Redefining the Poverty Debate – Why a War on Markets is No Substitute for a War on Poverty

New IEA research finds a market-oriented anti-poverty policy could lead to families being £750 a month better off Redefining Poverty Debate.pdf
Executive Summary:

  • In the past intellectual movements promoting free trade in particular and a free economy more generally were regarded as having a pro-poor agenda. The current poverty lobby, however, is focused entirely on government benefits as the solution to poverty and very rarely addresses government interventions that raise living costs. By way of example, when the debate about liberalising planning laws was at its height last year, all seven of the articles in the Child Poverty Action Group newsletter were about government benefits.

  • Some progress was made in reducing poverty through increases in income transfers after 1997. Indeed, at the current time, the UK spends a greater proportion of national income on transfers than many Germanic and Scandinavian countries. Also, the extent of redistribution through state welfare systems is as great as that in Sweden. Furthermore, we have now reached the position where at least 68 per cent of all households with children in Britain are in receipt of one form of major transfer payment other than universal child benefit.

  • Housing costs are a huge problem for the poor. Over the last 50 years, incomes before housing costs for the least well off have doubled. Incomes after housing costs, however, have risen by only 60 per cent. The evidence suggests that high housing costs are largely policy driven.

The poverty lobby’s response to this problem is to propose extending housing benefit. It seems oblivious to the huge problems that this policy would cause. Increasing housing benefit would exacerbate the already very serious poverty traps as the benefit is withdrawn and increase housing demand (and therefore prices). It is a myth that our population density justifies the UK’s restrictive approach to land-use planning. Reforming the planning system should be the focus of policy.

  • Liberalisation of the planning system could reduce housing costs by around 40 per cent. However, planning reform needs to run with the grain of the market so that development decisions reflect the value of environmental amenities. This would involve localisation of planning responsibilities and tax-collecting authority.

  • Food prices in the UK are considerably higher than in comparable EU countries. Again, restrictions on building are an important aspect of this as they reduce the productivity of the retail sector and reduce competition. Further reductions in food prices could be achieved by liberalisation of the Common Agricultural Policy. A conservative estimate suggests that policy changes could bring about a reduction in food costs of about 25 per cent.

  • Policy reforms in other sectors could also bring about considerable benefits for the least well off. Specifically, childcare costs are very high in the UK compared with
other European countries despite high levels of government subsidy; energy prices are raised by incoherent environmental policies; and many indirect taxes are especially targeted on products disproportionately consumed by the poor. It would be perfectly feasible to pursue the government’s carbon- reduction policies in ways that increased energy bills by much less.

  • Overall, a market-oriented anti-poverty policy could lead families to be up to £750 a month better off. There would also be scope for substantial decreases in taxation on the less well off because of substantial savings in benefits such as housing benefit.

  • The UK is an outlier in terms of the failure of employment and family policy. Nearly 30 per cent of British children live in households with no adult in full-time work. Britain spends more on family benefits than virtually any other country in Europe. Furthermore, Britain is unique in Europe with its combination of high levels of single-parent families and high worklessness among single-parent families. The poverty lobby argues that there are high levels of poverty among those in work. While this is true for households where parents work part-time, poverty rates among families where one or two parents work full-time are low for single-parent families and negligible for two-parent families.

  • These problems require a multi-pronged attack. Employment protection legislation – which tends to entrench long-term unemployment – should be liberalised; a new benefits
system should remove penalties against family formation; effective marginal tax rates should be significantly reduced; and specialist assistance to those with weak labour market attachment should be managed and financed at local level. The government’s much-trumpeted ‘universal credit’ will make little, if any, impact.

Media highlights include The Guardian, The Daily Mail, The Sun, The Sunday Times, The Telegraph and Conservative Home.

To read the press release for this paper, please click here.

2012, Research Monograph 67, pp. 250

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Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

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