5th September 2012
The credit crunch and the subsequent financial crisis were always going to have unpleasant side effects. This has been reinforced by the fact that the problems are not going away and that the UK has had negative economic growth in the last three quarters. We have not recovered to the pre-credit crunch level of output and are currently around 4% below it.
A Consequence of this: poverty?
Today in a rather chilling development the Save the Children Fund has launched an appeal for the UK and some of the details are chilling and heartrending. Added to this is the issue of an appeal for the UK rather than for abroad….
"There are an estimated 3.5 million children living in poverty in the UK and this figure is expected to soar by 400,000 in the coming years.A lack of jobs, stagnating wages,increased living costs and spending cuts are placing enormous pressure on families up and down the UK."
The section on "stagnating wages (and) increased living costs does resonate with two of the themes of this blog. Firstly we have seen real wages fall across the UK economy and in spite of so many reports across the media of a recovery they are still falling at an annual rate of 1% if you use the official inflation measure. It does not take a great leap of imagination to fear that wages are particularly under pressure at the lower end of the spectrum. Also the way that inflation has been allowed to rise above target always was likely to penalise the poor the most. By the same logic above they are the least likely to be able to get compensating wage rises.
The two factors above have always been part of the reason why I take a strong stance on inflation. Not every economist shares the view that it disproportinately affects the poor as for example Paul Krugman has argued that he feels that it hurts the rich. Some evidence for my case is presented in today's Save the Children report:
"Things like rising living costs are most damaging to those living in poverty, with the poorest 10% of households spending a much greater proportion of their income on items such as food and utility bills (key drivers of inflation in recent years)."
In my view it is quite clear that a feature of recent inflation in the UK it that it has been regressive and has hurt the poor. If you like that is the flipside in some ways of the Bank of England report that I reviewed on the 24th of August that concluded that Quantitative Easing has helped the rich.
What is poverty?
This is not as simple as you might think. It used to be considered on an absolute basis which defined it by certain criteria. For example three square meals a day,somewhere warm to go, clothes to wear and so on. It was against this that the squalor of the 1930s for example was measured as people living rough or going hungry were clearly living in poverty.
However in more modern times the concept of relative poverty has replaced the absolute one. A way of defining this new measure has been expressed by Professor Peter Townsend:
"resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities"
As you can see this is very different from the absolute definition and has led to the modern definition used in the UK which is something of a European standard:
"Those with less than 60 per cent of median income are classified as poor (The median is the "middle" income where half of the population have more than the median and half have less.)"
To my mind the relative definition of poverty has the problem that however well an economy does you will still have poverty. This does fulfil the statement in the New Testament that the poor will always be with us, but has the weakness that you could end up with people who are in many ways well off being defined as poor.
This problem is to my mind highlighted by the quote from the Save the Children report below:
"My son misses out on some school trips, which I just can't afford. Sometimes I go without a meal so that my son can eat"
I see the latter as poverty but not the former as many parents find themselves in the former position. I will be interested in readers views on this subject as it is contentious.
Remember the tax situation?
The Poverty Trap
Back on September 13th last year I discussed this problem:
"Some of our poorest individuals in the UK find themselves in a situation where if they earn an extra pound they not only find themselves having to pay income tax and national insurance contributions on it but they also find themselves losing entitlements to wait for it some combination of Housing Benefit, Council Tax Benefit, Child Tax Credit and – for people moving into work – Working Tax Credit. I do not believe that I have named them all as I am not a social security expert but I think you get the idea."
I went further and gave some estimates for the numbers affected on March 23rd of this year:
"The Department of Work and Pensions calculated the numbers affected by this and the effective rates of taxation on income and the estimated numbers affected in 2011/12 are shown below.
1,935,000 pay an effective tax on income of over 60%
1,710,000 pay an effective tax on income of over 70%
330,000 pay an effective tax on income of over 80%
130,000 people pay an effective tax on income of over 90%"
So my suggestion for an anti-poverty campaign would be to start right there and get rid of the poverty trap. This has been one of my recommendations since the early days of this blog.
Does charity begin at home?
The UK spends a substantial sum on foreign aid. The ministry concerned the Department for International Development spent some £8,570
million in 2011 and is one of the few ministries where the budget is planned to increase. It could provide the funds for Save the Children's request for £500,000 quite easily.
On a more fundamental level the foreign aid budget has many problems. Some of these are highlighted in the sub-continent as aid to fast growing India with its space programme has obvious conceptual difficulties. The other is corruption in aid programmes and growing doubts as to how much good it actually does. Whilst humanitarian assistance is something that we should all be proud of I wonder if much overseas aid is designed to make politician's look good rather than make a real difference.
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