Government Policies to Reduce Poverty & Inequity (AQA A Level Economics)

Policy

Reducing the use of  protectionist policies

• Removing protectionism or engaging in expansionary demand and supply-side policies will promote growth
   
• Data shows that economic growth has a very positive impact on economic development
  
  
• In most cases, growth precedes development
  
  
• Often in less developed countries, economic growth is linked to one industry and generates many negative externalities of production, possibly resulting in decreased living standards

Higher growth → higher wages → better education/healthcare → better human capital → better productivity → higher income

Education

• Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)

Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

 State benefits

• State benefits are usually given to the poorest and most vulnerable people in society
  
  
• State benefits include unemployment and disability payments, pension payments, heating discounts, public transport subsidies etc.

More benefits → higher wages → better education/healthcare → better human capital → better productivity → higher wages

Progressive taxation

• A progressive tax system is one that applies higher levels of income tax to higher levels of income i.e lower income earners pay a lower tax rate than higher income earners
  • Tax revenue collected is then redistributed to those who need it most
    
    
• Redistribution often starts with the provision of free education and healthcare
  
  
• Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes

Higher redistribution → better education/healthcare → better human capital → better productivity → higher income

Minimum wage

• National minimum wages are set above the free market rate
  
  • Firms are not allowed to pay anyone less than the legal rate
    
    
  • This raises the level of income in poorer households

Higher wages → better education/healthcare → better human capital → better productivity → higher wages

Employment 

• Employment may increase as there is an incentive for households to increase the supply of labour if minimum wages increase
  
  
• On the other hand, employment levels may fall as progressive taxes increase and there is a disincentive to work 
  • Firms may also demand less labour if the cost of hiring increases 

Economic growth 

• Higher levels of income may promote spending and increase economic growth
  
  
• However, higher taxes increase production costs and may cause firms to leave the country in favour of a lower tax system 
  • This causes output to fall and may lower economic growth 

Government finances 

• Increased taxes can lead to to an increase in government revenue 
   

• It can also lead to fiscal drag, where increased revenue is actually outpaced by a rise in government spending, particularly on social welfare payments and education
  • This causes negative effects for future generations if money needs to be borrowed to fund policies