Can we afford poverty?

People living in poverty are vulnerable to multiple deprivation. They are more likely to live in sub-standard housing, have poorer health, and have a greater risk of being affected by crime, debt and premature death. The consequences of poverty not only have an impact on the lives of low-income families, but also pose a serious risk to public finances. Peter Ambrose argues that we can no longer afford to ignore the true cost of poverty.

The changing threat posed by poverty
How expensive is poverty?
Poverty costs serious money
Why is poverty so persistent?
1. There is a gaping information gap
2. Some redistributive mechanisms remain unrecognised and un-discussed
3. Housing costs are a key element in reinforcing poverty
4. Incorrect diagnosis
What to do?

The changing threat posed by poverty
Historically the threats that have generated moves for the reduction of poverty and the redistribution of wealth have been on one of two grounds – public health or political stability. At certain points, for example in the mid-nineteenth century, the public health profession has argued that the poor posed health threats to the rest of society, partly in the form of communicable diseases. At other historical moments, such as after the First World War and even more forcibly after the Second, electoral expectations about a better life were such as to make a programme of social reform and redistribution politically inevitable.

Now, public health, morbidity and mortality have all greatly improved, even though the improvements have been much slower for the poor – some parts of the country have the same life expectancy as the average fifty years ago and health inequalities are widening. Similarly, the threat to political stability is quiescent in the UK – assuaged by a mixture of Macmillan-type 'never had it so good' rhetoric, hugely expanded mortgage and other indebtedness (which impedes collective action in the workplace) and by a constant media diet of images of 'how most people live' – compare the size of kitchens in adverts and in reality. In some ways social stability is under severe strain. The prisons overflow, the courts cannot collect all the fines they set, the bailiffs deal with 3.5 million cases a year and there are increases in evictions and suspended possession orders for rent arrears and in suspended prison sentences for council tax arrears. Meanwhile, the media projection of the housing problem consists of endless programmes about 'makeovers', how best to trade up and how to acquire a suitable second property abroad. These trivialisations of a serious and problematic issue themselves act as covert exclusionary and isolating mechanisms.

But there is one way now in which poverty, and the poor housing conditions that it frequently dictates, are a threat. These conditions pose serious problems for public finances. Poor and poorly housed people are expensive people.

How expensive is poverty?
We will not know just how expensive poverty is until one of the gaping holes in our research-based knowledge is plugged. Encouragingly there is growing research activity around the world aiming to assess the costs. An exploratory study carried out in 1996 as part of the 'health gain' work for the Central Stepney Single Regeneration Budget found that annual per household costs for some healthcare services were £515 in an unimproved area compared with £72 in an area of improved housing. The difference in policing costs for specified categories of crime was £380 compared with £85.[Footnote 1]

A recent report on Brighton and Hove has documented the problems of trying to live on low pay in this very high-cost area.[Footnote 2] The survey carried out on a sample of low-paid workers showed clearly how low income adversely affects health, diet, safety, recreational activities and holidays, family life, neighbourliness, volunteering and other activities. Many, if not all, of these adverse effects work through to higher costs on one public budget or another. Part of the report reviews the research on the 'health gradient' (poorer people are less healthy). It cites a study in East London [Footnote 3] demonstrating that the annual cost of primary health care per person at risk varied from £107 for those in social classes I and II to £256 for those in social classes IV and V.

In a recent groundbreaking study by the children's charity Barnardo's the life stories of seven young people aged from 13 to 30 were considered.[Footnote 4] Each faced, or had faced, severe difficulties. Using verified costings from the health, social, law enforcement and other relevant services, the actual costs on services generated by these young people was compared with the much lower cost of the preventative investment which, had it taken place, could well have reduced or completely prevented their later difficulties. The study was very innovative and was brought to the attention of government, but no action has been taken to develop the approach.

The Barnardo's report gave only the individual case study costings but it seems possible to generalise a little. The aggregate cost of the failure to invest came to just under £1 million for all seven combined. Their aggregate age came to 127 years so the cost of failing to invest was of the order of £7,870 for each year for these seven, or about £1,125 each per year. There are about four million children in poverty in this country. If it is assumed that even only one in four of these is at risk of running into the same kinds of difficulties, then the annual cost of this failure to invest in our poorer children equates to over £1.1 billion per year. The figure is suggested purely as indicative of the order of magnitude of the public costs involved.

Other research has begun to identify the cost of fuel poverty and indoor winter cold. A pilot study has been carried out by the Low Energy Architecture Research Unit, at the University of North London. [Footnote 5] It correlated data on low income, building characteristics and admissions to hospital. The aim is to develop a methodology for evaluating some of the benefits, in particular health improvements, which would result from investment in affordable domestic warmth.

The cost effects of poverty are felt in many other ways. The stress associated with inadequate income, and the debt, poor diet and crowded housing conditions that often result, has been linked by many observers with an increased risk of family tensions and breakdown and even of child abuse. Much more research is required to firm up these linkages but what is beyond doubt is that many of these outcomes are not only grievous for those concerned – they also generate heavy long-term costs for publicly funded services.

Research based in the US found that improving indoor environments, and thus reducing the incidence of asthma, allergies and respiratory diseases, could result in a productivity gain of between $30-150 billion annually. [Footnote 6] A study of the housing situation in Australia argues that inadequate housing and 'broader exclusionary forces' generate social and other problems that are producing fast rising fiscal costs for governments. [Footnote 7]

In view of the weight of evidence building up about the ways in which poverty and poor living conditions contribute to the demand for, and therefore the cost of, health and welfare services it is perhaps surprising that a recent report on the long-term funding needs of the NHS concentrates almost entirely on the supply side. [Footnote 8] It spends comparatively little time considering the ways in which policy interventions to reduce inequalities and provide better housing might work to moderate the growth in demand for healthcare provision.

Poverty costs serious money
In fiscal terms the reduction of poverty is of more than marginal concern:

The social protection, health and education spending headings, precisely those where it is argued that poverty and poor housing is generating 'exported costs', amounted to 57.8 per cent of all public spending in 1987. These headings now account for 67.1 per cent of total spending. They have been growing faster than all other spending categories over the past fifteen years. There is, of course, a wide range of reasons for this including demographic change and rising expectations but it is reasonable to suppose that the spend on these three items would be easier to contain were poverty to be reduced.

Why is poverty so persistent?
Why is poverty so persistent? To judge from public statements the Government has redistributive intentions and the Prime Minister himself took personal charge of the issue in November 2002. The Government claims that billions more is being spent on health, education and welfare services. But poverty persists with only minor signs of reduction. Why the paradox? The following are worth considering.

1. There is a gaping information gap
Some of our approaches to information gathering languish in the 20th Century - if not the 19th. Trumpeting increased spend on single policies is no guarantee of progress 'on the ground'. Policies come together only at the level of the household or individual spending unit. There is not enough evaluation of the way that employment, benefits, health and housing policies work together, or cancel each other out, at this level.

There is a set of questions which are vital to effective policy formation but whose answers we can only guess at. They include:

• How much income does a specified household need to live an 'included' and health-protecting life in different parts of the UK given vastly different living costs? The European Union recognises the need to have a system in place to identify minimum income requirements. A European Commission recommendation to member states dated 24 June 1992 identified the need to:
  
  …combat social exclusion [by] fixing the amount of resources considered sufficient to cover essential needs with regard to human dignity.
  
  We have good techniques to work out 'minimum income standards' but no British government since 1948 has implemented them. An approach to the Prime Minister has now been made by a group of MPs and Peers, prompted by the Zacchaeus 2000 Trust coalition of 65 non-government organisations with 10 million members comprising the faiths, charities, unions and health professionals (including CPAG), to propose a Commission to identify minimum income requirements.
  
  
• What are the short, medium, long-term and pension implications of an ever-increasing percentage of aggregate household income coming in the form of benefits and tax credits, not wages? Increasing proportions of the income of poorer households now take the form of benefits and tax credits. But these are means-tested and non-pensionable. What take-up rates apply? What marginal tax rates does the 'poverty trap' produce? What are the implications for dis-incentivising the move from welfare to work? And what are the implications for post-retirement incomes?
  
  
• How much more expensive on public services is a poor unhealthy person compared to a comfortably-off person over the lifetime of each? In particular, what do poverty-related conditions (obesity, low birth weight, indoor cold and damp, social isolation etc) cost the NHS annually and over the lifetime of those affected? We need much more research effort along the lines of the Barnardo's work cited.
  
  
• What is the range and weight of the 'exported costs' of poor housing and poverty? The summarising report on the Stepney work [Footnote 9] identifies at least 40 cost headings where expenditure is likely to be increased as a result of poverty and poor housing conditions. Very few if any of these have been measured.

Our lack of firm evidence on these and similar questions leaves us with an inadequate accountancy base. Despite all the talk about 'joined-up thinking' there is a failure to apply the simple principles of double-entry book-keeping to the national spend and to understand that costs and benefits can move across budgetary boundaries. This lack of understanding makes cost-effective decision making in relation to those spending programmes with cross-budget implications a matter of guesswork. We simply do not know what forms of public investment work most cost-effectively.

2. Some redistributive mechanisms remain unrecognised and un-discussed
Some areas of policy – for example, land use planning, the control of development land and property taxation – are not generally taken into the equation when policies to reduce poverty are being devised. But these mechanisms are actually powerfully redistributive – normally regressively. In the case of the Central Stepney redevelopment the failure over two decades to bring the key gasworks site on line for development, and the weak mechanisms available to ensure that a high proportion of the housing built on it is 'affordable', has contributed significantly to the problems faced by poorer people while presenting a good development opportunity to private sector housebuilders to produce 'executive' market-priced housing.

3. Housing costs are a key element in reinforcing poverty
Housing costs take a very high proportion of the spending of poorer households. Over the past few decades successive British governments have conceded a disastrous own goal. The total amount of house purchase debt outstanding (money lent by financial institutions for house purchase) stood at £62.3 billion in 1981.[Footnote 10] At 2001 prices this would now be £155.5 billion. If we allow that there has been a 36 per cent increase in the number of owner-occupied units, and that more credit would be required for this reason, we might expect the amount of house purchase credit outstanding to be about £211 billion. The actual amount of home loans outstanding in 2001 was £591.5 billion, about 2.8 times (or £380 billion) more than one would expect.

There has been no effective regulation of this sector of the finance market and no proper consideration of the consequences. Housing debt as a proportion of GDP has risen from about 23 per cent in 1980 to 54 per cent in 1998 (the percentage figure in comparable countries such as France and Germany has stayed roughly in the mid-20s). While investment directed to housing production, and thus output, has slumped the investment applied to consumption (in the form of credit made available to purchasers) has multiplied. It is no surprise that house prices and rents have spiralled and prices in particular have massively outstripped other price movements for many decades. One knock-on effect is that the price of new development land, which reflects the sale value of the houses to be built, has also risen faster than other prices. Another is that the cost of housing benefit has spiralled. Another is that such means-tested demand side support works very imperfectly, has sub-100 per cent take-up and imposes massive and costly stress on administrators and applicants alike. Another is that £380 billion of investment that might have gone to productive areas of the economy and to job creation has served to elevate property prices.

The final irony is that property price levels are often used as indicators of 'progress' in regeneration areas. The very choice of indicator reflects the apparent (not real) interest of the better off rather than the interests of poorer people seeking to access housing.

4. Incorrect diagnosis
Pressures from the poverty lobby can focus, very understandably, on the 'tip of the iceberg' issues – street homelessness, 'deprived estates' etc. This opens the way for politicians to dismiss the issue as one confined to marginal groups. But poverty is not like this. It is ubiquitous, systemic and it affects millions. It is not a 'management problem' in that parts of the system malfunction and simply need 'joining up', that local authorities are inefficient or that 'social capital' needs to be built up so that people can help themselves more effectively.

It is in the nature of modern economic systems that wealth generation is more effective than wealth distribution. Developments in technology, which occur at an accelerating rate, can easily have overall regressive effects, can move jobs around faster than people can move around and can increase the risks for those unable to buy into technologically-based avenues to a more comfortable life (a good education, a car, a computer etc).

What to do?
So what actions are open to those who are concerned with the high incidence of poverty and who deal with the outfall problems every day?

• Continue to do everything possible 'at the frontline' for those currently suffering under the system.
• Press for research studies that will produce evidence on questions such as those raised in the section on 'the information gap'.
• Argue vigorously that while the issue of poverty does have clear moral and ethical dimensions the main grounds for working towards a significant reduction in poverty are economic - they are about cost-effectiveness in the use of public money.

Peter Ambrose is Visiting Professor in Housing Studies at the University of Brighton

Footnotes
1. M Barrow and R Bachan, The Real Cost of Poor Homes: footing the bill, Royal Institution of Chartered Surveyors, 1997 [back to text]
2. P Ambrose, Love the Work, Hate the Job: low cost but acceptable wage levels and the 'exported costs' of low pay in Brighton and Hove, Health and Social Policy Research Centre, University of Brighton, 2003 [back to text]
3. A Worrall, J Rea, P Nicholas and Y Ben-Shlomo, 'Counting the Cost of Social Disadvantage in Primary Care: retrospective analysis of patient data', British Medical Journal, 314:38, 4 January 1997 [back to text]
4. M Hughes, A Downie and N Sharma, Counting the Cost of Child Poverty, Barnardo's, 2000 [back to text]
5. J Rudge, Developing a Methodology to Evaluate the Outcome of Investment in Affordable Warmth, LEARN, University of North London, Eaga Partnership Charitable Trust, 2001 [back to text]
6. W Fisk and A Rosenfeld, 'Improved Productivity and Health from Better Indoor Environments', Centre for Building Science Newsletter, Summer 1997 [back to text]
7. M Berry, T Dalton, M Horn and G Berman, Systematic Review of the Cost-effectiveness and Cost Benefit Studies of Homelessness, Australian Housing and Urban Research Institute, Melbourne, 2002 [back to text]
8. D Wanless, Securing our Future Health: taking a long term view, HM Treasury, 2002 [back to text]
9. P Ambrose, Second Best Value: the Central Stepney SRB – how non-joined-up government policies undermine cost-effectiveness in regeneration, Health and Social Policy Research Centre, Brighton University, 2002 [back to text]
10. S Wilcox, Housing Finance Review 2001-2002, Chartered Institute of Housing and Council of Mortgage Lenders, 2001 [back to text]

Poverty 116, Autumn 2003