GOVERNMENT POLICIES TO COMBAT POVERTY: AQA Economics Specification Topic 4.1

Topic 4.1 - Individuals, firms, markets and market failure

Snapshot of the AQA syllabus topic area we’ll be covering in this post.

GOVERNMENT POLICIES TO ALLEVIATE POVERTY AND TO INFLUENCE THE DISTRIBUTION OF INCOME AND WEALTH: poverty and inequality

AQA students must understand the following content [taken from the syllabus]

• The policies which are available to influence the distribution of income and wealth and to alleviate poverty.

• The economic consequences of such policies.

---

ESSENTIAL INFORMATION

[NOTE: supplementary knowledge, supporting diagrams and questions at the end]

INTRODUCTION

In the previous post, we discussed the topic of poverty and the difference between relative and absolute poverty. In this post, we will carefully examine the government policy that can be used to mitigate the effects of poverty throughout society.

Poverty is a serious issue that impedes social advancement and economic growth in any society. Governments are essential in resolving this problem by putting into place measures to redistribute income and wealth. By reducing the wealth gap, promoting social justice, and ensuring a more fair distribution of resources, these programmes aim to reduce poverty. In addition to acknowledging the moral and political stances involved with these techniques, this article will examine various government strategies available to alter income and wealth distribution as well as their economic effects.

INCOME REDISTRIBUTION POLICIES

1. Progressive Taxation: Progressive taxation is one of the most frequently used policies to redistribute income. Governments can raise more money from the wealthy segments of society and direct it towards programmes that fight poverty by enforcing higher tax rates on higher income groups. This strategy tries to close the income gap between various socioeconomic categories and achieve a more equitable distribution of the tax burden.

For example, the UK’s PAYE (pay as you earn) system is a progressive taxation system. There is a tax free allowance for earners up to £12,570 (2023/24 tax year), and beyond that taxpayers pay progressively more tax in bands of 20%, 40% which is based on earnings. The more you earn, the more tax you pay.

2. Social Welfare Programs and State Provision: To offer a safety net for the underprivileged, governments frequently undertake social welfare programmes like cash transfers, food aid, healthcare subsidies, and housing help. Targeted at people and families living below the poverty line, these programmes make sure they have access to the resources and basic needs they need to raise their level of living.

An example in the UK could be various benefits programmes such as the Universal Credit, social housing, free education and healthcare.

3. Minimum Wage Legislation: By establishing a minimum wage floor, employers may ensure that low-income employees are paid enough to cover their fundamental requirements. Governments can alleviate income inequality and lessen the occurrence of working poverty by enacting and readjusting minimum wage standards.

WEALTH DISTRIBUTION POLICIES

1. Inheritance and Estate Taxes: By levying taxes on the transfer of assets and properties between generations, inheritance and estate taxes aim to reduce wealth concentration among the richest in society. These policies can support social mobility and a more fair distribution of wealth by limiting the intergenerational transmission of wealth.

2. Land Reform: Land reform laws can significantly contribute to wealth redistribution in nations with sizable agricultural industries. To ensure a more equitable distribution of productive assets and to advance agricultural development, these policies entail transferring land ownership from large estates to landless farmers, or cooperative societies.

ECONOMIC CONSEQUENCES

1. Economic Growth and Productivity: Excessive income redistribution, according to critics, may deter entrepreneurship and investment, which could limit overall economic growth. However, research indicates that by encouraging a more inclusive and sustainable economy, moderate income redistribution can improve social stability, decrease income inequality, and promote long-term economic growth.

2. Fiscal Considerations: It costs a lot of money to put income and wealth redistribution programmes into practice. To prevent overtaxing the economy or spending too much on welfare, governments must carefully balance their fiscal priorities. The sustainability and effectiveness of these programmes depend on prudent financial management and resource allocation.

MORAL AND POLITICAL PERSPECTIVES

Political and moral factors are taken into account while evaluating income and wealth redistribution plans. On the basis of various ideologies and convictions about personal accountability, equality, and the function of the state, many perspectives emerge.

Some contend that eradicating poverty is morally required and that systemic disparities must be addressed through government intervention. Others support market-driven strategies, focusing on individual liberty and minimal government involvement.

While evaluating the effectiveness and fairness of various policy options, it is crucial for students to be aware of and critically analyse these perspectives.

CONCLUSION

In order to combat poverty and advance social equity, government policies that redistribute income and wealth are essential. Governments can work towards a more equitable distribution of income and wealth through progressive taxation, social assistance programmes, minimum wage laws, inheritance taxes, estate taxes, and land reform.

Finding a balanced strategy that addresses poverty while maintaining sustainable economic growth is essential, even though economic consequences and moral-political viewpoints should be carefully evaluated. Societies may reduce poverty, advance social justice, and encourage inclusive economic growth by carefully weighing their policy options.

---

SUPPLEMENTARY KNOWLEDGE

• It’s worth adding that welfare benefits are likely to be more successful if they are ‘means tested’ - meaning that applicants have to meet certain minimum requirements in order to be able to claim benefits

  • however, critics argue that the minimum eligibility criteria can be too strict or black and white, leaving many people who need help without it

• government policies to combat poverty have to be balanced with the needs throughout society

  • we have the need for the economy to grow and development to occur, but at the same time we should reduce poverty rates to ensure that everybody in society can benefit from economic developments

  • combating poverty costs money, which originates from the taxpayer - the government musn’t reduce the incentive for people to work or take entrepreneurial risks, otherwise the benefits system will fail

  • the government must also take into account the level of national debt - a generous benefits system that gives too much may cause debt to worsen - over time, this causes a burden on future taxpayers

• the benefits of progressive tax systems can be offset by regressive taxes

  • for example, PAYE in the UK is a progressive tax, but other indirect taxes such as VAT and excise duty, are actually regressive taxes

  • regressive taxes are taxes that burden the poorest in society more than the rich - for example, a rich person and poor person pay the same tax on a packet of cigarettes - but as a percentage of their incomes, the poor person pays more

---

SUPPORTING QUESTIONS

Question 1: What are the potential economic consequences of implementing income redistribution policies?

Answer:

An income redistribution policy is a type of policy that aims to more equally reward income to households, in order to reduce income disparities and lessen the problem of relative and absolute poverty.

One such example is the progressive tax system, in the UK known as PAYE for workers. This means the more you earn, the higher the percentage of tax you pay on your income.

Depending on their scope and execution, income redistribution policies can have a variety of economic effects.

Opponents of income redistribution policies contend that excessive income redistribution could discourage entrepreneurship, investment, and the will of employees to be more productive and create better futures for themselves - this potentially impedes overall economic growth and development.

Another argument is that income redistribution policies can often be offset by other policies - for example, indirect taxes are regressive, meaning that poorer people pay considerably more on indirect taxes as a percentage of their incomes.

However, research indicates that modest income redistribution can support a more inclusive and sustainable economy, reduce income inequality, and generate long-term economic growth. This is due to the negative effects relative and absolute poverty have on the economy. Such effects include higher crime rates, less access to opportunities such as starting up a business, a higher rate of malnutrition leading to low productivity and earlier death rates etc.