Welfare and the Benefit System

The benefits system provides practical help and financial support if you are unemployed and looking for work. It also provides you with additional income when your earnings are low, if you are bringing up children, are retired, care for someone, are ill or have a disability.

Policy options to change the distribution of income and wealth

There are many policy options available to a government if it wants to change the final distribution of income and wealth in a country. The main strategies that the Labour government has chosen to reduce poverty since it was elected in May 1997.

• The introduction of a National Minimum Wage and a series of increases in its value.
  

• The launch of the Working Tax Credit and Child Tax Credit – designed to boost work. incentives for low-income households who opt to work full-time or part-time.
  

• Provision of a Minimum Income Guarantee for Pensioners and increases in the real value of Winter Fuel Payments – designed to alleviate “fuel poverty” among old people.
  

• Active employment policies such as the introduction of New Deals for young people, the long-term unemployed, lone parents and disabled people – a long-term strategy designed to increase employment opportunities.

In addition the government already has in place a progressive system of income tax and welfare benefits that helps to reduce the huge differences between original and final disposable incomes between different groups of the population.

(click on the image above for indepth analysis of Tax Credits & Benefits)

Tax credits are payments from the government. If you're responsible for at least one child or young person who normally lives with you, you may qualify for Child Tax Credit. If you work, but earn low wages, you may qualify for Working Tax Credit. These benefits and income boosters are potentially very influential incentives to work. The idea behind the tax benefits is that the government wants to reward those who are working even if it is at low level wages and incomes.

Which policies are most effective in reducing poverty?
A government truly committed to making a serious dent in relative poverty would:

• Invest more resources in skills training and life-long education for all households – particularly those of low income families in a bid to make a real effect on child poverty.
  

• Making the tax system more progressive – for example raising the higher rate of tax from 40% for the top-earning households.
  

• Analysing carefully the effects of changes in indirect taxes such as VAT and excise duty in case they have a regressive effect on the overall distribution of income.
  

• Focus more on targeting benefits by means-testing them according to financial need.
  

• Increase the value of welfare benefits / tax credits in line with the annual percentage growth in median earnings so that the relative value of these benefits does not decline

For Q&A: Tax credits - click here.

Exam Questions

ECN5 - June 2003 (4b)

Evaluate the view that the most effective way to tackle problem of relative poverty is to increase the level of welfare benefits paid to the poor. (30 marks)

ECN5 - January 2003 (1d)
Identify and evaluate the policies a government might use to reduce or eliminate the problem of poverty trap derscribed in Extract C. (30 marks)

For more past papers visit the department's intranet pages.

-TAC-