Poverty, Inequality and Income Distribution - Activity

The aim of this Activity is to look at ways in which the government might attempt to tackle the problem of poverty in society and to assess the policy options open to the government in attempting to tackle this problem.

The starting point for the Activity will be attempting to set a definition of what poverty actually means. You will be familiar with the difference between absolute and relative poverty. (If not, check out our glossary(http://www.bized.co.uk/cgi-bin/glossarydb/browse.pl?glostopic=1&glosid=4).) In the UK, absolute poverty should not exist. Most people will come under the protection of the state benefit support system in some way or another so what we are really discussing is relative poverty.

Would a family in these circumstances be described as living in absolute poverty? Irina with her son Kirill stands in their bedroom of a communal apartment. Here 28 people from different families share ten bedrooms, one kitchen, one toilet, one bathroom and a long corridor. St Petersburg has more of these communal apartments, known in Russian as 'kommunalki', than any other Russian city.
Title: St. Petersburg Residents Live In Poverty in Communal Housing. Copyright: Getty Images, available from Education Image Gallery.

The second stage in the analysis will look at how we can define poverty levels in the UK.

To look at the impact of policies on poverty, we are going to use the Virtual Economy(http://www.bized.co.uk/virtual/economy/index.htm). This will mean that we are going to look primarily at the government's use of fiscal policy to deal with the problem.

Image: Is it right to stereotype a 'typical family'? Do we have to if policies are adopted to help families who live in poverty? Copyright: Tina Lorien

Poverty is a difficult concept to measure precisely. It can be a term applied to an individual or a group, can relate to a geographical region or be associated with a division between rural and urban life. Homeless people could be said to live in poverty. They are often individuals who have a medical or mental condition, have suffered physical or sexual abuse in the home from which they have escaped or have lost family connections through bereavement or through other reasons. Whilst there are common factors in homelessness, each person will be an individual case.

The group aspect to poverty mainly rests on families. But what do we mean by a family? Is a family a single mother with two children? A married couple with two children? A widowed father with three children? Clearly there is no single answer. For the purposes of the analysis, therefore, we will have to establish a definition of the type of family we are focusing on. The Virtual Economy allows you to be able to do this.

What does this family look like? We might have a stereotypical image of such a family but in many cases it is probably quite important to understand the features and characteristics of such families because this might affect the detail of the policy we adopt.

For example, it might be useful to know the type of accommodation these families tend to live in, whether there are geographical factors involved, how much tobacco and alcohol consumption is typical of such families, how they spend their leisure time, their qualifications and so on.

We can get such information from the Social Trends report from the Office for National Statistics (ONS) Web site [PDF, 5 MB]. (http://www.statistics.gov.uk/downloads/theme_social/Social_Trends34/Social_Trends34.pdf)

Fiscal policy is very important because the government, if dealing with such problems, will need to find ways of attacking the causes of poverty, diverting resources to fund those strategies but also to ensure that money is raised to help pay for the strategies. Such funds are going to be raised primarily through taxation. The redistribution of income may be a key way of solving poverty - taking from the rich and distributing that money to the poor.

In so doing, we could actually impact on the poor more than we intend if we do not understand some of the background factors mentioned above.

Let's take an example

We may decide to look at aspects of the benefit system such as child benefit. Or we could choose to target the tax credit system, whereby individuals are given money as a means of supporting them depending on their individual circumstances.

We could also (or as an alternative) adjust the tax thresholds to get more tax revenue from those who earn over certain levels whilst adjusting them so that those on very low incomes are taken out of the tax net.

Both strategies would cost money to implement. Such money could be raised by changes to the tax system. For example, you might think that it would be wise to pay for help to the poor by increasing the duty on cigarettes and alcohol.

For illustration, we have inputted the following changes into the Virtual Economy:

• Increased the threshold for the lowest tax band to £2,000.
• Increased the tax rate for the 'wealthy' to 41% from 40%.
• Increased the duty on beer by 3p and the duty on tobacco by 20p.
• Increased the child tax credit (family element) to £12.
• Increased child benefit for the first child to £6.00.

Once you have decided on your strategy, input the appropriate figures into the Virtual Economy. Run the model.

The results will tell you what the impact might be on the economy as a whole. You may have had an adverse effect on unemployment, inflation or growth. That is certainly a consideration. But what will be the impact on the average family in our analysis?

The image shows an excerpt from the results page. The impact on the economy as a whole has been fairly neutral but the effect on our 'poor families' has been rather mixed. The employed single person with no family is worse off but the family with two children but both parents unemployed is slightly better off as is the family with two children and one working parent earning over £17,000 and the single parent family. However, the family with one working parent earning less than £12,000 is worse off.

The real losers in this example are those earning over £100,000 but you could argue that it is only right that they should contribute to help solving the problem of poverty.

We also have to ask ourselves whether our good intentions are really going to help solve poverty as we have defined it. Is a 7p a week improvement going to reduce poverty? Will £1.59 a week help to take the single parent family out of poverty?

Try experimenting with other changes in the model and compare the results you get.