2.1.1 - Poverty, inequality and redistribution

Poverty and income inequality

Poverty concerns whether people have enough resources for a particular standard of living; inequality concerns how unevenly income is shared.

Income is a flow received over time, such as weekly wages or monthly benefits. Income inequality is the unequal distribution of income between people or households. It differs from wealth inequality: wealth is the stock of assets owned, less debts. Two households could receive equal wages but own very different amounts of property.

Relative poverty means having an income too low to achieve the normal or accepted living standard of the society in which a person lives. It is assessed in relation to other people's incomes or living standards, rather than only a basic-needs basket. A country might use a stated fraction of median income as its relative poverty line. The fraction must be supplied; there is no single universal percentage to memorise for this course.

Consider an illustrative country where the monthly cost of basic necessities for a particular household is £700 and its relative poverty threshold is £1,200. A household receiving £900 can afford that basic basket but is below the relative threshold. It may struggle to afford internet access, school activities or travel that are normal parts of participation in its society. It is in relative poverty under the stated measure, although these figures do not place it in absolute poverty.

If every household's real income rises proportionately, more households may afford necessities and absolute poverty can fall. Income inequality measured by proportional income shares need not fall. Relative poverty can also persist because the comparison income and threshold may rise. Conversely, incomes becoming more equal because richer households lose income does not automatically improve the poorest households' material living standards. Ask what happened to their actual purchasing power.

Reasons to reduce poverty and inequality

Reducing poverty can improve both immediate wellbeing and people's ability to participate in economic life.

Meeting basic needs is the most immediate reason. An income that buys adequate food, housing and heating protects health and survival. A hungry child may struggle to concentrate at school, while untreated illness can prevent an adult from working. Higher income can therefore relieve deprivation directly and help prevent deprivation from continuing into the next generation.

Raising living standards goes beyond survival. Better housing, access to transport, education and leisure can increase choice and quality of life. A benefit payment to a low-income household may enable the purchase of necessities that were previously unaffordable. A smaller income gap can also improve access to opportunities when poorer children previously could not afford education or healthcare. Higher average GDP alone cannot show whether those households benefited: extra output may produce income mainly for an already wealthy group.

There are also ethical reasons. People may believe that no one should be deprived of basic necessities, or that children should have a fair chance regardless of their parents' income. These are judgments about fairness, not claims that everyone must earn exactly the same amount. People can disagree about the appropriate extent of redistribution, for example because they place different weight on equal opportunity, rewards for effort and protection of the vulnerable.

These reasons overlap but remain distinct. Providing food meets a basic need; enabling someone to join ordinary community activities improves living standards; regarding severe deprivation as unacceptable is an ethical reason. Governments must also consider opportunity cost: funding poverty reduction uses resources that could have supported another public service. That cost does not remove the benefits, but it helps explain why policy decisions involve priorities.

Progressive taxation and benefit payments

Redistribution changes the income households can use by collecting taxes and transferring some resources to other households.