share of public spending and the concept of welfare state had taken a backseat. The government of Margaret Thatcher had illustrated spending cuts and this largely manifested itself in rise in incidence of poverty. Dismantling of the trade unions and abolition of wages council also contributed in rise of poverty. In the latest decade, the government has proactively promoted the welfare programs through increases in transfers like, family and child benefits. These efforts are paying off as poverty level is shrinking. However, levels of inequality had failed to show any fall. The last section of the essay points out to recent changes that have been incorporated by the government to improve the situation. It is too early to understand the impact of welfare reforms of 2012. Reference List Andersen, G. E., 2002. Why we need a new welfare state. Oxford: Oxford University Press. Andress, H. 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Muller, W., 2013. Does an unconditional basic income provide higher effectiveness and efficiency? An Analysis of the Social Security Systems of Germany, Sweden and the United Kingdom. Hamburg: Diplomica Verlag. Palmer, G., 2014. Income inequalities. [pdf] The Poverty Site. Available at: [Accessed 21 March 2014]. Pawson, R. and Tilley, M., 1997. Realsistic evaluation. London: Sage. Read More