What people in poverty can't afford
This week the Joseph Rountree Foundation (JRF) updated their Minimum Income Standard: research that identifies the income required to achieve a socially agreed minimum standard of living. So what can this ‘basket of goods’ approach tell us about how we measure poverty?
Last month Ian Duncan Smith announced his intention to revise the way that we measure poverty. As it stands, a family is deemed to be in poverty if their income is below 60% of the median income. (See pages 9 to 11 of our monitoring poverty report 2010 for a more detailed explanation).
One of the main criticisms of poverty measure is that it is relative; it doesn’t reflect whether a family has enough money to survive but how far their income is from those in the middle. This means that if the incomes of the poorest stay the same and incomes in the middle go up, poverty increases. Likewise, as happened this year, the incomes of the poorest fall slightly and incomes in the middle fall by more, poverty drops, although everyone is worse off .1 Clearly, if this measure of poverty is going to be used effectively then there needs to be an understanding of the factors contributing to such changes.
Rather than looking at the different points of the income distribution, one could construct a minimum standard of living below which no one should fall. The Minimum Income Standard, published by the Joseph Rowntree Foundation, does this.
The update report published yesterday explains MIS as:
The income that people need in order to reach a minimum socially acceptable standard of living in the UK today, based on what members of the public think. It is calculated by specifying baskets of goods and services required by different types of household in order to meet these needs and to participate in society. Thus, a minimum is about more than survival alone. However, it covers needs, not wants; necessities, not luxuries: items that the public think people need in order to be part of society.
Comparing the MIS with the 60% of median income threshold is instructive. For each age group, the minimum income standard is higher than the poverty line. For pensioners the MIS is similar at 66% of median income, whilst for single working age adults, a lone parent with one child and a couple with two children, MIS is around 79% of the median. This means that the “poverty line” is only 78% of MIS. This clearly runs counter to the argument that the poverty measure currently used does not measure hardship; to be in poverty, families must have an income below the socially acceptable minimum.
So what can you afford at with a MIS income but not in at a poverty level? When JRF research MIS they cost every single item that a family needs and average this out of the length of time that item will last, from a loaf of bread to underwear. For our analysis though, it is useful to group these items into 10 categories.
The graph below shows how these 10 categories make up the total MIS (100%). We give top priority to rent, food, fuel, water rates and transport; unavoidable weekly costs. After that we have personal good and services (such as soap and haircuts), clothing, and household goods and services (such as furniture). These costs might not occur every week but will inevitably arise over time. Finally, we have alcohol and socialising and cultural participation (including DVDs and holidays)2.
We have arranged the categories according to what we consider to be the most important - a necessarily subjective judgement. Realistically, families may well be able to save money within, for instance, the food budget for a week or so to spend on items in categories we have deemed less important. For simplicity, though, we take the categories in their entirety. And, it's worth repeating - all the items in all the categories are considered necessary for a minimum standard of living.
The line on the graph shows, for each family type, where the poverty line is relative to MIS. The data isn’t perfect – the MIS budget breakdown is for 2012 (the bars), but we do not know what the 2012 poverty line is yet. The lines in the graph therefore show what proportion of the 2010-11 MIS was covered by the 2010-11 poverty line (we discuss how this is might change for 2011-12 later).
For all groups, the poverty line covers food, fuels, rent, water, clothing and travel - the absolute basics . What it does not cover is personal and household goods and any form of social or cultural participation. The poverty line largely reflects the amount of income required to survive but not participate in society more generally. So what MIS shows, quite clearly, is that poverty leads to social exclusion.
In the appendix of the JRF report was a table showing the gap between MIS and median income has changed over time. This gap is actually getting smaller. When it was first established in 2008-09 MIS for non-pensioners was about 72% of the median income, in 2010-11 it was 77%. This is the story of the recession: incomes are not keeping up with inflation. IFS forecast a fall in the median income of 2.8% in 2011-12 (after inflation), so the income threshold to be in poverty will be even lower, meaning that the Minimum INcome Standard, which is driven by price rises, not income rises, will be even further above the poverty line than it is now. Soon poverty will not only mean not having enough money to participate in society more generally, it will also mean not being able to buy the basics.
1 Between 2009-10 and 2010-11 the incomes of the poorest fifth fell by 1.2% and the incomes of the middle fifth fell by3.1%.
2 One of the token objections to MIS is the inclusion of alcohol, so it might be helpful to know that alcohol makes little difference on the outcome. It represents around £6 per week and around 2% of the MIS total.