Absolute and relative poverty

Daniel Hannan writes:

Here's a bit of good news: we can look forward to a sharp decline in poverty over the next two years. No doubt Polly Toynbee is even now composing a paean of praise to David Cameron for achieving what Labour never could.

Oh, hang on. On closer inspection, it turns out that things aren't quite so straightforward. The reason fewer people will be poor is that poverty, these days, is defined as earning less than 60 per cent of median income. Although downturns are bad for everyone, including the destitute, wages are depreciating in real terms faster than state benefits. People dependent on welfare payments will be worse off in absolute terms, but their incomes will fall more slowly than those of working people. As the median wage drops, the poverty line drops with it.

Thus we see the absurdity of the Joseph Rowntree/IFS measure of poverty – the measure uncritically accepted by the BBC and most other media. I've remarked before that, by these metrics, policies that shift people from dependency into productive jobs are defined as 'regressive'. Now we see that, by the same token, an absolute decline in Britain's living standards means a reduction in poverty.

Here's what the IFS report itself (PDF) has to say on the matter:

the living standards of low-income families are set to fall over the period - which will increase absolute poverty - but they are forecast to fall by less than the living standards of families at median income, and so relative poverty is forecast to have fallen in 2010-11. Indeed, at its low point, real median household income is forecast to be 7% lower in 2012-13 than it was in 2009-10, and to remain below its 2009-10 level until at least 2015-16. This unprecedented collapse in living standards is chiefly due to the (actual or forecast) high inflation and weak earnings growth over this period. As families in poverty get much of their income from state benefits and tax credits, which are typically increased in line with inflation, a fall in real earnings closes the gap between them and families around median income, who get much of their income from earnings.

But that doesn't quite capture the full absurdity of their definitions, because it turns out that "absolute poverty" is also relative:

The Child Poverty Act, passed with all-party support in 2010, commits successive governments to the eradication of child poverty by 2020. The Act lists four measures of child poverty, each with their own target which needs to be met for child poverty to be said to be eradicated, but this Commentary concentrates on relative and absolute poverty, as the other measures cannot yet be modelled. The Act defines an individual to be in relative poverty if his or her household’s equivalised income is below 60% of the median in that year; and he or she is in absolute poverty if the household’s equivalised income is below 60% of the 2010-11 median income, adjusted for inflation.

Wow.

I couldn't quite believe it, so I decided to look up the text of the Act:

The absolute low income target:

(1)The absolute low income target is that less than 5% of children who live in qualifying households live in households falling within the relevant income group.

(2)For the purposes of this section, a household falls within the relevant income group, in relation to a financial year, if its equivalised net income for the financial year is less than 60% of the adjusted base amount.

(3)“The adjusted base amount”, in relation to a financial year, is the base amount adjusted in a prescribed manner to take account of changes in the value of money since the base year.

(4)In this section—

• “the base amount” means the amount of median equivalised net household income for the base year;

• “the base year” means the financial year beginning with 1 April 2010.

I'm not sure whether the actual figure is available yet. The latest ONS report I was able to find, Social Trends 41 - Income and Wealth (PDF), has the data for 2008/09:

It shows a mean weekly household disposable income [1] of £507 per week (£26,364 p.a.) and median of £407 per week (£21,164 p.a.). That puts 60% of median at £244 per week (£12,688 p.a.; £1057 per month).

Now, that's not a huge amount of money to play with, but it's more than enough to cover the essentials — food, shelter, clothing, and housing. It's a far cry from a dollar a day! And the numbers already take into account the challenges of larger families [2].

To put this in context, let's look at the ONS figures for household income over the last 40 years:

There we are, then. Although 'relative poverty' will never disappear, all we need to do get rid of 'absolute poverty' is to drive median incomes back down to where they were in the mid 80s.

I'm sure Caroline Lucas could arrange that.

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[1] "Disposable income is the amount of money that households have available for consumption expenditure or savings and is calculated by taking total income from all sources and deducting expenditure on taxes, social contributions and other expenses such as insurance premiums" — it all seems a bit arbitrary to me, and I'd prefer to have details of the "other expenses", but hey ho.

[2] Note that these are 'equivalised' values, assuming a childless couple as a baseline, with some arbitrary weights for spouses and children of different ages to fudge the values. Appendix 5 of Social Trends 39 (PDF) explains the details.