3.4.10 Further policies to reduce poverty, income and wealth inequality Notes

Apart from taxes, there are many other policies that can be used to reduce poverty, and income and wealth inequalities, including:

1. Policies to reduce inequalities of opportunities / investment in human capital.
2. Transfer payments.
3. Targeted spending on goods and services.
4. Universal basic income.
5. Policies to reduce discrimination.
6. Minimum wages.

Policies to reduce inequalities of opportunities / investment in human capital

1. In most poor countries, the access to essential services such as education, healthcare, differs greatly between the rich and the poor.
2. Therefore to eliminate this inequality in opportunity, the government can invest in human capital, and provide such services free of charge to the poor.
3. This way, low-income households can expand their skills and qualifications to:
   1. Be able to get better jobs in future.
   2. Be able to maintain their health.
   3. Provide better living standards for their kids, closing the cycle of poverty.

Advantages

1. Enhanced social mobility: free access to education and healthcare enables low-income households to improve their skills and qualifications, leading to better job opportunities and reduced income inequality.
2. Breaking the cycle of poverty: improved living standards for children, including better health and education, allow future generations to escape poverty more effectively.
3. Long-term economic growth: investing in human capital increases the productivity and efficiency of the workforce, driving economic growth over time.

Disadvantages

1. High costs for governments: providing free education and healthcare requires substantial public funding, which may strain government budgets, especially in poorer countries.
2. Risk of inefficiency: poorly implemented policies may lead to resource wastage, corruption, or mismanagement, reducing the effectiveness of these measures.
3. Dependence on government support: relying on free services may discourage self-sufficiency, with individuals or families expecting continued government aid without seeking personal development.

Transfer payments

Transfer payments can include:

1. Unemployment benefits: financial assistance for individuals who are temporarily out of work.
2. Pensions: payments to retired individuals to ensure a basic standard of living.
3. Child allowances: financial support for families with children to cover expenses like food, clothing, and education.
4. Disability benefits: assistance for individuals with disabilities to help cover their living costs.

Advantages

1. Support for vulnerable groups: transfer payments provide a safety net for individuals facing unemployment, retirement, or disabilities, ensuring a basic standard of living.
2. Reduction of poverty: these payments help low-income households meet essential needs like food, housing, and education, reducing overall poverty levels.
3. Promotion of social stability: by addressing income disparities, transfer payments help reduce social tensions and promote stability within a society.

Disadvantages

1. High government costs: financing transfer payments requires substantial public spending, often funded by higher taxes or government borrowing.
2. Risk of dependency: recipients may become reliant on transfer payments, reducing motivation to seek employment or improve skills.
3. Inefficient targeting: poorly designed systems may direct benefits to individuals who do not need them, while failing to adequately support those in genuine need.

Targeted government spending on goods and services

1. Governments often spend part of their government revenue for the provision of merit goods, such as:
   1. Education.
   2. Healthcare.
   3. Physical capital (clean drinking water, infrastructure etc.).
2. Governments provide these goods since they tend to be unaccessible for low income households.
3. Hence, by providing such goods, the government can reduce the inequality in the access to essential goods and services, reducing poverty.

Advantages

1. Reduces poverty: direct government provision ensures that low-income households have access to essential goods and services, improving social mobility.
2. Long-term economic growth: a healthier, more educated workforce increases productivity and contributes to economic development.
3. Public welfare improvement: direct provision enhances the overall well-being and quality of life, reducing poverty-related issues.

Disadvantages

1. High government costs: requires significant public spending with high opportunity costs, which may strain national budgets.
2. Risk of inefficiency: poor implementation or corruption can lead to resource wastage and misallocation.
3. Potential market distortions: excessive government involvement may reduce private sector incentives to provide these goods efficiently.

Universal Basic Income (UBI)

1. Universal Basic Income (UBI) is a government policy that provides all individuals with a fixed, unconditional payment at regular intervals, regardless of their employment status or income level.
2. The goal of UBI is to ensure a basic standard of living for all and reduce poverty and inequality.

Advantages

1. Reduces poverty: provides a safety net for individuals and families, ensuring they can meet their basic needs.
2. Simplifies welfare systems: replaces complex welfare programs with a single, straightforward payment.
3. Encourages entrepreneurship: gives people the financial security to pursue education, start businesses, or take risks without fear of losing income.

Disadvantages

1. Cost: funding a UBI program can be extremely expensive, requiring significant tax increases or cuts to other public services.
2. Inflation: an increase in disposable income could lead to higher demand for goods and services, driving up price levels.
3. Disincentive to work: critics argue that UBI might reduce the incentive for individuals to seek employment, reducing the productivity of the labour force.

Policies to reduce discrimination

As we discussed in previous sections, discrimination can be one of the driving forces behind poverty and income and wealth inequalities.

For this reason, policymakers often attempt to reduce discrimination, such as:

1. Affirmative action: policies that provide opportunities for systematically discriminated communities, in education, employment, and government to address systemic discrimination.
2. Anti-discrimination laws:legislation that prohibits discrimination based on race, gender, age, disability, or other factors in areas like hiring, housing, and public services, ensuring equal treatment for all.

Advantages

1. Promotes equal opportunities: policies such as affirmative action help historically marginalised groups access education, employment, and leadership positions.
2. Reduces income and wealth inequality: by addressing systemic discrimination, these policies help disadvantaged groups secure higher-paying jobs and accumulate wealth.
3. Enhances social cohesion: ensuring equal treatment fosters inclusivity, reduces social tensions, and promotes a more equitable society.

Disadvantages

1. Potential reverse discrimination: affirmative action may unintentionally disadvantage other groups, leading to concerns about fairness.
2. Implementation challenges: enforcing anti-discrimination laws requires strong oversight, legal frameworks, and resources, which may not always be effective and come with opportunity costs.
3. Resistance and controversy: these policies can face political and societal pushback, particularly if they are perceived as favouring certain groups over others.

Minimum wages

1. Minimum wage laws set the lowest hourly/monthly wage that employers must pay their workers.
2. As you may recall from subtopic 2.7.2, minimum wages are one of the most common form of price floors.
3. These laws aim to ensure a basic standard of living for low-income workers and reduce poverty and income inequality.

Advantages

1. Reduces poverty: increases the earnings of low-wage workers, helping them afford basic necessities.
2. Boosts consumer spending: higher wages increase disposable income, stimulating demand for goods and services.
3. Promotes fairness: ensures that workers receive a fair wage for their labor.

Disadvantages

1. Unemployment: critics argue that higher labor costs may lead employers to reduce hiring or cut jobs.
2. Informal employment: some businesses may evade minimum wage laws by hiring workers off the books.
3. Regional disparities: a uniform minimum wage may not account for differences in living costs across regions.