Government Policies on Poverty

Many countries in the world struggle to cope with poverty and income inequality issues. Poverty creates an environment where people don’t have equal opportunities to progress. Government policies on poverty are therefore key to increasing social well-being. Without government policies in place for poverty alleviation, income inequality can become a threat to economic progress.

Read this explanation to learn more about the impacts of government policies on poverty!

Poverty and wealth

Poverty is one of the social evils and it affects humanity all around the world. For a country to prosper, it is important to combat this problem.

Basic necessities are the things that people need to survive such as food, clothes, and shelter. There are two main types of poverty: absolute poverty and relative poverty.

Any household that is below the minimum income level to meet the basic needs is considered to be living in absolute poverty.

The United Nations has set $1.90 per day as the minimum daily income level.¹ It is a low income per day but the UN has to take into account the living standards of all the countries in the world. The criteria for measuring absolute poverty is constant, whereas relative poverty can change depending on a country’s economic climate.

Wealth is a term often used in the context of poverty. Wealth inequality is one of the major reasons for the rising levels of poverty.

If the financial resources are not distributed equally in an economy, this leads to rising poverty.

Government policies on poverty and wealth

There are many different policies a government can introduce to reduce poverty and redistribute wealth. Let’s take a look at a few of these policies:

1. Taxes
2. Benefits systems
3. Minimum wage
4. Direct provision of goods and services

Taxes

Taxes are the financial contributions imposed by the government on individuals and organisations.

In the context of government policies on poverty, there are two main types of taxes that you need to understand: progressive taxes and regressive taxes.

Varying the level of taxation is one way the government can control poverty and redistribute wealth. To do this successfully, the government needs to find a perfect balance on the level of taxation.

There are two options the government has when it comes to altering taxes. They can either:

1. Increase progressive taxes

2. Decrease regressive taxes

Increasing progressive taxes

Increasing progressive taxes means taxing the rich more heavily, rather than the poor. The aim is for the government to receive more tax revenue from higher earners. In turn, the government can use this money to finance programs and policies that benefit the poorest in society.

Decreasing regressive taxes

Decreasing regressive taxes would alleviate the poor from higher tax burdens. The aim is that the poorest in society retain more of their income which they can use on necessities or other goods and services to improve their standard of living.

A government has to find the right balance in the tax system. The tax policy tilted towards either side could be dangerous for the economy. Increasing the progressive tax could lead to less burden on the poor. It could be important in restoring income inequality in an economy.

However, it could also lead to lower government revenue as people would be less motivated to earn more because of the taxes on their additional income. In the case of regressive taxes, it could create an economy with wealth inequality but it could also motivate low-income earners to earn more and move to higher income brackets.

Government programs for poverty alleviation: the welfare system

Through a welfare system, the government introduces programs to alleviate poverty and to ensure equal distribution of financial resources.

The aim is to ensure the well-being of people by providing them with social and financial security that will help them in maintaining an adequate standard of living. People who belong to low-income levels can get financial assistance from the government under such a system.

This system gives many benefits to the people.

The advantages of having a welfare system are:

• More equality among the citizens of a country.
• All people, regardless of their income levels, will have access to food and health.
• Unemployed or low-income individuals will be taken care of financially.

The disadvantages of a welfare system are:

• Higher tax rates.
• It could lead to low productivity in the economy.
• More unemployment.

Government programs for poverty alleviation: the minimum wage

The minimum wage is the lowest wage per hour a worker/employee is entitled to get, declared by the law.

It is enforceable by law and all employers are required to follow it. According to the UK government, the current minimum wage rate is £8.91 for people over 23 years old. It will increase to £9.50 from April 2022.²

A higher minimum wage means more income for low-wage earners and it could lift some families out of poverty. Raising the minimum wage also means companies will have to pay more in wages to the workers which means more costs of production and fewer profits than before.

Government programs for poverty alleviation: direct provision of goods and services

In many countries, governments supply certain goods and services which are available to all the citizens.

Direct provision of health and education is one example. For education, public schools and colleges are available to the citizens. Education is free for all citizens and it helps in educating the individuals and in enhancing their knowledge. Through this, people are well-learned to take up jobs in the future.

The health care system in the UK is free for all citizens. It is funded through taxes and government spending, but it allows for the needs of all citizens to be taken care of - especially those who are low-wage earners and are struggling with poverty.

Such provisions have a huge impact on the wider scale of an economy. There will be more chances of having high-skilled domestic industries, a better workforce, and reduced poverty.

The impacts of government policies on poverty

The policies that we examined above, if implemented and checked correctly, can help reduce poverty significantly.

However, these policies can also have some negative consequences if they aren't implemented correctly. These consequences are:

1. Fiscal drag

2. Poverty trap

3. Unemployment trap

Fiscal drag

Fiscal drag in an economy is directly related to poverty and unequal household incomes.

Fiscal drag results in an increase in income in monetary value, but the real income stays the same. Therefore, more people end up in the tax net and pay a large share of their incomes in taxes which slows down the economy.

The government receives an increase in tax revenue, but individuals pay more in taxes and have less left to spend. Thus, fiscal drag decreases the purchasing power in the economy which also results in a decrease in the demand for goods.

The poverty trap

The poverty trap or earning trap could be caused by fiscal drag. Low-waged workers who now pay taxes on their inflated incomes (not real incomes) are caught in a position where they pay more in taxes and receive less in benefits due to the means-tested benefits policy.

Figure 1 shows how the poverty trap works in more detail.

A low-wage worker is now stuck in the zone of overlap as the figure above shows. It is a disadvantageous position to be in. The inflated income level and means-tested benefits system ensure that the person stays poor. People pay high taxes on extra earnings, and they get no benefits. It results in more spending and hence this cycle continues.

The unemployment trap

Fiscal drag and the poverty trap affect low waged workers. It does not affect unemployed people since they do not pay taxes and they can claim unemployment benefits.

However, both fiscal drag and the poverty trap create unfavourable situations in the economy because they encourage low waged workers to give up their work and to rely solely on unemployment benefits. The reason is that they pay more in taxes and claim little or nothing in social benefits, whereas the situation is slightly better for unemployed people.

These poverty and unemployment traps also encourage the creation of a black economy. To be exempted from taxes and to claim unemployment benefits at the same time, people look for jobs that pay them in cash. This way, they avoid declaring their income and paying taxes.

Examples of government policy to reduce poverty in the UK

In the UK, the government has taken initiatives to control poverty and ensure fair distribution of wealth. In 2011, they published a strategy to reduce child poverty in the country. They took the actions based on this strategy between 2011 and 2014. In 2014, they published the UK's second national strategy to reduce child poverty. Their aim was to end child poverty in the country by 2020, but they didn’t achieve it.

Another initiative was to include young people between 16-24 years old in learning and employment programs. this initiative focused on reforming schools and giving vocational education to young people.

The hope is that it will bring more career opportunities for them and they will be able to support themselves in the future. The Universal credit program was introduced alongside this initiative. Its aim is to solve the insecurity caused by gaps in income in case of unemployment or when a person is between jobs.

Sources

1. United Nations, ‘Ending Poverty’, 2022, https://www.un.org/en/global-issues/ending-poverty

2. UK Government, ‘Minimum wage rates for 2022’, 2022, https://www.gov.uk/government/publications/minimum-wage-rates-for-2022