Poverty is expensive

There are 14 million people in poverty in the UK, and it is costing taxpayers £50bn+ per year more than if those people were given the income and resources necessary to lift them out of poverty.

“Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.” — James Baldwin, writer

While it is easy to see how the above quote is true for the individual, especially if you have ever been in the situation where your income is below the poverty line, it is much less well understood how expensive the existence of poverty is for the rest of society.

Below I will seek to quantify this wider expense and show that allowing it to persist makes zero financial sense for any government.

What do we mean by ‘Poverty’?

In order to understand this, we first need to determine what we mean by poverty. There are numerous ways to view poverty, but in all its forms it ultimately represents the lack of income or resources necessary to provide a person’s basic needs.

This article is an attempt to calculate the overall cost to the economy and government of this poverty. Once established, that will help us understand the economic value of ending it. So we will view it in terms of income levels, though conceding that for the individual, the experience of poverty is often much more complex.

Where is the poverty line?

What is the level of household income, beneath which you would be considered to be living in poverty?

There is no hard-and-fast rule, but the assumption in the Child Poverty Act 2010 was 60% of median household income. The Social Metrics Commission has more recently suggested 54%, but to avoid contention in this area we will assume the higher figure. There will undoubtedly be disagreements on the exact point at which household income would be considered to be below the poverty line, but it would likely make little difference to the overall outcomes demonstrated in this article.

Luckily we have a clear starting point for assessing those measures: each year the Office of National Statistics publishes data on the incomes of households, including benefits and taxes.

That data shows us that the median household disposable income in 2019 was £29,600, which gives us a poverty line of £17,760 per year (60% of the median).

All household data in this article refers to the ‘equivalised’ household (i.e. the figures assume for comparison purposes that households are the same in terms of demographics and size).

The size of the ‘Poverty Gap’

So what is the gap between the poorest households and the poverty line?

We can see from the figures below that the two poorest deciles have a disposable income below the poverty line of £17,760 per year.

That might not seem like much, but this represents 5.6 million households, or around 14 million people, and includes around 3 million children. And many of them are falling far below that line (also important to note that a further 2.8 million households are barely above that line — a 15% drop in income in any given year would see them descend below it)

The poorest 10% (2.8 million households) are, on average, barely halfway towards the poverty line with a poverty gap of nearly £8000 per year. Their income would almost have to double for them to find themselves lifted above it.

The second poorest decile are much closer, but still clearly below it.

Apart from the tales of personal and familial hardship this represents, it also shows the significant change in fortunes that would need to occur for millions of households to get over that line. Small improvements just won’t deliver.

The total poverty gap highlighted here by the area in orange is £26.3 billion per year.

The poorest decile has a £22.4bn poverty gap (2.85m households x £7,880), while the 2nd decile has a £3.9bn gap (2.75m households x £1,420).

However, these figures take into account benefits paid to those with disabilities to help with the additional costs that they would incur. If we remove these benefits for the poorest 2 deciles, this increases the poverty gap by around £4.1bn.

So, our total poverty gap is around £30.4bn

This represents the scale of poverty in the UK, at least in monetary terms, and shows by how much those household incomes would need to increase to end it.

This number is reinforced by other data suggesting that the poorest households are having to borrow around £26bn per year to cover their basic needs.

The full cost of poverty

Now that we have a figure for the extent of poverty (and the lack of income that defines it), what impact does that level of poverty have on the wider economy, and specifically on public spending?

The Joseph Rowntree Foundation has already done this assessment for us, and the results are staggering.

JRF estimated in 2016 that the full cost of managing the impact of poverty in the UK was a whopping £78 billion (inflation adjusted for 2019, this would be £85bn).

In their own words:

“a large proportion of what we spend publicly (about £1 in every £5 spent on public services) is making up for the way that poverty damages people’s lives.”

This amount is in addition to income-related benefits paid out, and is made up primarily of:

Public service costs, i.e.:

• Health care (£29bn)
• Schools (£10bn)
• Crime (£9bn)
• Children’s Services (£7.5bn)
• Adult social care (£4.6bn)
• Housing (£4bn)

“Knock on” effects, such as:

• Lost tax revenues from those who have grown up in poverty (£4bn)
• Additional benefits to those who are still in poverty even after income-related benefits have been paid out (£5.1bn)

The report itself is well worth a full read, not least because it suggests that the figure presented as the public cost of poverty is almost certainly an under-estimate.

It does not include costs associated with suffering from poor health, either by the individual or by wider society : i.e. it does not include loss of economic productivity due to ill-health or premature death. It does not include the cost of being a victim of crime, only the public service cost of managing the subsequent criminal justice processes.

And it does not include the reduction of wider economic capacity as a result of lower educational attainment and loss of skills (it only calculates the reduction in tax revenues that derive from that direct under-utilisation).

So, we must treat these JRF calculations as obvious under-estimates of the true cost of poverty to our economy and society.

Poverty elimination’s return on investment

The conservative estimate of the cost of poverty in 2019 is £85bn.

The amount of additional income required to lift every household to the poverty line in 2019 was £30.4bn.

For every £1 below the poverty line that households sink, the taxpayer has to provide additional spending (or cover losses) of £2.80.

This spending isn’t solving the cause of poverty, but merely managing the impact. The problem and the spending requirement will still be there next year.

So, purely in fiscal terms, poverty is incredibly expensive for government and taxpayers.

If your objective were to reduce public costs and improve economic outcomes, not to mention increase the capacity of over-stretched public services, then clearly the eradication of poverty should be very high on your list of priorities.

The return on investment for a successful anti-poverty strategy would be £2.80 saved for every £1 distributed to those households.

So why isn’t the welfare system designed to eliminate that poverty and save taxpayers that additional cost?

Well, it is (kind of), but it clearly isn’t working.

There is a simple reason why.

The means-tested paradox

Earlier, we identified the size of ‘the poverty gap’ among UK households in 2019. Clearly if we could transfer this £30.4bn to the households that needed this income to get over the poverty line, we could overcome the poverty gap altogether and (eventually) save the taxpayer the huge expense currently being met to manage it.

Surely what we need is a system that identifies these poorest households and provides them with the additional revenue that would raise them out of poverty?

Believe it or not, we do have that system. It’s often referred to as a ‘means-tested benefits’ system and it seeks to assess the means of each household and provide extra funds to those falling below the poverty line.

So why is it leaving this £30.4bn gap?

What if I told you that this gap exists mostly because those households are simply not collecting the money that has been offered to them? That doesn’t seem believable, right?

Well, it is (largely) true.

According to the Entitledto website, In 2018 over £21bn of means-tested benefits went unclaimed (i.e. individuals and households were entitled to additional money from government, but didn’t collect it). As shown in the table below, this money extended across a range of income-related benefits (apart from a small amount in child benefit, which is universal for all households earning below £50k per year). The number of households listed seems larger than the 5.6m households we identified as living below the poverty line, but this is due to double counting on their part (see point C in the table)

These benefits, if collected, would close 70% of the poverty gap we have identified. Still not everything we need, but that would get us most of the way towards solving the problem.

So, why on Earth would households desperately in need of further financial support, not take it when offered?

The answer is probably a mixture of reasons, such as recipients:

• Not being aware of their eligibility for these funds
• Not understanding the process for acquiring them
• Trying to apply for them, but giving up.
• Applying but inputting incorrect information

The means tested benefits system is horrendously complicated (there were 15 different types of Child Tax Credit until recently). The introduction of Universal Credit was meant to simplify it and improve take-up, but so far it’s not looking good.

In 2020, the amount that went unclaimed was £16bn, but this is calculated using a different approach and excludes the new Universal Credit payments, because in the government’s own words “Universal Credit take-up rates were unable to be estimated”.

That doesn’t bode well.

Means tested benefits remain an almost impenetrable fortress of rules, conditions and procedures.

There are so many conditions that it’s easy to get lost and convince yourself that you wouldn’t qualify. Begin a relationship? Reduce or increase the number of hours you work? Fall ill or recover from illness? Have or spend savings? Study or volunteer your time? Have claimed or not claimed benefits in the past?

Even websites which tell people what they might be entitled to within a few minutes don’t seem to be improving access to these benefits for those who most need them.

This seems to be an inevitable outcome of any means tested benefits system, and the more you try to focus on those most in need, the worse it gets.

This creates a ‘Means-Tested Paradox’:

A system that is designed to deliver resources to the people who are most in need, unintentionally excludes those people from that system.

And so, for as long as our main means of combating poverty is a system of means-tested benefits, we will fail to solve the problem.

A false economy

What the data described in this article clearly shows is that reducing benefits, or excluding some on low income from claiming extra money, is a false economy.

An improvement on the government’s short term balance sheet has led to massive spending requirements from government in other areas.

Allowing poverty to continue is costing taxpayers around £50bn+ per year more by not providing these extra payments.

Clearly there is a moral, economic and fiscal imperative to end poverty and elevate each of these households above the poverty line.

But if a means-tested benefits system that is specifically designed to target income and resources at these households is not working, then what will?

Pull yourself up by your bootstraps!

Historically, left and right wing policy makers have taken a broadly similar approach to tackling poverty. It has usually been a mixture of means tested benefits combined with multiple schemes to help get the poor ‘back into work’, or otherwise self-improve their way out of poverty.

The assumption here is that poverty is a personal failing or setback, or a result of temporary personal circumstances that can be overcome with a bit of extra individual support, motivation or skills acquisition. All of these things are perfectly laudable, and useful things in their own right, and they can of course help individuals develop, grow and maybe even earn more money.

But they won’t end poverty across society.

That’s because poverty is a structural issue, not an individual one (though plenty of individuals are trapped by it).

“The Poor you will always have with you”

Jesus to the apostles (Matthew 26:6–13)

If Jesus said it, it must be true, right? Poverty is just a part of every human society, like hierarchy, family, conflict and community.

Perhaps. But that doesn’t make it inevitable.

A lack of personal independence drives most poverty

If we take a look at the JRF/Joseph Rowntree Foundation’s own analysis of those living in poverty, we see that the majority of them can be found in households with

• a person with disabilities or long term sickness
• their carers
• dependent children
• young adults still dependent on their parents/family
• pensioners who no longer have the same opportunities to increase their earnings

People who are dependent on others for their day-to-day care, and those they are dependent on, make up the majority of those living in poverty. People who lack independence for other reasons, but are not cared for by others, such as those with mental or physical health issues, should also be included in this category.

Even those who are in work and living below the poverty line, are most often limited in their earning capacity by the dependence of others (such as children), or their own lack of independence (due to a variety of factors including ill-health). For example, there has been no noticeable increase in poverty for families without children, but working lone parent families have seen a 50% increase in poverty in the last decade.

However, sometimes, the lack of independence people experience can be directly connected to a lack of cashflow, rather than the amount they earn per se. Disruptive events such as sudden repairs or replacement of personal capital goods, like a vehicle needed for work; or the eviction from a home; or a sudden change in personal circumstances like a relationship ending or a child being born, or temporary ill-health, can be the catalyst for a descent into poverty.

People’s total reliance on their short-term income is, in effect, a type of dependence that those on higher incomes do not experience. Again, policy makers can respond by providing access to finance, but as with the ‘means-tested paradox’ this access often comes with such barriers to entry and administrative complexity that it excludes the very people it should be helping.

I want my independence

And so, if the cause of poverty is a lack of personal independence, then the solution cannot be to create a new type of dependence on the government and its ‘strings attached’ support.

It doesn’t matter how much money you throw into the means-tested benefits system, it will never be enough to re-establish personal and household independence

The real solution to ending poverty is to set people free.

That should include changes that create structural support for dependents and those they depend upon, but it must also include an increase in financial independence too.

And that means financial certainty, no strings attached, no conditions to meet, no external agents to placate (neither private nor public) and no gaps to fall through.

Those in poverty need support to re-acquire their independence when it comes to their own life choices. Support with childcare, disability, illness and financial insecurity are all key elements of this.

But establishing that financial security means ensuring that people know they stand on a solid income floor that will not give way under the first sign of stress. Only then can they regain their sense of independence, and only then can we truly tackle the root causes of poverty.

All road lead to UBI

That ‘solid income floor’ needs to take the form of a Universal (or Unconditional) Basic Income that consists of guaranteed, direct payments and comes with zero conditions. Anything less will see us fall back into the mean tested trap that has prevented anti-poverty programmes from working in the past.

There are numerous proposals for this kind of UBI. I won’t focus on any one of them here, but they all have one thing in common: they all require a significant increase in government expenditure to fund these automatic, unconditional payments. This is often presented as a killer argument against UBI — “It’s just too expensive!” — but those analyses rarely incorporate the real cost of leaving 14 million of our fellow citizens living in poverty.

There are 85 billion reasons for government to intervene to end poverty in the UK. But no more means-tested experiments! Only a UBI will deliver the result we need, and we need an honest appraisal of, not just its cost, but also the substantial savings to the tax payer it could deliver.

Ending poverty will require extra spending and resources, but not ending it will require spending at an even higher level.

Poverty is expensive and we can no longer afford it!

Martin Farley is the Convener of the Tax & Fiscal Policy Working Group of the Green Party of England and Wales