Redefining The Poverty Line3

Labour blogger Hopi Sen has read our report on welfare reform and perhaps unsurprisingly, doesn't like what it says. But it's worth running through his objections because they highlight some key points about our argument.

The most important issue is the definition of the poverty line. Sen writes:

"If you’re the Taxpayers’ Alliance, the way to cut the gordian knot of Welfare reform without spending any money seems to be to redfine poverty to a much lower level, reduce support for those a little above that level, and abandon pretty much all support for those on medium-low incomes.

In other words, if you’re near the current definition of poverty, struggling to get by, and find tax credits and child benefit and income support useful- Watch out. They’re coming to get you."

As readers of our report will know, the fundamental question we seek to address is a tough one – how to break the welfare trap for the able-bodied working age poor without spending money the country can no longer afford. Although we can all agree on the need to cut the scandalously high 70-80% effective marginal tax rates faced by the poor (mainly because of benefit withdrawal), that's the easy bit. The difficult bit is to say how the money will be found.

Our proposed solution is to redefine the poverty line from its current 60% of median income back to 50%, which is where it originally started out. We calculate that would save £20-30bn pa, which would then be available to substantially reduce those high marginal tax rates. In fact we calculate that we could afford to cut them to a uniform 55% – still too high, but a vast improvement on the current situation.

Unfortunately, while he slams our proposal, Sen offers no alternative. Like the left in general, he doesn't say where he'd get the money from. All he says is that the TPA is out to get the poor. In reality – as we hope is clear in our paper – our aim is to help the poor, by providing a practical and affordable scheme to make work pay.

Turning to a specific point Sen makes about our modelling work, he objects to the way we derive our figure for median income from the official household survey data. The median income is important because under the current British welfare system it is the benchmark against which the poverty line is drawn.

As explained in the paper, we derive the median from the net income of households before taking account of any welfare payments they are receiving. We acknowledge that the official statistics currently derive it after welfare payments, but we believe that's a circular and misleading calculation. It means that both median income and the poverty line are artificially inflated by the welfare system itself. The system ends up chasing its own tail towards ever higher costs and an ever worse welfare trap.

This touches on a key difference between us and the left on welfare. Whereas the left see welfare as a tool for compressing income relativities throughout the income range, we believe that for able-bodied adults of working age, welfare payments should, in principle, be confined to a safety net, designed to relieve absolute poverty among those towards the bottom*. Paying income support to those who are at or around median incomes means taxing them with one hand and paying it back with the other. Which is not only administratively expensive and wasteful, but also certain to distort the way people choose to work, and to spend their own earnings.

Sen makes much of the fact that there'd be some losers from our proposal. Indeed there would be, as we recognise in the paper. And that's why we urge the Department for Work and Pensions to conduct a detailed analysis, identifying precisely who the losers would be, and reviewing the need for transitional arrangements. Nobody says it would be easy, still less pain-free. But then again, given where we are, none of the choices before us are easy or pain-free.

We also need to remember that the current system itself has serious problems for the poor. It is so complex that take-up rates for many benefits are very low (just 57% in the case of the Working Tax Credit). And it leaves many people living in severe poverty – an estimated 6% of the population, up from 5% a decade ago. Fraud and error are rife, running at an estimated £4.5bn pa.

The key point about our proposal is one that Sen doesn't pick up at all. It is to give the able-bodied working age poor a clear financial incentive to escape the welfare trap and take control of their own lives. It's a goal we believe worth fighting for, and as our paper demonstrates, even in these tough fiscal times we believe we can achieve it.

*Footnote – The dispute over the definition of poverty goes back 50 years. The left have argued that we should focus on relative income distribution, and they have prevailed - hence the current definition of the poverty line at 60% of median income. But that's not what most people actually think of as poverty, which tends to focus on not having enough food, or a roof over your head, etc. That is the traditional definition of poverty, known as absolute poverty, and in principle, it is the approach we favour. Which is why in Appendix C of our paper we recommend that the Department for Work and Pensions conduct some proper analysis in this area and publish a measure of absolute poverty, comparable to the one produced by the US Census Bureau.

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Mike Denham
Mike is a former Treasury economist who worked extensively on public spending and fiscal analysis during the 1970s and early 1980s. His work included cost benefit appraisal of public projects, analysis of public sector cost inflation and value for money studies.
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