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Last Updated: Tuesday, 30 March, 2004, 11:30 GMT 12:30 UK
The UK's wage poverty paradox
By Robert Chote
Director of the Institute for Fiscal Studies

Families have received more money under Gordon Brown
Households with children have received more cash under Mr Brown
New Labour has achieved big declines in child and pensioner poverty since coming to power in 1997.

Yet income inequality in Britain is still higher than at any time in the previous 18 years of Conservative rule - and probably for at least 20 years before.

That falling poverty should not be accompanied by reduced inequality is something of a paradox, especially as Gordon Brown has deliberately set out to be a Robin Hood chancellor.

His tax and benefit reforms have taken from the relatively rich and given to the relatively poor.

Poor households

The impact on child and pensioner poverty is clear to see.

Tuesday's Households Below Average Incomes report from the Department of Work & Pensions shows that the proportion of children in poverty fell from 33.9% in 1996/97 to 28.5% in 2002/03, the latest year for which we have data.

The proportion of pensioners in poverty dropped from 26.9% to 21.4% over the same period.

These headline measures define a child or pensioner as poor if they live in a household with less than 60% of the median household's income, after housing costs and adjusting for family size.

Many pensioners don't take up the benefits they are entitled to
Pensioners have been beneficiaries of action on poverty
If you rank households from rich to poor, the median is the one in the middle.

These poverty rates have fallen so sharply - albeit to levels still well above the best in Europe - in part because Mr Brown has deliberately focused resources on these particular groups.

By 2002-03 he had allocated an extra 8.4bn a year to boosting the incomes of families with children and 5.8bn a year to boosting the incomes of pensioners.

But he has spent much less on the remaining two-fifths of the population - working age adults without children.

Higher inequality

Between 1997 and 2002, the maximum means-tested benefit and tax credit award for a single unemployed person aged 25 or over rose by just 1% in real terms, compared to 33% for an unemployed lone parent with two children under 11.

As a result, poverty rates for childless working age adults have not fallen - indeed they are at their highest for more than 40 years.

Taking all these groups together, the proportion of people in poverty across the whole population has fallen from 24.7% in 1996-97 to 21.8% in 2002-03.

Although modest compared to the rise in the poverty rate seen during the 1980s, the decline is still significant.

But why has it not been accompanied by an equivalent drop in inequality? The so-called "Gini co-efficient" measure of inequality has edged lower in the latest two years, but not by a statistically significant amount.

Inequality remains significantly higher than when Labour came to power.

Part of the explanation is that incomes before tax and benefit payments have become more unequal.

Mr Brown has had to run to stand still. If he had simply uprated the tax and benefit system in line with inflation the rise in inequality under Labour would have been twice as big.

The rise in inequality since 1996/97 also in particular reflects what has been going on at the extremes of the income distribution.

At the top, incomes have risen rapidly - perhaps reflecting demand for educated workers outstripping supply and greater acceptability for big increases in executive pay.

At the bottom, incomes have grown much more slowly, possibly due to non-take-up of means-tested benefits, in part by people whose incomes are temporarily low.

But it is hard to know for sure, because the incomes of the very poorest households are hard to measure accurately. Meanwhile, inequality among the middle 70% of the population has been falling.

Low-skill worries

So what can we expect in the future? The chancellor has been channeling more resources to children and pensioners since 2002-03, which suggests that poverty among these groups should fall further in the short term.

The introduction of the Working Tax Credit may also start to reduce poverty among childless adults.

The outlook for inequality is less clear. The small decline over the latest two years could reflect the impact of the stock market slump on City earnings and investment income, which already shows signs of reversing.

More important in the long term is whether better education can boost the earning power of the relatively low-skilled in the face of technological progress and competition from cheaper workers overseas.

That would reduce the pressure on Mr Brown and his successors to play Robin Hood.

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