Posts Tagged ‘UK poverty’

Nigel Lawson: No Fiscal Stimulus, Darling

24 November, 2008

You can rely on Nigel Lawson, Chancellor of the Exchequer 1983-89, to go against the conventional wisdom (see his views on climate change here and here, for example). He’s certainly not a member of the “we’re all Keynesians now” group. In today’s FT he argues that monetary policy is the key tool, not fiscal stimulus. Keynes was wrong:

“Britain … recovered faster than any other major nation from the 1930s slump. It did so largely on the basis of cheap money and a balanced budget. Between the slump’s deepest point, in 1932, and 1937 the UK economy grew at an unprecedented 4½ per cent a year. Nor was this due to rearmament spending, which did not start until 1936″.

I await the comments of economic historians on his reading of the 1930s. For the moment let me focus on his central message.

Lawson argues that recapitalizing the banks is the priority. Certainly, deleveraging by the banks has been huge. Nobody can deny that the economy can’t move again until the banks are sorted out. They are the achilles heel of the battered Anglo-Saxon model of capitalism. Today Citgroup got a $300 bn bailout.

But is this enough? It won’t be if deflation sets in. Then the real value of debt will rise, which will punish Britain’s already highly indebted households. Once deflationary expectations take hold, they are very difficult to shift as Japan in the 1990s demonstrated. Then monetary policy becomes next to useless: interest rates cannot be cut below zero.

Not using fiscal policy to stimulate consumer spending is therefore enormously risky. For sure, consumers might save rather than spend (see my previous post). And Britain will face a big tax bill (after the next election). The gilts market might take fright, but for now they are buying (few want equities).

Back to the lessons Lawson draws from the 1930s: if Britain was to revert to a balanced budget then it would have to cut public spending in a recession rather than raise it. This would have its own deflationary effect which, as economic activity fell, would reduce the tax base – thereby requiring a further expenditure cut to maintain a balanced budget. This is not a recipe for achieving economic recovery.

So, Nigel Lawson’s defiance of the Keynesian consensus is brave, but wrong. His recommendation is too risky. The same goes for doing nothing about climate change (on the latter: go here for a debate between Lawson and Oliver Letwin).

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

Keynes is Back. But What to Do, Darling?

24 November, 2008

Britain’s Chancellor of the Exchequer, Alistair Darling is praising Keynes – along with just about everyone else. He’s boosted public spending (go here). The present focus on fiscal policy reflects the fear of a ‘liquidity trap’ – which Keynes first identified in the 1930s. The Bank of England is set to cut interest rates further, but this might not encourage banks to lend. So monetary policy alone can’t do the trick (it is said). Hence public spending. And now tax cuts.

Today we hear the Chancellor’s plans (at 3.30 pm: go here). The government’s spin machine was busy over the weekend so a VAT reduction will hardly come as a surprise. The FT reckons it will be a £12.5 bn package:

“At the heart of the stimulus package is an expected “temporary” cut in the VAT rate from 17.5 to 15 per cent, the lowest standard rate allowed in the EU. Food, children’s clothing and some other items have always been zero-rated in Britain”.

Will a VAT cut work? Canada cut its sales tax at the beginning of 2008, but this had modest effects on total spending, according to the ‘Undercover Economist’, Tim Harford interviewed on the BBC Today programme this morning. For a critique of the Canadian tax cuts from a poverty perspective see GrowingGap. Canadian readers: send us your views.

To cut taxes now, taxes have to rise later. Economists describe this as borrowing from ourselves. Spending won’t rise if we fully anticipate the future tax increase. Or at least that’s what some macro-economists say (see Robert Barro). It’s called Ricardian Equivalence (drop that into your next pub conversation on the economic crisis: sure to impress). Economist readers: please up-date us on whether Barro is right.

Will businesses cut prices following a VAT reduction? They are slashing prices in any case, in advance of Xmas – a last ditch hope that the sales can carry them through the new year. Buyers stormed Marks & Spencers last week, following a 20% price cut. So we might all now afford fresh underwear. But will stores cut prices further, or take some of the VAT cut to rebuild their margins?

Ann Pettifor of the New Economics Foundation interviewed on the BBC yesterday was skeptical about tax cuts (Ann was one of the first people to predict this crisis). She believes that people will instead save the VAT cut (i.e. you will still buy the same basket of goods, but now the basket will be cheaper and you won’t add any more items. Your money is then deposited in one of Britain’s hopeless banks or under your mattress). Ann points out that if the money is spent then a lot will go on foreign imports (true, but I don’t think this is necessarily as bad as is often believed. The Americans need help too. I’ll do my bit by buying a new Apple Mac).

Other ideas I have come across: delay VAT payments by small businesses for six months. Many small businesses are penalized by the larger firms not paying their suppliers on time (a zero-cost way for the latter to fund themselves). Peter Mandelson promised a crack down, but doesn’t seem to have achieved much yet. In the recession of the early 1990s, small business failures were running at a 1,000 a week. So maybe government could help with a delay in VAT payments. Housebuilders want a continuation of the present holiday on stamp duty to get the housing market re-started. Readers might like to comment on the merits of each.

But there are two ideas from the Get Fair campaign that I really like.

First, immediately invest £4bn in measures to halve child poverty by 2010. Child poverty costs at least £25 billion each year in losses to the Exchequer and in reduced GDP, according to research from the Joseph Rowntree foundation. So spending tax revenue on eliminating child poverty now would actually save public money in the future. Surely a good idea.

Second, Get Fair says improve the take-up of existing benefits: they estimate that this would help 500,000 pensioners out of poverty. Here in the UK we have just had Remembrance Sunday, a day on which we remember those who gave their lives to defend Britain – especially in the Two World Wars. A 20-year old in 1940, is now 88. Helping our pensioners now, especially those in poverty (2.5 million of them) will be one of our last chances to thank their generation.

So, over to you Darling.

Parks for the Poor

11 November, 2008

Yes, having some greenery around you can improve your chances in life. A new study in the Lancet finds that living near parks or woodland improves life expectancy and health, regardless of income class. People living in poorer areas are more likely to die earlier and to suffer more ill-health than the UK average. This income-related inequality in health is less pronounced in populations with greater exposure to green space, according to the study by Richard Mitchell and Frank Popham from the universities of Glasgow and St Andrews (see this BBC report).

Victorian Britain saw great efforts to bring green space to the poor. The first children’s playground was created in a Manchester park in 1859. Many of Britain’s inner city parks went into decline from the mid-twentieth century, and their regeneration began in earnest in the late 1980s. Manchester’s St Michael’s Flags and Angel Meadow Park is an example. The area became notorious in the 19th century for the mass burial of the poor whose families could not afford a proper funeral.

The charity GreenSpace is now working to improve parks and green access in the UK. We also need more efforts in the mega cities of the developing world. On a recent trip to Dhaka I was struck by the lack of accessible greenery. Much appears to have been illegally built over – including one green space now occupied by a truly hideous ‘pleasure park’ which charges for admission.

Green space is also exceptionally important to managing the impact of climate change on urban areas, a theme in Manchester University’s research on sustainable cities (check out John Handley in the School of Environment and Development). So get planting.

Like to Know How to Live on a Dollar a Day?

9 November, 2008

Then go to the One Dollar Diet Project – you will be shocked at how difficult it is. Christopher Greenslate and Kerri Leonard tried it for a month. To survive the two Californians had to give up most purchased food and make their own from the raw ingredients. Many vegetables were too expensive, and they had to forage. Vitamin intake became a serious problem. The two school teachers found that they could not sustain their previous energy levels. The average American eats $7 worth of food per day, but it can go below a dollar late in the month before pay day or when food stamps run out. In a New York Times article on the project, Christopher says: “I challenge anyone to live on a dollar a day and eat fresh food in this country”.

This resonates with the British debate around food and poverty, which has been given another boost by Jamie Oliver (see our earlier posts). Obesity is generally above average among low-income groups in rich socities. Why? One reason is that junk foods (energy dense: with the most calories and fewest nutrients per ounce) are cheaper than nutrient rich, lower-calorie foods like fruits and vegetables.

Pablo Monsivais and Adam Drewnowski found that junk food is not only less expensive, but that it has gone up less in price than nutrient rich, lower-calorie foods. In their Seattle study, the cost of the latter is $18.16/1,000 kcal, compared with $1.76/1,000 kcal for the most energy-dense (junk) food. Over a 2-year period, junk food actually fell by – 1.8% in price while the least energy-dense foods saw a price rise of 19.5 per cent.

Get Fair on UK Poverty

19 October, 2008

The UK has got a lot richer over the last twenty years – we are the world’s fifth richest country – but not fairer. Inequality has risen, and 12.8 million Brits live in poverty (30% of children, and 17% of older folk). That’s the message of Get Fair – a national campaign calling for an end to poverty in the UK by 2020.

The coalition now consists of more than 50 organizations. They work on poverty right across society, including among children, older people, refugees, and the disabled. Get Fair includes housing groups, as well as faith and community groups.

Two at least of their recommendations could help Britain dig itself out the recession, namely invest £4bn measures to halve child poverty by 2010 and improve the take-up of existing benefits (they estimate that this would help 500,000 pensioners out of poverty).

On 4 October, Britain’s biggest ever event to end child poverty was held in Trafalgar Square, London, organized by End Child Poverty. And Poverty Action Week takes place 31 January to 8 February 2009, organized by Church Action on Poverty.

The Habitual Food of the Working Man Varies According to his Wages

1 October, 2008

So wrote Friedrich Engels in The Condition of the Working Class in England based on his investigations into poverty in Manchester. The link between poverty and bad nutrition still resonates in Britain as Jamie Oliver’s new TV series Jamie’s Ministry of Food shows. Writing in today’s Guardian, Felicity Lawrence cites work by Tim Lobstein of the International Association for the Study of Obesity who has calculated the cost of 100 calories of food energy from different types of food.

“The cheapest way to get your 100 calories is to buy fats, processed starches and sugars. A hundred calories of broccoli costs 51p, but 100 calories of frozen chips only cost 2p. Good-quality sausages that are high in meat but low in fat cost 22p per 100 calories, but “value” fatty ones are only 4p per 100 calories. Poor quality-fish fingers are 12p per 100 calories compared with 29p for ones made with fish fillet that are higher in nutrients. Fresh orange juice costs 38p per 100 calories, while the same dose of energy from sugary orange squash costs 5p”.

The result? Rising obesity, and the associated diseases, among Britain’s poor. This is one reason why life expectancy can differ so radically within just a short distance in Britain, as you go between low-income and higher income areas: by as much as 28 years – yes 28 years – according to WHO.

One of the areas investigated by Engels was ‘Little Ireland‘, populated by those who escaped the Irish famine of the 1840s. The area that was Little Ireland is close to the University of Manchester and Manchester Metropolitan University.

Property Refuses to Dance

29 August, 2008

Talking of politics trying to cope with capitalism’s erratic moves (see our last post), UK Chancellor Alistair Darling has come up with another wheeze to try and save Britain’s collapsing property market — now on the floor after a speculative frenzy to the tune of easy credit. Repossessions are dramatically up, not least in Manchester, a city often labeled as the ‘UK’s debt capital’.

First, the Chancellor tried to encourage the banks to clear up their own mess — with a bit of public money. Interesting isn’t it how (private) banking crises always try and turn themselves into (public) fiscal crises? And in both rich and poor countries, too (see Jay Rosengard on East Asia hereWillem Buiter’s blog, and Managing a Bank-Specific crisis: A UK perspective from the Bank of England, no less).

Now, the Chancellor is going to help local authorities and housing associations buy up unsold properties and help people facing repossession with mortgage rescue schemes. We leave it to our readers to figure out whether this is good or bad social policy (it’s good for the banks since the schemes reduce their bad debts: that fiscal connection again). It certainly reflects the political battering the government is taking. Today’s Times — with a nice photo of the ‘Chimney Pot’ regeneration in Salford — sums it all up:

“This latest strategy highlights the increasing influence of Vince Cable, the Liberal Democrats’ Treasury spokesman, a man as deft at articulating the concerns of Middle Britain as he is at the paso doble in the ballroom”.

Meanwhile, the UK property market seems unable to get to its feet. Dance on.

Abolition of the 10p tax band: How much more can Britain’s low paid workers take?

23 April, 2008

In the 2007 Budget Gordon Brown, then Chancellor of the Exchequer, announced that the 22p tax band would be reduced to 20p in the pound as of April 2008. In addition, the 10p tax band was to be abolished. The aim was to create a simplified and fairer tax system and raise some much needed revenue for the government – they expect to make £3.7bn from the changes. A year has passed since then and the planned tax system changes have been implemented but only now are we beginning to understand the implications of these changes. As the tax band changes have the effect of ‘making poor people poorer’ (to quote Labour MP David Anderson) Brown is facing a substantial backlash from backbench Labour MPs, other political parties and the general public.

In essence, what the tax band changes amount to is a reduction in the tax paid by higher earners and an increase in the tax paid by those on the lowest incomes. Let me repeat that. A Labour government, which is intent on tackling poverty, has implemented a change to the tax system which sees the better off in society gain money and the poor lose money. As The Times put it, it amounts to a robbing Peter to pay Paul type of situation but in this case Peter was notably poorer than Paul in the first place. It has been estimated by the Institute of Fiscal Studies (IFS) that 5.3 million households will be negatively affected by these changes with poor households losing out by up to £232 per year. This is shameful enough but when this is juxtaposed against the fact that the tax changes mean that everyone earning above £41,435 will have an extra £297 a year in their pockets there is little wonder there has been a substantial and sustained backlash.

The Government’s position on the emerging tax rebellion has changed several times in the last few weeks from outright denial that the changes will negatively affect anybody to some form of commitment to do something about it somehow in the future. For now, Gordon Brown and the current Chancellor of the Exchequer, Alistair Darling, are attempting to stave off criticism by pointing to the role of the tax credits system in making up any short fall in household income. Admittedly this would be an effective mechanism if the tax credit system was infallible and was available to all workers and if homo-sapiens became homo economicus – the optimum economic being – but this is not the case. Current estimates suggest that around only half of those eligible for Working Tax Credit actually claim it. In my work with working poor households in Manchester I found that many households did not claim tax credits because of (i) a perceived stigma around being seen to claim benefits despite the fact that they were a form of in-work support and (ii) because of the complex nature of the system. In addition, the recent problem of tax credit overpayment had dented the confidence of many low income households in the system and has put many off from claiming. In the last three years nearly £6 billion has been overpaid to hundreds of thousands of households. The government’s attempts to claim this back from low income households has exacerbated the experience of poverty for many recipients. Some claimants have even been forced to sell or re-mortgage their homes to (more…)

Social mobility in the UK: poor but not getting worse

14 December, 2007

The Sutton Trust yesterday released a report (available here) on social mobility in the UK, which concluded that the UK continues to perform poorly on measures of social mobility. Between 1958 and 1970 there was a well documented decline in social mobility. For example, as the report states, for sons in the bottom quartile the proportion remaining in the bottom quartile is 30 per cent for children born in 1958 and 38 per cent for those born in 1970. (Sons are used to remove the effect of changing levels of women’s labour market participation). Also, there was less likelihood of those born in 1970 making large movements in economic group, with the percentage rising from the bottom quintile to the top quintile at 18 per cent in 1958, declining to 11 per cent in 1970. A significant factor in explaining this fall in social mobility is the rising association between family income and accessing higher education.

Evaluations of more recent data finds that since 1970 there has been little change in intergenerational mobility. Social immobility ‘appears to have flattened out’, although it has not started to improve the report concludes. Britains comparatively high level of social immobility therefore continues. This has a major impact on the attainment different groups can expect. The report says: ‘Children in the poorest fifth of households but in the brightest group drop from the 88th percentile on cognitive tests at age three to the 65th percentile at age five’. By contrast, those from the richest households who were among the least able at three moved up from the 15th percentile to the 45th percentile by the age of five. If this trend were to continue, they would overtake the gifted children from poor backgrounds by the age of seven.

Government recommits to UK Child Poverty targets

11 December, 2007

Ed Balls gave a speech yesterday on child poverty before launching his Children’s Plan today in the Commons. He recommitted to the aim of halving child poverty in the UK by 2010 and eradicating it by 2020. Meanwhile, research by the Department for Work and Pensions has shown that 41% of the British public believe that there is ‘very little’ child poverty in Britain (approximately 3 million children are classified as being in poverty – roughly a third of the total). Around 52% think that there is quite a lot of poverty. Voters are also increasingly likely to blame the poor themselves.

There are a couple of articles in the Guardian about it, one on Ed Ball’s speech here, and a comment by Polly Toynbee here.


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