A weekly expense for most families is filling up their car(s) with petrol, but this activity is becoming increasingly expensive and is putting added pressure on lower and middle income families in particular. For those families on lower incomes, a tank of petrol represents a much larger percentage of their income than it does for a higher income household. Assuming that petrol for a month costs you £70 and your monthly income is £500, as a percentage of your income, a tank of petrol costs you 14%. Whereas, if your income is £900, the percentage falls to 7.7% and with a monthly take-home pay of £2000, the cost of a month’s petrol as a percentage of your income is just 3.5%. This is a stark indication of why those on lower incomes feel the burden of higher petrol prices (and indeed, higher prices for any essential items) more than other families.
The price of petrol will today be debated by MPs, following an e-petition signed by more than 100,000 people and having the support of more than 100 MPs. When in power, the Labour government proposed automatic fuel-tax increases, but these were scrapped by the Coalition. However, in January, the government plans to increase fuel duty by 3p a litre and further increases in prices are expected in August in line with inflation. This could mean that the price of unleaded petrol rises to over 1.40p per litre.
And it’s not just households that are feeling the squeeze. The situation described in the first paragraph is just as relevant to firms. The smaller firms, with lower turnover and profits are feeling the squeeze of higher petrol prices more than their larger counterparts. Any businesses that have to transport goods, whether to customers or from wholesalers to retailers etc, are seeing their costs rise, as a tank of petrol is requiring more and more money. To maintain profit margins, firms must pass these cost increases on to their customers in the form of higher prices. Alternatively, they keep prices as they were and take a hit on profitability. If prices rise, they lose customers and if prices are maintained, profitability suffers, which for some companies, already struggling due to the recession, may not be an option.
Mr. Halfon, the Tory MP whose motion launched the e-petition said that fuel prices were causing ‘immense difficulties’ and the Shadow Treasury Minister Owen Smith has said:
‘With our economic recovery choked off well before the recent eurozone crisis, we need action.’
With inflation at 5.2% (I’m writing an hour or so before new inflation data is released on 15/11/11), higher prices for many goods is putting pressure on households. This is possibly contributing towards sluggish growth, as households have less and less disposable income to spend on other goods, after they have purchased their essential items, such as groceries and petrol. A criticism leveled at oil companies is that they quickly pass on price rises, as the world price of oil increases, but do not pass on cuts in oil prices. The issues raised in the debate and how George Osborne and David Cameron respond, together with inflation data for the coming months, may play a crucial role in determining just how much a tank of petrol will cost in the new year.
MPs to debate motion calling for half in petrol prices BBC News (15/11/11)
Petrol price rise: David Cameron faces Commons revolt after No10 e-petition Guardian, Cherry Wilson (15/11/11)
David Cameron faces backbench rebellion over fuel price hike Telegraph, Rowena Mason (14/11/11)
Petrol prices may be slashed by Rs 2 per litre on November 16 The Economic Times (15/11/11)
Paying the price as fuel costs rise BBC News (15/11/10)
Oil barons the big winners from soaring pump prices, ONS figures reveal Daily Mirror, Graham Hiscott (15/11/11)
Scrap rise in petrol duty: 100 MPs demand Osborne abandon planned 3p increase Mail Online, Ray Massey and Tim Shipman (15/11/11)
Questions
- As the price of petrol rises, why do people continue to buy it? What does it suggest about the elasticity of this product?
- Why do higher prices affect lower income families more than higher income families?
- What are the arguments (a) for and (b) against George Osborne’s planned 3p rise in petrol duty?
- Do you think that higher prices are contributing towards sluggish growth? Why?
- What type of tax is imposed on petrol? Is it equitable? Is it efficient?
- Why can the oil companies pass price rises on to petrol stations, but delay passing on any price reductions? Is there a need for better regulation and more pressure on oil companies to change their behaviour?
The National Minimum Wage is a rate applied to most workers in the UK and is their minimum hourly entitlement. For adults over the age of 21, it has recently been increased to £6.08 – 15p rise. Rises have also been seen for 18-20 year olds, 16 and 17 year olds and apprentices. Undoubtedly this is good news for workers receiving the minimum wage, but what does it mean for firms and national unemployment data?
Market wages are determined by the interaction of the demand and supply of labour and when they are in equilibrium, the only unemployment in the economy will be equilibrium unemployment, namely frictional or structural. However, when the wage rate is forced above the equilibrium wage rate, disequilibrium unemployment may develop. At a wage above the equilibrium the supply of labour will exceed the demand for labour and the excess is unemployment. Furthermore, firms are already facing difficult times with the economic climate: sales remain relatively low, but costs are still high. By increasing the national minimum wage, firms will face higher labour costs and this may discourage them from taking on new workers, but may also force them into laying off existing workers.
It is hoped that the size of the increases will help low paid workers, as costs of living continue to rise, but won’t cause firms to reduce their labour force. This is one reason, in particular, why the increase in the minimum wage for young workers is smaller than that for adults. Youth unemployment is relatively high and so it is essential that firms keep these workers on, despite their increased costs.
Although the TUC has welcomed the increases in the National Minimum Wage, saying they will benefit some 900,000 workers, the General Secretary of Unison has said that it isn’t high enough.
“The rise to £6.08 is a welcome cushion, but with the price of everyday essentials such as food, gas and electricity going up massively, it won’t lift enough working people out of the poverty trap.”
The following articles consider this issue.
Minimum wage rises by 15p to £6.08 an hour Telegraph (3/10/11)
Minimum wage up by 15p to £6.08 BBC News (1/10/11)
150,000 social care workers paid below legal minimum wage, research reveals Guardian, Shiv Malik (3/10/11)
Unions want £8 an hour minimum wage Press Association (1/10/11)
Hunderds of thousands of women to benefit as minimum wage hits the £6-an-hour mark for the first time Mail Online, Emma Reynolds (29/9/11)
Unions demand minimum wage of £8 an hour Telegraph (30/9/11)
Changes will benefit workers Sky News (2/10/11)
Questions
- Is the minimum wage an example of a price ceiling or a price floor?
- If the National Minimum Wage was imposed below the market equilibrium, what would be the effect?
- If imposed above the market wage rate, the National Minimum Wage may create unemployment. On which factors does the extent of unemployment depend?
- Why is it expected that female workers are likely to be the main ones to benefit? What does this say about gender inequality?
- Why does the General Secretary of Unison not believe the higher National Minimum Wage will help people out of the poverty trap?
- How will the National Minimum Wage affect a firm’s costs of production. Illustrate the likely impact on a diagram.
As the new tax year begins, many changes are taking place. In order to cut the large budget deficit, sacrifices have to be made by all. The tax and benefit changes could make households worse off by some £2bn this year – definitely not good news for those households already feeling the squeeze. However, the Coalition say that the poorest households will be made better off relative to the rich.
Personal allowance is increasing by £1,000, which is expected to benefit £800,000 people who will no longer pay any tax. At the same time, the 40% tax bracket is being reduced from £43,875 to £42,475, which will bring another 750,000 people into this higher tax bracket, bringing in much needed revenue for the government. Employee’s national insurance contributions will rise by 1% and according to Credit Action, this will leave households £200 worse off per year. Benefits do rise with inflation, but they are to be indexed against the CPI rather than the RPI. The RPI is usually higher and hence benefits will not increase by as much, again leaving some people worse off. Child benefit will be frozen for all and will then be removed for higher rate tax payers from 2013. According to the Treasury, it is the top 10% of households who will lose the most from these needed changes. However, as Justine Greening, the Economic Secretary to the Treasury said:
‘Labour left behind a complete mess with no plan to deal with it, apart from to run up more debts for the next generation to pay off.’
In order to cut the deficit, which stands at an estimated £146bn, spending must fall and tax revenue for the government must rise. The government argues that if cuts are not made today, even higher cuts will be necessary in the future and this will harm the poorest even more. Whilst the Treasury have accepted that there was a ‘marginal loss’ across the population, it is the highest earning households that will suffer the most.
Wednesday of woe as the taxman bites: Changes could leave you £600 worse off Daily Mail, Becky Barrow (6/4/11)
Benefit cuts: Labour warns of ‘Black Wednesday’ BBC News (6/4/11)
Tax and benefit changes: row over financial impact BBC News (6/4/11)
Black Wednesday will hig millions in tax changes and cuts Metro, John Higginson (5/4/11)
Taxman to take extra £750 from families this year Scotsman, Tom Peterkin and Jeff Salway (6/4/11)
Tax and welfare changes will hit women and children hardest, says Ed Balls Guardian, Helene Mullholland, Polly Curtis and Larry Elliott (6/4/11)
Black Wednesday for millions of British families Telegraph (6/4/11)
Majority of households ‘better off’ The Press Association (6/4/11)
Questions
- Where does the term ‘Black Wednesday’ come from?
- What is the likely impact of the 1% rise in NICs? Think about the income and substitution effects. Can you illustrate the effect using indifference analysis?
- Why are Labour arguing that women and children will be hit the hardest and the coalition arguing that it is the highest income households who will lose the most? Can both parties be right?
- What are the arguments (a) for and (b) against bringing in tax and benefit changes today rather than in a few years?
- How might these changes affect the economic recovery?
- Is it equitable that child benefit should eventually be removed from those paying the higher rates of income tax?
- Why has the government indexed benefit payments to rise in line with the CPI rather than the RPI?
One of the key areas discussed in the election was welfare and in particular what to do about those who remain long term dependent on welfare. How can the UK government encourage people back to work? A key issue is the poverty trap: some people are simply better off living on benefits than they are getting a job. Here, we’re talking about the marginal-tax-plus-lost-benefit rate. When you start earning, you get taxed, pay national insurance contributions and lose some of your benefits. All this leads to a situation where work doesn’t pay.
In a paper ‘Escaping the Poverty Trap’ by Lawrence Kay, he considered how much better off people are moving from different benefits into work, taking into account the high costs of actually finding a job and then starting work. He found that after 16 hours of work, someone on Job-seekers’ allowance would be £15.07 poorer and someone on Employment and Support Allowance would be £39.35 worse off. In many cases, people were facing a marginal effective tax rate in excess of 100%. Given this, it’s hardly surprising that Lawrence Kay found that ‘Long term welfare claims have been Britain’s blight for many years’.
However, the Coalition has plans to change this and make sure that those in work are paid more and are better off than those on benefits. By making working life a more attractive option, this should encourage those for whom work doesn’t pay to enter the labour force. This will obviously benefit them, increase the potential output of the economy (hence growth) and improve net taxes, as tax revenue rises and benefits expenditure falls. While this may not lead to tax cuts for those in work (as benefits spending falls), it may mean that more tax revenue is devoted to areas such as health and education or that the government can close the budget deficit.
The ‘universal credit’ aims to simplify the current system and make work pay, by re-introducing a culture of work in households. There is also a plan to place sanctions on those turning down work and place a cap on benefits to any single family. There was also be tax changes aimed at helping those moving into work keep more of their money, thereby removing, or at least reducing, the poverty trap. However, some families will lose out – as the IFS noted, any reform ‘creates winners and losers’. However, the reforms are a step in the right direction. As David Cameron said:
“I think that will, over time, solve the whole poverty trap issue that has bedeviled governments of all colours.”
The Labour party does back some of the changes, but questions whether there is enough help for people finding work. Another issue that must be considered is while it is undoubtedly a good plan to encourage more people to move into work and off benefits, which jobs will they move into? With unemployment still high, now is not exactly the best time to be looking for a job. However, whatever the state of the economy, providing incentives for people to move from benefits into work is definitely a good plan, but of course the methods used will be under constant scrutiny.
Articles
Iain Duncan Smith sets out Welfare Reform Bill plans BBC News (17/2/11)
Bill ditches housing benefit cut The Press Association (17/2/11)
Life on benefits is no longer an option Mail Online, James Chapman (17/2/11)
Universal Credit welfare switch ‘to hit 1.4m homes’ BBC News (12/1/11)
Nick Clegg blocks housing benefit cut for jobless Guardian, Patrick Wintour (17/2/11)
It’s time to end this addiction to benefits Telegraph (17/2/11)
Report
Escaping the Poverty Trap Policy Exchange, Lawrence Kay 2010
Questions
- What is the poverty trap? Which factors make it worse?
- Why does the poverty trap act as a labour supply disincentive for those on benefits?
- If taxes of those in work have to be increased, what happens to their incentive to work more hours? Think about the income and substitution effects of a real wage change.
- Why is it that working may not pay?
- How does the Universal Credit aim to alleviate the poverty trap? Who are likely to be the winners and losers from the government’s proposed welfare reforms?
- What is a marginal-tax-plus-lost-benefit rate? How do you calculate it?
- Are there any other policies that could also reduce the poverty trap? How effective are they likely to be?
One of the key issues tackled during Labour’s term was poverty. In 1997, the UK had one of the worst child poverty rates in Europe (20% of the population) and so Labour made a concerted effort to move more people out of poverty than ever before. Low income was defined as income below 60 per cent of median income. As Chapter 1 from the first “Data and reports” link below states:
Over the period 1994/95 to 2008/09, the percentage of the population below 60 per cent and 70 per cent thresholds of contemporary median income showed slight falls on both Before Housing Costs and After Housing Costs bases. …The proportion and number of the population below low-income thresholds … fell substantially over the same period – with proportions falling by around one half.
Over the period 1994/95 to 2008/09, there was a marked fall in the proportion of children below low income thresholds held constant in real terms. 2008/09 has shown a fall compared to 2007/08.
Despite these improvements, there is a high concentration of people just above the 60% of median income level. And, although poverty rates have fallen since 1997, income inequality remains stubbornly high, with a post-tax-and-benefit Gini co-efficient hovering around 0.38 since 1992, compared with around 0.30 in the late 1970s/early 1980s.
As recession set in, there were concerns about the effect it would have on poverty figures. However, according to the Department for Work and Pensions (DWP), throughout 2008 and 2009 both children and pensioners saw their position improve, as hundreds of thousands were lifted out of poverty. According to the DWP’s annual Households Below Average Income report, mean take-home incomes grew for the seventh consecutive year – by 1% in 2008/9.
Whilst the most vulnerable seem to have survived the first test, the next will come with the substantial budget cuts the UK will see, as the government attempts to reduce the budget deficit. Poverty campaigners have warned that attempts to reduce the deficit must not be detrimental to poverty figures, by taking benefits away from those who need them. As Michelle Mitchell, the charity director at Age UK said: “Clearly there are huge challenges ahead for the new government, but now is the time to renew the fight against pensioner poverty and commit to eradicating it once and for all.”
Articles
Campaigners warn Coalition not to jeopardise falling poverty rates Guardian, Katie Allen (20/5/10)
Child poverty ‘historically high’ The Press Association (20/5/10)
Labour kept poverty in check, says IFS Financial Times, Nicholas Timmins (22/5/10)
Child poverty in Scotland increases by 10,000 in year Scotsman, Gareth Rose (21/5/10)
What the poverty figures show Guardian (20/5/10)
The untold story of poverty in working households Guardian, Peter Kenway (21/5/10)
UK pledges to reduce poverty Financial Times, Daniel Pimlott (21/5/10)
Don’t scrap child benefits, charities warn Guardian (20/5/10)
Data and reports
Households Below Average Income (HBAI) 1994/95-2008/09 Department for Work and Pensions (19/5/10)
Households Below Average Income (pdf file) National Statistics, First Release (20/5/10)
Effects of taxes and benefits on household income Office for National Statistics (see also, especially Tables 26 and 27)
Poverty and inequality in the UK: 2010 Institute for Fiscal Studies
A range of poverty data The Poverty Site
Previous blog
See also The poverty of poverty reduction policies
Questions
- What are the main causes of a) poverty and b) inequality?
- What is the difference between poverty and inequality? Can you think of any policies that might improve one of these objectives, but worsen the other?
- Explain how and why the recessions of the early 1980s, the early 1990s and between 2008 and 2009 could have led to poverty being reduced.
- The Financial Times article talks about different levels of poverty across the country. What can explain these regional disparities?
- The Coalition government has pledged to lift the income tax threshold to £10,000. What effect could this have on unemployment and poverty? How might this effect the poverty trap?
- The Guardian article ‘What the poverty figures show’ says that high levels of child poverty will cost the country at least £25bn a year. Why is this?