Poverty

Absolute Poverty

When people's income is too low for them to afford basic necessities such as food shelter or warmth.
Even in developed countries such as the UK, there are undernourished or homeless people.

Relative Poverty

When people are poor compared to others. The Relatively poor may not be able to afford a certain standard of living.

Causes of Poverty

  • Unemployment - Households with no employed people
  • Low wages - Workers in unskilled employment earn low wages, since their MRP is low
  • Sickness / Disability - People dependent on sickness / disability benefits have relatively low income
  • Ageing population - State benefits are the main income for the elderly. Becoming less relevant as people build up pensions
  • Increase in tax / reduction of benefits
    • 1973 - VAT 8%
    • 2022 - VAT 20%

Policies to reduce poverty

  • National minimum wages
    • Encourages people to work and gives them higher pay
  • Cutting bottom rate of tax
    • Makes tax less regressive and gives more incentive to work
  • Exploiting trickle-down economics
    • Some economists argue that higher spending by the rich will stimulate the economy, benefiting everyone.
  • Increasing the retirement age
    • Gives more time for people to save and reduces the time they are dependent on welfare.

Increasing benefits

The direction of incentive effects created by increasing welfare is controversial.
Free market economists argue it will cause voluntary unemployment, Keynesian economists think increased government spending will stimulate AD, and create jobs

Tax credits

Tax credits are benefits paid through the tax system.
The idea is that this creates incentives to work whilst reducing child poverty