3.1.7.2–3.1.7.3 - Poverty and redistribution

Absolute and relative poverty

Poverty measures depend on the standard of living being compared and on the resources households need to meet it.

Absolute poverty means lacking resources to reach a specified minimum living standard, held constant in real terms. The benchmark can be a basket of basic needs or a fixed real income threshold. Holding it constant in real terms means adjusting its cash value for changes in prices. It need not mean literally having no food or shelter. Different measures choose different benchmarks.

Relative poverty means having resources substantially below the prevailing standard in a society. One approach defines a threshold as a proportion of median equivalised disposable household income. The proportion is a measurement convention: it does not establish a natural dividing line between every adequate and inadequate life. Relative poverty concerns the ability to participate in that society, as well as material needs.

Consider an illustrative economy using a relative threshold of 60% of median annual income. If median income is £30,000, the threshold in pounds is $0.60\times30{,}000=18{,}000$. A comparable household receiving £17,000 is below it. If median income later rises to £40,000, the threshold becomes £24,000. The household's income could rise to £20,000 yet remain in relative poverty. If an absolute threshold is £18,000 in both periods at unchanged prices, it has escaped that absolute measure. A rise in everyone's income by the same proportion can reduce absolute poverty while leaving relative positions unchanged.

Income is a useful but incomplete measure of deprivation. Housing costs, disability costs, debt, household size, public services and access to assets affect living standards. Comparing before- and after-housing-cost measures can change who is counted. The poverty rate counts the proportion below the line; the poverty gap describes how far below it they are. A policy can reduce the depth of poverty without moving everyone over the threshold. Consistent definitions and real purchasing power matter when comparing periods or countries.

Why poverty can persist

Poverty can result from low market income or high needs, and it can create barriers that make future poverty more likely.

Unemployment, insecure hours, low pay, weak bargaining power and lack of skills can reduce earned income. Caring responsibilities, illness or disability may restrict work or increase unavoidable spending. Regional job shortages, costly transport and discrimination limit opportunities even for willing, capable workers. Poverty also depends on the resources of the whole household, including other earners, transfers and savings. Employment reduces one cause of low income but does not guarantee adequate hours or income after costs.

Insufficient income can worsen health through poor nutrition, inadequate heating or stressful housing. Poor health then restricts work and productivity. A household unable to afford transport or childcare may miss suitable jobs. A child without a quiet study space, adequate nutrition or access to learning resources may acquire fewer skills, reducing later earning opportunities. These are possible causal cycles, not claims that people in poverty lack ambition or ability.

The effects extend beyond the household. Underinvestment in education and health loses productive potential and can create costs for others. Social exclusion restricts participation. Greater reliance on emergency public services and benefits can increase fiscal pressure. Across many households, weak spending can reduce firms' sales and employment; the overall effect depends on economic conditions and spending elsewhere. Poverty can thus connect a local opportunity failure to aggregate demand and productive capacity.

Causes interact, so diagnosis matters. Training may help someone whose skills do not match available work but do little immediately for a disabled person unable to work. A wage floor helps covered employees but cannot directly raise the income of a household with no worker. Durable relief often requires both adequate resources now and removal of the barriers producing low income.

Redistribution through taxes and cash benefits

Taxes and transfers change disposable income directly, while also changing the incentives facing households and firms.

A progressive income tax takes a rising proportion of income as income increases. Using its revenue to finance benefits for low-income households can narrow the disposable-income distribution. A means-tested benefit targets people with low measured resources; a universal benefit does not withdraw eligibility as income rises. Targeting can provide more support per recipient for a given budget, but tests, applications and stigma can reduce take-up. Universal provision can be simpler and avoid some withdrawal incentives, but costs more if it also pays households with high incomes.