Over the weekend, I was reading the new report from the British Social Mobility and Child Poverty Commission – State of the Nation 2013: social mobility and child poverty in Great Britain – which has just been presented to the British Parliament (October, 2013). The conclusions from the Report are not good. They find that the “falls in poverty seen over the last 15 years may be be reversing” and that “(a)bsolute poverty is rising”. The UK will likely miss its “2020 target to end child poverty”. The other shocking statistic is that poverty rates among those who work are rising and “(t)wo in three poor children are now in families where someone works”. There are now “5 million adults and children in working poor households” in Britain. This puts the skiver/bludger/welfare criminal narrative that the neo-liberals in Britain have been running into a different light. It cannot be said that workers are skivers – they get up in the morning (or sometime) and sacrifice the best part of their lives working for some capitalist or another. They are increasingly getting paid such that they cannot live above the poverty line. That is a failed state if ever there was one.
We learn that the:
The Social Mobility and Child Poverty Commission is an advisory non- departmental public body established under the Child Poverty Act 2010 (as amended by the Welfare Reform Act 2012) with a remit to monitor the progress of the Government and others on child poverty and social mobility.
The Commission is chaired by a Labour MP (Milburn) and co-chaired by a Conservative MP (Shephard).
It seems from reading their Report that they have taken it on themselves to also make macroeconomic assessments of the financial constraints facing the UK government such that it claims that any future government in the UK will face:
… a major fiscal challenge in the medium term … we risk spending more as a country than we are earning. Austerity is likely to be with us beyond the short term. Something will have to give. In future, governments will have to accept that hard choices will need to be made about where they place their bets.
All of which is claptrap when applied to the UK and reinforces the notion that there will be nothing serious done about the increasing poverty in the UK while this ideological straitjacket chokes all understanding of what are the real choices and opportunities.
However, I was interested in their analysis of the distributional impacts of the fiscal consolidation over the last few years.
Overall income distribution in the UK
Overall income inequality has risen in the UK quite dramatically since the surge in Thatcher’s regime.
I usually talk about movements in the wage share which refers to the so-called functional distribution of income, which divides national income up by what economists call the broad claimants on production – the so-called “factors of production” – labour, capital, and rent. Other classifications also include government given it stakes a claim on production when it taxes and provides subsidies (a negative claim).
The other main classification system used to analyse the distribution of income is what is called the size distribution of income or personal income distribution, which focuses on distribution of income across households or individuals. Often the data is expressed in percentiles (each 1 per cent from bottom to top), deciles (ten groups each representing 10 per cent of the total income), quintiles (five groups each representing 20 per cent of the total income) or quartiles (self-explanatory).
Various summary measures are used to demonstrate the income inequality. For example, the share of the top 10 per cent to the bottom 10 per cent.
The Gini coefficient is another summary measure used in this type of analysis. The ABS publication – Household Income and Income Distribution, Australia, 2009-10 – defines the Gini coefficient as:
… a single statistic that lies between 0 and 1 and is a summary indicator of the degree of inequality, with values closer to 0 representing a lesser degree of inequality, and values closer to 1 representing greater inequality.
If you want to extend your knowledge further then this academic article (from 1954) – Functional and Size Distributions of Income and Their Meaning – is a good starting point for understanding the two concepts in more detail, although you need a JSTOR library subscription to access it.
[Full Reference: G. Garvy (1954) 'Functional and Size Distributions of Income and Their Meaning', The American Economic Review, 44(2), Papers and Proceedings of the Sixty-sixth Annual Meeting of the American Economic Association (May, 1954), 236-253]
The following graph plots the Gini Coefficient for the UK from 1961 to the 2011-12 fiscal year. The red shaded areas indicate periods when British Labour was in power. The plot closely mimics what you would see if we plotted the so-called 90/10 ratio – which considers the income received by the 90th percentile of the income distribution as a ratio of the income received by the 10th percentile. It has risen from around 3.2 in 1961 to 5.2 in 2011-12 (and is rising).
Observations from the graph include:
1. When British Labour is in power income inequality does not rise except when it became “New Labour”, which was code for neo-liberal in the period from 2003-04 until their demise in 2010.
2. Income inequality almost always rises under the Conservatives.
3. Income inequality shifted dramatically upwards under the Thatcher government and the rate of increase moderated under Major.
4. Income inequality is on the rise again under Cameron.
5. By comparison, Australia’s value is around 0.34 and this has risen from 0.30 over the last 20 years – but still much more egalitarian than the UK. The Gini for the US is up around 0.48, which means the UK is doing its best to mimic the inequality in that nation.
Child Poverty rates on the rise again
Overall poverty rates in Britain are now rising. Between 2010-11 and 2011-12 and extra million British people entered poverty (BHC) and 900,000 (AHC).
While the traditional sources of poverty have fallen (old-age and retirement) the IFS study (published June 2013) –
Living Standards, Poverty and Inequality in the UK: 2013 – documents are marked rise in the working poor:
Rising poverty among working-age adults without children partly reflects substantial increases in the number living in workless families and a decline in the relative value of out-of-work benefits. More importantly, poverty among those living in families containing at least one worker has increased. During the period 1978-1980 to 1996-97, this reflected an increase in hourly and weekly earnings inequality. Post 1996-97, it reflects the fact that any earnings growth was generally weak for this group right across the income distribution.
The following graph shows child poverty rates in the UK from 1961 to 2011-12 using the benchmark of 60 per cent of net equivalised household income as at 2010/11.
The red shading is as before. BHC refers to before housing costs are taken into account, AHC after housing costs are deducted from income.
The Cameron government is overseeing a rise in child poverty rates.
Fiscal consolidation and Poverty
For me the most interesting aspect of the report was its analysis of the distributional impacts of the fiscal austerity being imposed by the current national government in the UK.
The Report notes that nations with rising poverty rates incur all sorts of negative consequences. Nations with rising poverty rates endure declining educational attainment and personal development.
The single most evocative (and dammning) sentence in the Report is:
Poorer children fall behind in development before the age of 3, and never catch up again.
That is, a life sentence of harship is imposed on babies who didn’t ask to be born.
The Report also nots that:
Britain cannot afford to waste talent and potential that could make a major contribution to growing a sustainable economy.
What is often lost on the neo-liberals is that the single most significant source of waste and inefficiency is mass unemployment and the poverty that it produces.
In an era where, every day, some policymaker or another warns us about the dangers of the ageing society it is amazing how disconnected their narrative is when their next statement urges us to get tough on the unemployed (which only makes them poorer and less likely to acquire the skills necessary to ensure a high productivity future for all of us).
It is even more stunning when all of the research data tells us about the massive future costs that society will bear from forcing higher numbers of children to grow up in poverty-stricken households.
Any forward-looking government with an eye to the evidence would do everything they could to ensure that no child was born into or grew up in an impoverished household.
But that is not what government obsessed with fiscal austerity do – they make poverty and child poverty worse and we will all pay for it in the years to come – the costs being borne disproportionately, though, by those who have to endure the poverty.
The Report outlines “five main reasons for making child poverty and social mobility national priorities for action”.
1. “Fairness case” – moral argument.
2. “efficiency case” – waste and cost-savings relating to avoiding problems that poverty brings.
3. “economic case” – increased demand on welfare system etc.
4. “growth case” – economies with rising inequality do not grow as consistently as those with reduced inequality. Even the IMF believes that now.
5. “business case” – reduced poverty lowers the cost of recruitment etc because social mobility is higher.
However, the Report claims that these are “tough times for making progress on improving social mobility and reducing child poverty”.
To which I ask why?
And the Report says there are four main challenges:
1. The “economic challenge” – as a result of the deep recession and slow recovery. Clearly, this is not a challenge but a failure. The deep recession and slow recovery Could have been avoided, without doubt, if the government had not become obsessed with austerity.
The British government has all the capacity needs to ensure that aggregate demand remains strong enough to keep all those who wish to work in employment at a wage that is above the poverty line. That is unquestionable and any deviation from that position in the real world is a policy choice.
It could have substantially reduced poverty rates over the last three years if it so desired. There is no question about that.
The British government chose to allow its economy to suffer a debilitating recession with a very weak recovery. It is therefore responsible for the negative consequences, which include the rising poverty and child poverty rates.
2. The “fiscal challenge”:
.. is that there is less money to support the incomes of low-wage families and fund services that level the playing field on life chances. All the main parties are committed to fiscal consolidation (the debate has been about timing and structure), so this is about how, and not whether, difficult choices are made. Austerity is not ending any time soon, regardless of the result of the next Election … Crucially this is not just a short-term constraint. An ageing society means we face a long-term dilemma of funding working-age social objectives when there are fewer workers per retiree.
The claim that there is “less money to support the incomes of low-wage families and fun services that level the playing field” is an unmitigated lie.
The honest statement is that the government is choosing to make less money available. The British government, as the currency-issuer of the pound, has infinite minus a penny pounds available to spend at any time.
Further, as regular readers will appreciate the ageing society claim is without application to a sovereign nation. The real challenge facing societies with increasing dependency ratios is whether there will be enough real goods and services available in the future to ensure real material living standards are maintained and increased.
Above all, that is a productivity challenge and nations that undermine their education systems and hold increasing proportions of the population in poverty and joblessness are doing exactly the opposite to meet that challenge and will pay the price as the dependency ratios continue to rise.
Please read my blog – Ageing, Social Security, and the Intergenerational Debate – Part 3 – and the earlier parts (linked in Part 3) – for more discussion on this point.
It is sad that this group, which recognises that the “fiscal consolidation to be regressive, with the lowest-earning fifth of households making a larger contribution than any other group except those in the top 20 per cent, both as a proportion of their incomes and in absolute terms” is prepared to roll over and play doggo on the fiscal lie.
3. The “earnings challenge” – recognises that “employment and earnings are the key drivers of child poverty” and that real wages are in decline – “real median weekly earnings have fallen by 10.2 per cent since 2009 and are now lower than in 1997, putting a tight squeeze on standards of living”.
4. The “cost of living challenge” – real wage cuts due to rising costs. Remarkably, “(h)ousing costs, water, electricity and gas take up nearly 60 per cent of total income for the poorest tenth compared with less than 30 per cent of that of the richest 10 per cent.”
What has been the impact of the fiscal consolidation on lower income groups?
The Report notes that the British government has choices have included:
- Accelerating the speed of fiscal consolidation relative to the plans of the previous administration, based on its judgement that this was essential to secure market confidence and avoid fiscal crisis.
- Shifting the balance of fiscal consolidation away from tax rises and towards spending cuts, in line with its assessment of the international evidence.
- Making significant discretionary cuts to social security expenditure to reduce the pressure on public services, focusing on reducing benefit and tax credit entitlements for children and working-age adults while increasing the generosity of the state pension and protecting most other benefits for pensioners.
- Shifting the pattern of taxation, for example by increasing the income tax personal allowance by one-third in real terms and raising the rate of VAT from 17.5 per cent to 20 per cent.
They then consider the “short-term” consequences of these decisions.
Their Figure 2.6 (reproduced next) summarises the “overall impact” in terms of percentage changes in net income (against the 2010-11 benchmark).
The results show that the “the highest earning 20 per cent of households making the greatest contribution to reducing the deficit, both in absolute terms and also as a proportion of their incomes”.
However, once you take the highest earners out of the picture, the impacts of the fiscal consolidation are disproportionately being borne by families in the lowest quintile of the income distribution.
They say that:
… those at the bottom making a larger contribution than any other group except those in the top 20 per cent, both as a proportion of their incomes and in absolute terms.
The results also show that the fiscal consolidation damages the “the young more than the old, and those with children more than those without”.
Which is exactly the opposite to what you might want if you are worried about the ageing society.
The overall conclusion is that:
… the Commission concludes that the process by which fiscal consolidation has been implemented is placing an unfair burden on the poorest households – including those in low-paid work …
The Report considers this situation is not “sustainable for the future” and urges the government to:
1. Increase the mininimum wage.
2. Eliminate youth unemployment.
3. Increase apprenticeship opportunities.
4. Promote a rise in real wages generally.
5. Stop targetting fiscal consolidation at the lowest quintile.
All these are admirable suggestions and could be augmented by the introduction of a Job Guarantee where the British government could unconditionally offer a public sector job to anyone who wanted to work for a minimum wage that was above the poverty line and allowed people to be socially included.
As time passes there will be more opportunities to analyse the consequences of fiscal austerity. At present, my research group are examining the spatial consequences in Australia of the fiscal contraction. More about that later.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.