Critically Review Observed Trends In

UK Inequality And Poverty Over

Recent Decades. Evaluate The Shift Of
Focus From Welfare Benefits To
Incentives To Work And Assess The
Extent To Which The Implementation
Of Universal Credit Is A Credible
Solution To Addressing Poverty And
Inequality

By Caitlin Jacqueline Caine

Index
Introduction 2

Key Terms And Definitions 2

Inequality Over The Past 25 Years 4

Poverty Over The Past 25 Years 6

Welfare Policies Of The Past 25 Years - The Shift From Welfare Benefits To Incentives
To Work 7

Conservative Party (1994-1997) 7

New Labour (1997-2010) 7

Conservatives and Liberal Democrats Coalition (2010-2015) 8

Welfare Benefits to Incentives to Work 9

Universal Credit 10

What Makes A Policy Credible? 10

Is Universal Credit Credible In Addressing Inequality And Poverty? 11

Conclusion 12

Figures 13

References 13

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Introduction
Within this essay, I shall be discussing the trends in UK inequality and poverty over the past
25 years, as this constraint of time means that we can focus more on the latter part of the
question but also covers a variety of governments and therefore their policies, as well as
assessing and evaluating the shift from Welfare Benefits to Incentives to Work and the
implementation of Universal Credit. However, before we rush into the details of this essay we
should show and define some of the key terms within this essay.

Inequality and poverty are important topics to discuss and keep an eye on, as it is the biggest
risk to those on low incomes, arguably the most vulnerable of society. Hence I believe that
policies to tackle these issues, especially poverty, is imperative to a successful society and in
turn to a successful economy.

Key Terms And Definitions

Firstly, there are two types of inequality within our scope of economics: ​inequality of
outcome​ and ​inequality of opportunity​, the first of which is the differences of incomes
between individuals and the second is the differences between the opportunities offered to
individuals (usually based on their background, for example not being able to go to university
due to not having the income to support it, leading to a lower paid job) which feeds into an
inequality of outcome later in life​ [1]​.

Secondly, there are two types of poverty: ​absolute poverty​, where household income does
not cover basic necessities (such as food, housing, clothes), and ​relative poverty​, which is
where a household earnings are less than 60% of the median income. The figures in this
essay measure relative poverty, as it is hard to measure those who are in absolute poverty.

Thirdly, ​Welfare Benefits​ are a tool used by the government (or welfare state) to achieve
three objectives: poverty relief (no household should fall below a minimum standard of living),
social insurance (a mechanism for risk sharing, which means no one should accept a large,
unexpected, fall in living standards) and consumption smoothing (individuals should be
allowed to reallocate consumption over their lifetime). These usually come in the form of
payments made to individuals by the government. In economic terms, this would be a form of
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non-labour income, which is income earned without working, if this increased it would make
not working more attractive as it increases the opportunity cost of working.

Fourthly, ​Incentives to Work​ are a tool used by the government to try to change individual
work/leisure preferences of those claiming benefits to attempt to incentivise them to work, by
reducing non-labour income and therefore the opportunity cost of working.

Fifthly, ​Opportunity Cost​ is the cost of the next best alternative or the other option, when
comparing two courses of action.

Sixthly, ​Non-Labour Income​ is income that you get from anything aside from working, such
as rental income, benefits and getting an inheritance to name a few examples. Whereas
Labour Income​ is income you gain from working.

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Inequality Over The Past 25 Years
Within this essay we shall use inequality of outcome, as it is more easily quantifiable than its
counterpart, when we discuss inequality. The UK government uses the ​Gini Coefficient,​
which ranges from 0 to 1, with 0 representing perfect equality and 1 representing perfect
inequality (values over 1 are possible if there are negative incomes or wealth, via debt) ​[2].​

Figure 1.​
The line graph above, which shows a time-series of Gini Coefficients from 1990 to
2017,using data provided by the Office of National Statistics (ONS, a government backed
organisation). Over the past 25 years (1994 to 2017, as we do not have data for 2018 and
2019 on the graph), between the period of 1994 to 2001 there was a steady rise in inequality
from 0.365 to 0.39, with a small dip in 2000 with a spike at 0.39 in 2001.

However, after 2001, there has been a steady decrease in the Gini Coefficient, from 0.39 in
2001 to 0.36 in 2016/17, during this period there have been a few spikes such as between
2004 and 2006 where it went from 0.365 to 0.38. The most recent Gini Coefficient on the
graph is at 0.36 (2017). Another thing of note is the fact that the unusual spikes or dips in the
Gini Coefficient usually happen around the years when general elections occur ​[3]​.

So what does this mean? It means that inequality has reduced slightly over the 25 year
period, if the coefficients for 1994 and 2017 were directly compared with one another without
the data in between, this would be the case, but it has remained extremely consistent as it

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has stayed within the 0.39-0.36 range for the duration. The level of the coefficient would also
suggest that the UK leans more towards the income equality side of the spectrum.

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Poverty Over The Past 25 Years
Within this essay we shall use the Households Below Average Income (HBAI) survey which
is published yearly by the government, which shows the percentage of UK households who
have income that is less than 60% of the average (relative poverty), over the period 1994 to
2017/18.

Figure 2.
Over the period, pensioners have seen the biggest decrease in poverty from 29% (1994) to
17% (2017), with children also experiencing a small decrease in poverty from 33% (1994) to
30% (2017) and working age adults with children experiencing a small decrease from 24%
(1994) to 22% (2017). Working age adults without children are the only group experiencing
an increase in poverty (from 17% to 18%).

From looking at the graph, we can see that 2004 was when all of the poverty rates started to
increase, as they had previously been decreasing (with the exception of working age adults
without children), following that there was a large dip in pensioner poverty from 2007, but that
is slowly increasing again. As well as that, there has been a slight decrease in the
percentage of all people in poverty (from 25% to 22%), suggesting that the proportion of the
other groups no longer in poverty are more than the increase of working age adults without
children in poverty.

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Welfare Policies Of The Past 25 Years - The Shift From Welfare
Benefits To Incentives To Work
Within this section of the essay, we shall be discussing the welfare reforms over the past 25
years and comparing them with the graphs for inequality and poverty shown previously. Then
at the end of the section I shall give my thoughts on the various welfare reforms.

Conservative Party (1994-1997)

During this period, ​Job Seekers Allowance​ (JSA, 1996) was introduced, put forward as the
Jobseekers Act 1995, replaced the Income Support Provision. It had two types of payments:
means tested, and non-means tested. The non-means tested payments were for those who
had paid into the National Insurance fund in the past two years, which enables them to claim
for up to 182 days before it switches to means tested payments ​[4]​. Over this period, there
was an increase in inequality from 0.37 to 0.38 and there was no real change in poverty
levels of any of the groups.

This provided a safety-net of sorts to those facing temporary unemployment, while ensuring
that there was not an increase in long term non-labour income, meaning that in the short run
(182 days) working would have a higher opportunity cost, but in the long term it would have a
lower opportunity cost.

New Labour (1997-2010)

During this period, the ​New Deal For Young People ​(NDYP, 1998) was introduced, which
targeted young people, between the ages of 18 and 24, in long term unemployment (6+
months) which aimed to ease their transition into work by increasing their employability via
the ‘Gateway’, which was up to 4 months of personalised support to find an unsubsidised job.
In the ‘Gateway’, if the claimant was unable to find a job after the initial period, then they
would receive four options: ​“subsidised work, full-time education and training, work in the
voluntary sector or work with the Environment Task Force” [5].​ If they rejected the options,
then they would stop receiving JSA. This would help to shift the work/leisure preferences of
young people in long term unemployment, so that it doesn’t become habitual or permanent.

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Also during this period, ​Tax Credits ​and ​Allowances​ replaced pre-existing allowances such
as: working family allowance, disabled person’s allowance, income support for illness and
disabilities. These were replaced with: ​Working Tax Credit ​(1999), ​Child Tax Support
(2003), ​Employment and Support Allowance ​(2008, they added a ​Work Capability
Assessment​ for those who were ESA referees in 2010). This increased non-labour income,
meaning that the opportunity cost of working increased, which would mean a potential
increase in those claiming benefits.

Over this period, using the Gini Coefficient, we can see that inequality had an increase from
0.375 in 1997/8 to 0.3925 in 2001/2, then experienced a sudden decrease resulting being at
0.365 in 2004/5, which then returned to 0.38 by 2006/7. Since 2006/7, inequality has been
steadily decreasing. Over the same period, pensioner poverty has halved from 29% in
1997/8 to 14% in 2010/11, while poverty for those of working age but without children has
increased from 16% to 19%, poverty rates for the other groups did not change much over the
period.

Conservatives and Liberal Democrats Coalition (2010-2015)

During this period, the ​Work Choice​ (2010) scheme was introduced, which was a specialist
employment programme for disabled people which supported the extra costs of them being
hired by firms. They also introduced the ​Work Programme​ (2011) which was a
welfare-to-work initiative, focused on sustainable employment, targeting those who were long
term unemployed and also those at the biggest risk of becoming long term unemployed, firms
were paid out by results. A year later, the ​Youth Contract ​(2012) was introduced, supporting
new job opportunities, apprenticeships and work experience for young people; with additional
support for 16/17 year old NEETs (those not in education, employment or training but aged
under 18). This would also help to shift the work/leisure preferences of young people in long
term unemployment, so that it doesn’t become habitual or permanent.

Later, ​Universal Credit ​(2013) was introduced. We will go into depth on this particular reform
in a short bit.

Over this period, using the Gini Coefficient, we can see that inequality had a steady decrease
from 0.37 in 2010/11 to 0.35 in 2015/16, with a small spike in 2012/13 at 0.37. In terms of

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poverty, the rates of all groups have been relatively steady, with pensioner poverty increasing
by 2% being the only worthwhile mention during this period.

Welfare Benefits to Incentives to Work

As we can see from the reforms above, over the past 25 years we have seen different
governments focus on different types of welfare reform. Labour focus on welfare benefits,
which is the amount of and access to benefit payments, as well as having arguably the most
welfare reforms during their tenure. On the other hand, the Conservatives (and by proxy
Liberal Democrats) don’t have a large focus on welfare benefits, but instead on incentives to
work, shown by their introduction of the Work Programme. However an important thing to
note is that Labour themselves started the shift towards incentives to work by the introduction
of the New Deal For Young People. The success of the policies is a completely different topic
to discuss, one which this essay will not go into.

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Universal Credit
First of all, Universal Credit (which we will from now on be referred to as UC within this
essay) was a welfare reform introduced by the Coalition government in 2013 and continued
on by future Conservative governments, however it is not expected to be fully rolled out until
2023 ​[6]​. It condenses most of the various benefit payments and packages them into one
singular payment, however there is a cap on the maximum amount of benefit one can receive
- but there is no cap on the hours that can be worked while claiming. It aimed to reduce the
amount of paperwork and back-and-forth claimants had to do to claim various benefits, while
also making it easier to track who has what benefits and why.

What Makes A Policy Credible?

Credibility is, in the setting of policy analysis, defined as the likelihood that pledges or policies
will be implemented and carried out by policymakers. With four factors that impact it: public
and private bodies, rules and procedures, public opinion and past performance of policies ​[7]​.

So let us run through these factors in the context of UC. Firstly, in terms of public and private
bodies, UC is ultimately controlled by the Department for Work and Pensions (DWP), but
specifically ran by DWP and Tax Credit processing centres ​[8]​, which means that the policy is
backed an important governmental department - improving its credibility. However, as
suggested by ​Emma Norris ​(2016), the scheme doesn’t have a ​“stable senior team and a
single official owner who feels personal responsibility for a project”​ due to the fact that the
“DWP is a large and complex department with a host of other challenging priorities”​ ​[9]​ which
therefore reduces the credibility of the scheme. This also then leads us to be able to make
the assumption that the scheme’s past performance is not that positive, therefore hurting the
scheme’s credibility further.

Secondly, in reference to the rules and procedures of UC, the Child Poverty Action Group
said that the ​“arbitrary rules”​, ​“claimants being wrongly benefit-capped”​ and ​“erratic
payments” [10]​ are jeopridising families who rely on UC. This would hurt the credibility of the
scheme even more as it shows that the procedures and rules aren’t being carried out
properly or even on time, as the scheme has been delayed multiple times and the rollout has
cost more than originally predicted ​[6].​ Hence, it is obvious that public opinion of UC is not

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positive, however there would obviously be a split between the opinion of those who are
claiming UC and those who are not claiming UC and hence contributing to paying for it
through taxes - one side would believe it is punishing them for not having a job, while the
other side would want it to be harsher to encourage them to get a job and to funnel that
money into another area of the public sector (like the NHS).

Therefore under the factors discussed above, I conclude that UC is not a credible policy as it
has failed to be rolled out on time, achieve its goal of simplifying the process of claiming
benefits and having a stable leadership team.

Is Universal Credit Credible In Addressing Inequality And Poverty?

In relation to UC’s impact on poverty and inequality, the ​IFS​ (Institute For Fiscal Studies)
gives a scathing report on this exact topic. Their report found that ​“UC disproportionately
reduces incomes among poorer adults”​, specifically those in the ​“lowest-income 10% of the
population” [11]​, this would suggest that not only is UC increasing those at risk of being in
poverty actually entering poverty, but it also means that it is increasing inequality of outcome
between the poorest 10% and the rest of the population. However, what is worth noting is
that ​“the effect of UC on the persistently poor is considerably less than on the temporarily
poor” [11]​, which is a silver lining. Hence it is safe to argue that Universal Credit is not a
credible policy in addressing inequality and poverty as more people lose out than gain, but
those who are already poor disproportionately lose out.

You could however argue that the reduction in benefits was meant to incentivise those who
are poor to work, by decreasing the non-labour income they receive and lowering the
opportunity cost of working. But due to the fact that UC hurts the temporarily poor marginally
more, you could argue that this is not the case. As those who are temporarily poor are often
those who are likely to already be working, such as the self-employed, people with significant
financial assets and owner-occupiers.

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Conclusion
In conclusion, over the past 25 years, over numerous governments and a shift from the
welfare benefits policies of the Labour era to the incentives to work policies of the
Conservatives, there has been an improvement in inequality with the Gini-Coefficient being
lower today than it was 25 years ago. However, poverty has remained at a similar rate to that
25 years ago, however with less pensioners being in poverty and more working-age adults
without children being in poverty, as discussed earlier.

Whether or not Universal Credit is credible in addressing poverty and inequality, which as
discussed earlier it is not, it signifies the biggest shift from welfare benefits to incentives to
work within the past 25 years.

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Figures
1. Equalitytrust.org.uk. (2019). ​How Has Inequality Changed? | The Equality Trust.​ [online]
Available at: ​https://www.equalitytrust.org.uk/how-has-inequality-changed​ [Accessed 20 Nov.
2019].
2. JRF. (2019). ​Poverty rate by person type over time, after housing costs (AHC).​ [online]
Available at:
https://www.jrf.org.uk/data/poverty-rate-person-type-over-time-after-housing-costs-ahc
[Accessed 20 Nov. 2019].

References
1. Economicsonline.co.uk. (2019). ​Inequality - equity | Economics Online.​ [online] Available at:
https://www.economicsonline.co.uk/Managing_the_economy/Inequality_and_equity.html
[Accessed 20 Nov. 2019].
2. Chappelow, J. (2019). ​Gini Index Definition​. [online] Investopedia. Available at:
https://www.investopedia.com/terms/g/gini-index.asp​ [Accessed 20 Nov. 2019].
3. En.wikipedia.org. (2019). ​List of United Kingdom general elections​. [online] Available at:
https://en.wikipedia.org/wiki/List_of_United_Kingdom_general_elections​ [Accessed 20 Nov.
2019].
4. Legislation.gov.uk. (2019). ​Jobseekers Act 1995​. [online] Available at:
http://www.legislation.gov.uk/ukpga/1995/18/part/I​ [Accessed 20 Nov. 2019].
5. Wilkinson, D. (2003). ​New Deal For Young People | Policy Studies Institute publications.​
[online] Psi.org.uk. Available at: ​http://www.psi.org.uk/site/publication_detail/722​ [Accessed 4
Dec. 2019].
6. Butler, P. and Walker, P. (2019). ​Universal credit falls five years behind schedule​. [online] the
Guardian. Available at:
https://www.theguardian.com/society/2016/jul/20/universal-credit-five-year-delay-2022-damian
-green​ [Accessed 10 Dec. 2019].
7. Averchenkova, A. and Bassi, S. (2016). ​Beyond the targets: assessing the political credibility
of pledges for the Paris Agreement.​ [online] Eprints.lse.ac.uk. Available at:
http://eprints.lse.ac.uk/65670/1/Averchenkova-and-Bassi-2016.pdf​ [Accessed 6 Dec. 2019].
8. En.wikipedia.org. (2019). ​Universal Credit.​ [online] Available at:
https://en.wikipedia.org/wiki/Universal_Credit#Implementation​ [Accessed 10 Dec. 2019].

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 9. Norris, E. (2016). ​What next for Universal Credit?​. [online] The Institute for Government.
Available at: ​https://www.instituteforgovernment.org.uk/blog/what-next-universal-credit
[Accessed 10 Dec. 2019].
10. Butler, P. (2018). ​Universal credit flaws leaving families in debt, campaign group says​. [online]
the Guardian. Available at:
https://www.theguardian.com/society/2018/aug/06/universal-credit-flaws-leaving-families-debt-
child-poverty-action-group​ [Accessed 10 Dec. 2019].
11. Brewer, M., Joyce, R., Waters, T. and Woods, J. (2019). ​Universal credit and its impact on
household incomes: the long and the short of it​. [online] Ifs.org.uk. Available at:
https://www.ifs.org.uk/uploads/publications/bns/Universal%20credit%20and%20its%20impact
%20on%20household%20incomes%20the%20long%20and%20the%20short%20of%20it%20
BN248.pdf​ [Accessed 6 Dec. 2019].

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