Absolute Poverty has always been an issue in high income economies such as the UK; however, in recent times, he issue has risen to greater heights. The BBC (BBC, 2024) records that the rate of absolute poverty has risen by 0.78 percentage points since 2022-23. Generally, absolute Poverty is defined as “when a person or household does not have the minimum amount of income needed to meet the minimum living requirements needed over an extended period of time.” (endpoverty.org, 2023). In recent years, with the cost of living crisis initiated by double digit inflation in 2021 (Financial Times, 2023), households all over the UK are bearing the price burden, with those at the lower end of the spectrum at even worse odds (npr.org, 2022). In my own research, I believe the UK is underestimating this issue, as well as being ignorant about the potential returns dealing with it could provide.
The policy I intend to implement is a specialised universal basic income (SUBI). Universal basic income (UBI) has been proposed as an alternative to welfare payments or policy with the aim of reducing inequality (Basic Income Lab, 2020). Generally, in theory, universal basic income gives a fixed sum of money to every member of the population to supplement any income they already have. The reason this policy is believed to work is because is because of the high marginal propensity to consume between those in lower income classes. As they have a greater number of needs not yet met, those in poverty are incentivised to spend most if not all of their additional money. Hence, this autonomous spending (CFI, 2024) on the population will lead to greater expenditure by poor on consumer goods and service. As a result, the poor can increase their living standards, which remain stable throughout the year.
Another intended effect is a rise in labour mobility for the poor. The consistent income provided by the UBI could allow them to buy certain goods they otherwise wouldn’t have been able to such as cheap phone contracts and transport passes. The method behind this is to provide the economically inactive in absolute poverty with income through an online gateway. As well as increasing their IT-literacy, this provides social connectivity, to find educational and work opportunities in the local area. Access to regular transport (which falls in average cost with long term passes), also increases their occupational mobility of labour, providing access to more employment opportunities. A greater income ensures they can pay for long-term transport passes, which offer lower average prices for journeys (National Rail, 2024). Similarly, the ability to travel longer distances makes it easier to source cheaper essential products, such as food and other necessities, allowing them to compare prices for daily needs. Hence, they have greater information, reducing the impact of bounded rationality on the goods and services they choose to buy.
Alongside this, my use of universal basic income will aims not only to increase standards of living but also encourage a transition into employment. I posit reducing the value of the UBI significantly year on year. Although if maintained at the same value, the real value of this income will fall, this is not significant due to the population in question. My argument is that lower income individuals are less likely to understand inflation and will care more about the nominal income they receive (Shafir, 1997), thus suffering from money illusion. In turn, reducing their income will lead to ever lower expectations of income in the future. In order to maintain their higher standards of living, these beneficiaries will aim to at least maintain their income by looking for jobs with their new access to employment opportunities. Thus, this policy should aid the transition from economic inactivity into permanent employment increasing the productive potential of the economy.
A heavy criticism of universal basic income is its potential to cause money supply inflation. This is because as money is printed to supply to everyone, more money will be in circulation, causing a rise in consumption by households. Hence, aggregate demand will rise, leading to an increase in inflation. As aggregate demand is greater than current output, this will lead to inflationary pressures (Petterson, 2024). The issue with this is that high inflation reduces the international competitiveness of British goods and services, and discourages investment in UK assets. However, in the long term, I believe the productive capacity of the UK will rise, as the economically inactive in the UK economy begin to acquire low-skilled work. Hence, LRAS will increase, increasing potential output and reducing the aggregate price level. The supply-side impacts of this policy innovatively deal with greater long-term issues in the economy.
Bibliography:
BBC, 2024. Absolute poverty: UK sees biggest rise for 30 yearsAvailable at: https://www.bbc.co.uk/news/uk-68625344Accessed on: 13/5/2024
EndPoverty, 2023. Relative Poverty vs. Absolute PovertyAvailable at: https://endpoverty.org/relative-poverty-vs-absolute-poverty/Accessed on: 12/5/2024
NPR, 2022. Inflation may be easing — but low-income people are still paying the steepest pricesAvailable at: https://www.npr.org/2022/05/11/1097966775/inflation-poor-income-inequality-biden-federal-reserveAccessed on: 13/5/2024
Basic Income Lab, 2020. What is Basic Income?Available at: https://basicincome.stanford.edu/about/what-is-ubi/Accessed on: 13/5/2024
IMF, 2018. WHAT IS UNIVERSAL BASIC INCOME?Available at: https://www.imf.org/en/Publications/fandd/issues/2018/12/what-is-universal-basic-income-basicsAccessed on: 13/5/2024
National Rail, 2024. Season TicketsAvailable at: https://www.nationalrail.co.uk/tickets-railcards-and-offers/ticket-types/season-tickets/#:~:text=between%202%20stations.-,If%20you%20make%20the%20same%20journey%20regularly%2C%20a%20Season%20ticket,day%20up%20to%201%20year.Accessed on: 14/5/2024
CPI, 2024. Autonomous ExpendituresAvailable at: https://corporatefinanceinstitute.com/resources/economics/autonomous-expenditures/Accessed on: 14/5/2024
Petterson, 2024. Universal Basic Income: An In-Depth Analysis of Economic Impacts on Inflation, Funding, and LabourAvailable at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4647940Accessed on: 14/5/2024
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