Poverty in a first world economy

Paul Parkinson takes an analytical look at the topical subject of where the thorny issues of welfare benefits, poverty and income incentives overlap.

The definition of “being at risk of being in poverty”, recognised by the Office of National Statistics (ONS), is where “One’s equivalised disposable income (after social transfers such as direct income support, child benefits, and non-contributory pensions) is lower than 60% of national median equivalised disposable income.”

What are the practical implications of applying such a definition to Welfare policy?  Well, let’s look at a fictitious case study to compare 6 households each with a single parent and 2 children of pre-school-age.  They each rent a property costing £495 per calendar month & pay private childcare costs of £300 per week.  They all work in the NHS but each in the following 6 jobs:

a)                  Band 2 – Medical Records ClerkNHS hospital ward reception

b)                 Band 3 – Clerical Officer

c)                 Band 4 – Medical Secretary

d)                 Band 5 – Staff Nurse

e)                 Band 6 – Psychiatric Nurse

f)                  Band 7 – Ward Sister

 

Earned Income (£’s p.a.)

Band 2

Band 3

Band 4

Band 5

Band 6

Band 7

Gross Salary

14,153

16,110

18,652

21,176

25,528

30,460

Income Tax

1,068

1,459

1,948

2,428

3,209

4,139

National Insurance

615

799

1,038

1,275

1,684

2,148

Pen Contributions

708

806

933

1,376

1,659

2,437

Take-Home Pay

11,762

13,046

14,733

16,097

18,976

21,736

 

Means-tested Income Entitlements (£’s p.a.)

Band 2

Band 3

Band 4

Band 5

Band 6

Band 7

Tax Credits

18,585

17,825

16,837

15,986

14,323

12,624

 

Means-tested Bill Reductions (£’s p.a.)

Band 2

Band 3

Band 4

Band 5

Band 6

Band 7

Council Tax Benefit

715

597

444

285

22

Housing Benefit

5,016

4,634

4,137

3,621

2,766

1,764

 

Other Income Entitlements (£’s p.a.)

Band 2

Band 3

Band 4

Band 5

Band 6

Band 7

Child Benefit

1,752

1,752

1,752

1,752

1,752

1,752

 

Total Spendable Income (£’s p.a.)

Band 2

Band 3

Band 4

Band 5

Band 6

Band 7

Take-Home Pay

11,762

13,046

14,733

16,097

18,976

21,736

Total Entitlements

26,068

24,808

23,170

21,645

18,863

16,140

Spendable Income

37,830

37,854

37,903

37,742

37,839

37,876

Note:    All figures calculated, for 2012-2013, courtesy of website https://www.turn2us.entitledto.co.uk

What’s striking is just how close in amount the Spendable Income figures are, no matter which of the 6 jobs depicted one is in:

Promotion

Additional Gross Salary (£’s p.a.)

Extra Spendable Income (£’s p.a.)

Band 2 to Band 3

1,957

24

Band 3 to Band 4

2,542

49

Band 4 to Band 5

2,524

-161

Band 5 to Band 6

4,352

97

Band 6 to Band 7

4,932

37

NHS staff

The above begs the question whether it’s worth getting promoted, especially from Band 4 to 5, when one would be £161 p.a. worse off!  How many Band 7 Ward Sisters would regard (1) their years of study for exams, (2) the daily pressure of patient-care decision-making and (3) the responsibility of line management associated with their position, as worth merely an extra £46 p.a. spendable income over a Band 2 Medical Records clerk, especially when the former’s gross salary is more than double the latter?

One alternative “yardstick” to the poverty definition recognised by the ONS is the Minimum Income Standard as shown by the Joseph Rowntree Foundation. To put this into perspective, one must be on an income on a par with an NHS Registrar to be able to spend £685.04 p.m. (£35,622.08 p.a.)  Example: Salary of £54,000 p.a. would give a take-home pay of £35,697.60 p.a. after deductions of £9,561.60 p.a. Income Tax, £3,934.70 p.a. Employee National Insurance and £4,806 p.a. NHS Employee Pension Contributions.

If one looks at the table below which contains extracted data from Table 2.5 in the Income Tax Liabilities Statistics 2012-2013 published by HMRC on 31st January 2013, there are only 2,973,000 people in the UK with a taxable income of £50,000+ p.a.; that, as a % of the total number of taxpayers in the UK, is 9.94%.

Income Range

(£’s p.a.)

Number of Taxpayers

Total Taxable Income of Income Range (£’s p.a.)

8,105 – 9,999

1,820,000

16,400,000,000

10,000 – 14,999

6,380,000

80,100,000,000

15,000 – 19,999

5,480,000

95,300,000,000

20,000 – 29,999

7,150,000

175,000,000,000

30,000 – 49,999

6,130,000

234,000,000,000

50,000 – 99,999

2,310,000

152,000,000,000

100,000 – 149,999

364,000

43,500,000,000

150,000 – 199,999

127,000

21,700,000,000

200,000 – 499,999

134,000

39,000,000,000

500,000 – 999,999

25,000

17,400,000,000

1,000,000 – 1,999,999

9,000

11,700,000,000

2,000,000+

4,000

15,700,000,000

Total  29,900,000

Total  901,000,000,000

 There is a school of thought that, if only incomes were “fairer”, then the issue of poverty would be lessened.  If one assumes there is a parallel universe where everyone was prepared to accept the same income – irrespective of their technical ability, workplace-seniority or business success – then let’s divide the £901,000,000,000 total taxable income by the 29,900,000 taxpayers; it works out at £30,133.78 p.a. each.   If that were to occur, then everyone in the UK would potentially still be eligible for means-tested welfare entitlements.   It stretches credulity to even suggest that, on such a basis, everyone in the UK would be living in perpetuity “in poverty” thus requiring the Government to borrow money each year to pay out Tax Credits to the whole population.

family_services_food_bank_newThe UK clearly has a serious “cost of living” problem, as depicted by the Minimum Income Standard mentioned previously: but it is common sense that not everyone can have the expertise which can command a high income, and logic dictates that not every job which an economy needs to be carried out can financially offer a high salary.   The current welfare entitlements system is unsustainable, not just because of the amount of debt the government has to issue each year to finance it, but also the pernicious effect it has on “social mobility”.   Why would one try to “better oneself” in career terms if there is no financial benefit for oneself and one’s family?  Just look around your workplace at those who are on a much lower salary grade than you, and ponder whether their welfare entitlements cause them to be at least no worse off, or indeed even better off, than yourself.

What is becoming self-evident is that the politicians (from all the political parties) do not have cogent and viable solutions as to how one can help those for whom there is no realistic alternative to a low income have an acceptable standard of living (whatever that should entail in practice) which (1) does not distort the jobs market, (2) does not create perverse outcomes like Tax Credits have been shown to do above, and (3) does not risk stoking resentment amongst the productive sector of society which, in reality, pays for the whole kit & caboodle.

Paul is a Lake-District fell-walking law graduate with a keen interest in analysing the political and economic impact which government policies have in practice on ordinary people. He tweets as @pjpcfp

LEAVE A REPLY

Please enter your comment!
Please enter your name here