Policies to alleviate poverty and redistribute income: more generous state benefits

Economic Development – Poverty

1. Definitions of Poverty

• Absolute poverty – living below a fixed income threshold (e.g., US $1.90 a day) that is considered the minimum needed for basic nutrition and shelter.
• Relative poverty – having considerably less income than the average household in a society, usually measured as a proportion (often 60 %) of the median household income.

2. Causes of Poverty (syllabus requirement)

• Unemployment or under‑employment
• Low wages
• Poor health or illness
• Age‑related factors (children, the elderly)
• Environmental factors (natural disasters, climate change)

3. Why Reduce Poverty?

Poverty hinders economic development because it:

• Reduces human capital – poor health and low education limit productivity.
• Weakens domestic demand for goods and services.
• Increases social instability, crime and the risk of unrest.
• Widens income inequality.

4. Policy Options to Alleviate Poverty (Cambridge syllabus 5.2 Poverty)

The syllabus expects you to know all six options. Each option should be described in terms of what it is, how it works and its main advantages/disadvantages. Diagrams are optional but useful.

1. Economic‑growth strategies – investment, trade liberalisation, infrastructure development.
   How it works: raises long‑run aggregate supply (LRAS) → higher output and incomes.
   Diagram suggestion: LRAS shift right.
2. Education and training programmes – free primary/secondary schooling, vocational training.
   How it works: improves human capital → higher productivity and wages.
   Diagram suggestion: upward shift of the labour‑supply curve (more skilled workers).
3. Health and nutrition programmes – free clinics, school meals, vaccination.
   How it works: healthier workers are more productive; better nutrition supports learning.
   Diagram suggestion: increase in LRAS or AD (through higher labour productivity).
4. More generous state benefits – cash or in‑kind transfers, social insurance.
   (see detailed section 5 below)
5. Progressive taxation – higher tax rates on higher incomes, often used to fund redistribution.
   How it works: reduces disposable income of the rich, raises revenue for welfare programmes.
   Diagram suggestion: Lorenz‑curve shift towards equality.
6. National minimum wage (or other wage‑setting measures) – legally binding floor on pay.
   How it works: raises earnings of low‑paid workers; may affect employment if set above equilibrium.
   Diagram suggestion: labour‑market diagram showing wage floor.

5. More Generous State Benefits

State benefits are direct cash or in‑kind transfers from the government to households. “More generous” can mean raising the payment level, widening eligibility, adding new categories, or improving the frequency of payments.

5.1 Types of State Benefits

5.2 Ways to Increase Generosity

• Raise the payment level – increase the weekly or monthly cash amount.
• Expand eligibility – lower the income threshold or remove the means‑test.
• Add new benefit categories – e.g., a child allowance or disability supplement.
• Improve payment regularity – move from quarterly to monthly payments to smooth household cash flow.

5.3 Economic Rationale (IGCSE/A‑Level level)

• Low‑income households have a high marginal propensity to consume (MPC) (often 0.8 – 0.9). An extra £1 of cash therefore raises consumption by £0.80‑£0.90.
• Higher consumption shifts the aggregate‑demand (AD) curve rightward, boosting real GDP in the short run.
• If the economy is near full capacity, the AD shift can generate inflationary pressure (link to syllabus 4.7 Inflation).

Quantitative illustration (using MPC = 0.8):
A £100 million increase in benefits raises disposable income by £100 million. Consumption rises by 0.8 × £100 million = £80 million, moving AD rightward and potentially increasing output by a similar amount (depending on the multiplier).

5.4 Advantages of More Generous Benefits

• Poverty reduction – directly raises the income of the poorest households.
• Better health and education outcomes – more resources for nutrition, medical care and school fees.
• Stimulus to aggregate demand – high MPC leads to a noticeable rise in consumption.
• Social cohesion – narrows the income gap and lowers the risk of unrest.

5.5 Disadvantages / Limitations

• Fiscal cost – requires higher taxes or borrowing; may be unsustainable if fiscal space is limited.
• Work disincentive – generous cash transfers can reduce the incentive to work, especially if benefits replace earnings.
• Targeting errors:
  • Over‑targeting (over‑coverage) – benefits go to households that are not poor (e.g., universal programmes).
  • Under‑targeting (under‑coverage) – needy households are missed because of strict means‑tests or poor data.
• Inflationary pressure – if supply cannot keep pace with higher demand, prices may rise.

5.6 Fiscal & Administrative Considerations

• Fiscal space – countries with a narrow tax base or high debt may need to rely on targeted rather than universal transfers.
• Administrative capacity – accurate means‑testing and timely payments require reliable household data and an efficient bureaucracy.
• Financing choice – higher taxes (progressive or consumption) versus borrowing; each has macro‑economic implications.

5.7 Interaction with Other Policies

• Benefits can be conditioned on school attendance or health checks, reinforcing education and health programmes.
• When paired with active‑labour‑market measures (training, job‑search assistance), the work‑disincentive effect is reduced.
• Revenue from progressive taxation often funds generous benefits, creating a policy link.

6. Evaluation – When Are More Generous State Benefits Most Effective?

Consider the following criteria when assessing the likely impact of more generous benefits.

1. Level of existing poverty – In countries with very high absolute poverty, cash transfers can provide immediate life‑saving income.
2. Labour‑market conditions – In economies with high unemployment, benefits must be coupled with job‑creation or training to avoid large drops in labour‑force participation.
3. Fiscal space – Nations with limited tax revenue may prefer targeted programmes to keep spending sustainable.
4. Administrative capacity – Accurate targeting and regular payments need a strong bureaucracy and up‑to‑date household registers.
5. Supply‑side response – If increased demand is met by higher output, inflation is limited; otherwise price rises erode real benefit values.
6. Complementary policies – Combining benefits with education, health, and active‑labour‑market measures maximises long‑run poverty reduction.

7. Suggested Diagrams

• AD–AS diagram showing a rightward shift of AD after a cash‑transfer increase (possible short‑run inflation).
• Lorenz curve before and after a universal cash transfer – curve moves closer to the line of equality.
• Labour‑market diagram illustrating a possible reduction in labour‑supply when benefits are very generous.
• Fiscal‑space diagram (government revenue vs. expenditure) to discuss sustainability.

8. Summary Points

• Absolute poverty = fixed threshold; relative poverty = % of median income.
• Causes: unemployment/under‑employment, low wages, poor health, age‑related factors, environmental shocks.
• Six syllabus‑required policy options; this note gives a brief overview of each.
• More generous state benefits: raise payments, widen eligibility, add categories, improve frequency.
• Economic rationale – high MPC → higher consumption → rightward AD shift; possible inflation if supply is constrained.
• Advantages: immediate poverty relief, better health/education, demand stimulus, social cohesion.
• Disadvantages: fiscal cost, work disincentive, targeting errors (over‑ and under‑coverage), inflation risk.
• Effectiveness depends on fiscal space, administrative capacity, labour‑market conditions, and the presence of complementary policies.