Monday, 25 August 2008

Tackling poverty, part one

Old jokes often contain interesting messages. Take the joke about a couple who are lost in their car in the middle of nowhere and stop a passing local to ask directions to London, "London, you say? Well, if I wanted to drive to London I wouldn't start from here." The message behind this tale is that you should think carefully about what you do in case it makes your eventual goal more difficult to achieve. This is important when we ask how poverty can be tackled. With prices of food and fuel going up at an alarming rate we will hear a lot about poverty in the months ahead because it is those on limited income who are hit most by increased prices for essentials.

Yesterday I tried to explain why I believe "poverty" is a word best confined to describe the state of those with an income below subsistence level, I also explained (by use of very rough-and-ready figures) that I estimate something like £10,000 a year to be subsistence income for a childless couple and £6,000 a year for a single person, perhaps more in areas where housing is expensive and undoubtedly less in areas with cheap housing. Before asking what can be done about poverty we need to look at why some people have such low incomes. I am not interested in airy-fairy theories, I want to look at real life in the real world.

There will always be those without the skills to earn anything more than a low income and there will always be those who, through indolence or lifestyle choice or bad luck, find themselves with very little money. "Let them eat cake" is a fair approach to take towards those who will not help themselves but I do not believe most of the people in poverty in this country to be in that camp. I believe that the vast majority wish to work in order to support themselves and their families, they do not want to be dependent on the State. Some, of course, have no choice because they suffer from a physical or mental condition which precludes them from earning a living even though they are of normal working age. These people are in a special category which I will return to another time. Others cannot work because of their age, the position of those outside normal working age is also outside the scope of today's thoughts. Today I want to look at the lot of those who are in work but earning very little.

First it is sensible to make clear that for the vast majority in this position their only poverty is financial. A common error on the political left is the belief that those who earn low wages feel resentful towards those who earn more and are unhappy with their lot simply because they do not have much money. That is complete nonsense. Ask the average road sweeper whether he thinks an accountant should earn more than him and his answer will be "yes" because he knows that the accountant could sweep the road but he could not be an accountant. Ask him whether he feels unhappy that he is not an accountant and his answer will be "maybe it would be nice, but I do what I can, I work hard and I support my family ... here's a picture of my little girl at sports day, she won the egg-and-spoon race, she's a lovely girl". Of course he will also say he would like to earn more, but what is most important to him is that he is able to support his family through honest work. Many on the left think his income, social background and employment define him but he knows better, he knows that his values define him.

The road sweeper is employed providing a service and there is a limit to what can sensibly be afforded to pay for that service. So it is also with those in the private sector performing mundane manual tasks. The work requires little skill and adds little value, pay too much for people to do it and you price your goods out of the market. That is why automation in factories has advanced so much over the last thirty years and more. Those without skills who would formerly have been cutting shapes out of sheet metal on a foot-operated press have been replaced by computer guided machines and have had to seek employment elsewhere. Their lack of skills limits the type of work for which they can be hired and necessarily means that anything they do will be low-paid. In turn this means that their poverty is a direct consequence of an inescapable fact of life, that we can only ever be paid what our work is worth.

Government has a part to play in assisting those whose income is below the poverty line and in preventing those above the line from slipping below it when costs of living rise. Government can have both an active and a passive role. The active role involves paying money to those in poverty, the passive role involves not taking money from them. In relation to the unemployed who are seeking work the active role is potentially important but for those in work the passive role is far mightier. To illustrate what I mean I want to look at the threshold for income tax.

For the tax year 2008-2009 the income tax threshold is a touch over £6,000, less than £120 a week. Yesterday I explained how I estimate that figure to be subsistence income for a single person living alone and renting a small room. It is an income level at which saving for the future is impossible, even the need to replace a broken kettle would cause hardship, and yet additional earnings trigger a requirement to pay 20% of the extra money in tax. This is simply obscene. What makes it absurd as well as obscene is that we now have a statutory minimum wage which is meant to represent the fair minimum amount someone should be paid if they are working. It was said to be a recognition of the minimum earnings required to be able to live to modest but acceptable standard and is not, therefore, a definition of a subsistence income. The current minimum wage for someone aged 22 or over is £5.52 per hour, £220.80 for a 40-hour working week, £11,481.60 per year.

So the government tells us that £11,481.60 is the very least anyone should be paid for a full working year, yet on that sum almost £1,100 will be payable in income tax. This might not involve any chicanery because by saying £11,481.60 is the minimum to be paid the government knows it amounts to just over £10,000 after deductions. The absurdity, however, is in setting the tax threshold below the figure the government considers necessary to live a tolerable existence. Reverting to what I said yesterday, it is important to bear in mind what subsistence level income means - it means being able to afford housing, heating, water, food and clothes and having a tiny amount for discretionary spending. To impose tax at 20p in every pound above such a low level of earnings is nonsensical.

The first thing government should do to tackle poverty among the employed is to raise the tax threshold to a much more realistic level. The net income resulting from the statutory minimum wage would be a good start because it would put the threshold at a nice round figure of £10,000. We could make it £10,400 so that it is exactly £200 a week. That is hardly a fortune. Such a change would acknowledge that people in this country should not be dependent on the government to keep them out of poverty if they are able to do so by their own efforts. It would also acknowledge that it is beneficial for those in work to have use of as much of their own money as possible because they can, if they choose, save it, but the government cannot save it for them. You want to be fair to those in employment? You don't start from here, you don't start with a tax threshold so low. If it were not for years of allowing the threshold to lag the problem would not have arisen.

So, that is my first suggestion. It is not a new idea but it is fair. It will also reflect the values of those in low paid employment who take great pride in being able to pay their way. One problem with charging income tax at the margins of subsistence earnings is that it tilts the balance of power towards the government. "We will allow you a bare subsistence income but after that you must pay us one fifth because we have plans" is the current position. I want the narrative to go from the taxpayer to the government, not vice versa; I want to hear "I now earn enough to support myself in a modest lifestyle, I will now allow you to have one fifth but don't waste it." My further musings on poverty will be made against that background.

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