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

Economic Development – Poverty

1. What is Poverty?

Poverty is the condition in which people lack the resources to meet a minimum standard of living. It can be measured in two main ways:

• Absolute poverty – living below a fixed income threshold (e.g., $1.90 per day).
• Relative poverty – having significantly less income than the average household in a society.

2. Why Reduce Poverty?

High levels of poverty hinder economic development because they:

• Reduce human capital (poor health, low education).
• Limit domestic demand for goods and services.
• Increase social instability and crime.
• Exacerbate income inequality.

3. Policy Options to Alleviate Poverty

Governments can use a range of policies, including:

1. Economic growth strategies (e.g., investment, trade liberalisation).
2. Education and training programmes.
3. Infrastructure development.
4. Tax reforms.
5. More generous state benefits.

4. More Generous State Benefits

State benefits are direct transfers from the government to households. Making them more generous means increasing the amount, coverage, or both.

4.1 Types of State Benefits

4.2 How Generosity Can Be Increased

• Raise the payment level (e.g., increase weekly cash amount).
• Expand eligibility (e.g., lower income thresholds).
• Introduce new benefit categories (e.g., child allowance).
• Improve payment regularity (e.g., monthly rather than quarterly).

4.3 Economic Rationale

More generous benefits can raise the disposable income of low‑income households, leading to higher consumption. In a simple Keynesian framework:

\$\Delta Y = \frac{1}{1 - MPC} \times \Delta G\$

where \$MPC\$ is the marginal propensity to consume. Since low‑income households have a high \$MPC\$, a rise in \$G\$ (government transfers) can have a strong multiplier effect.

4.4 Advantages

• Poverty reduction: Directly lifts incomes of the poorest.
• Improved health and education outcomes: More resources for nutrition, schooling, and medical care.
• Stimulus to aggregate demand: Higher consumption can boost short‑run growth.
• Social cohesion: Reduces inequality and the risk of unrest.

4.5 Disadvantages / Limitations

• Fiscal cost: Higher taxes or borrowing may be required.
• Potential work disincentive: If benefits replace earnings, labour supply may fall.
• Targeting errors: Universal programmes may give money to non‑poor; means‑testing can be costly to administer.
• Inflationary pressure: Increased demand may push up prices, especially if supply is constrained.

5. Evaluation – When Are More Generous Benefits Effective?

Effectiveness depends on the economic context and design features:

1. Level of existing poverty: In countries with very high absolute poverty, cash transfers can have immediate life‑saving impacts.
2. Labour market conditions: In economies with high unemployment, generous benefits risk reducing labour participation unless paired with active labour market policies.
3. Fiscal space: Nations with limited tax bases may need to prioritise targeted over universal benefits.
4. Administrative capacity: Accurate means‑testing requires reliable data and efficient bureaucracy.
5. Complementary policies: Combining benefits with education, health, and job‑training programmes maximises long‑term poverty reduction.

6. Suggested Diagram

7. Summary Points

• More generous state benefits increase disposable income for low‑income households, directly reducing poverty.
• Key design choices are universality vs. means‑testing, benefit level, and eligibility thresholds.
• Advantages include immediate poverty relief, higher consumption, and better social outcomes.
• Disadvantages involve fiscal cost, possible work disincentives, and targeting errors.
• Effectiveness is maximised when benefits are part of a broader development strategy that includes education, health, and active labour‑market policies.