How ACOSS exaggerates poverty

In the Impact magazine of Winter 2007, Peter Davidson defines poverty in the following manner:

[The] poverty line… used by the OECD, is set at 50% of the median (middle) disposable income for all Australian households for a single adult.

Using this measure, Davidson (a researcher with ACOSS) concludes that in 2004, “1,935,000 or 9.9% of Australians, including 365,000 children, lived below the most austere poverty line widely used in international research.” Elsewhere in the article Davidson uses a “less austere” measure of 60% of median income, finding that “3,859,000 people, including 786,000 children, were found to be living in poverty in 2004. This represented 19.8% of all Australians.”

So, if we believe ACOSS, nearly 4 million people (out of a population of about 20 million) were living in poverty just a few years ago. Are we experiencing Third World conditions in spite of rising real incomes and economic growth?

The answer is… no. Because Davidson’s definition is the type that guarantees “poverty” will never be eliminated. For example, if the median income was $1 million, then people earning less than $500,000 (50/100 x 1,000,000) would be “living in poverty”. This shows that using the middle number in an ordered series as the threshold of poverty is silly. What Davidson is really measuring is not poverty, but the distribution of income, or relative poverty. The true extent of hardship in Australia is much lower. Certainly it is lower than 19.8%.

Even if the median income is difficult to live on, it’s important to get definitions right so that policies are evaluated correctly.

A more accountable measure is absolute poverty. This could be measured by taking a representative bundle of goods and setting a baseline. If a person is struggling to obtain a certain amount of food per week and a certain standard of housing, or obtain access to clothing and medical assistance, then they should be classified based on such facts.

(Peter Saunders says it better than me)

12 thoughts on “How ACOSS exaggerates poverty

  1. Median household income according to the 2006 Census is $53,404AUD. So poverty is a household living on $26,702 or below?

  2. What hurts people on incomes like this is the barrage of high and regressive taxes and anti development and occupational licensing requirements.

    I think these people, like all of us can be helped by economic reform. Low income earners may benefit the most from further rationalist economic reform. They don’t need tariffs with effective tax rates approaching 40% or excise taxes varying between 33% and 40%.

    But honestly the worst that would happen is that you can’t live in a chic neighbourhood, one partner goes on the dole, or you move in as or with a housemate, don’t have new car and don’t have the most expensive plasma TV and don’t eat out that much.

    I know it isn’t great when money is tight, but if the median income rose to $65 000, then by definition, ACOSS would call $32 500 the poverty line. This is becoming trivial.

    There is a difference between poverty and living a modest lifestyle.

  3. ‘poverty’ is an emotive word. it needs to be looked at both in relative terms and absolute terms.

    if there really are two million Aussies living on a combined family income of just $26,702, then i would define their lives as very harsh indeed. perhaps even ‘poor’.

    anyone know what an unemployed family of four gets in total state benefits?

  4. I can’t see any point looking at things in relative terms.

    We need to focus on the basket of essential goods and how much it costs to have them. This definition lasts longer and doesn’t need re-evaluating every time the distribution of income changes or new innovations are brought into the mainstream.

    If we don’t, then we define poverty as not being able to afford internet, mobile phones, cable tv, and more.

    Even things like cars, cigarettes and some household appliances were not owned by the mainstream 3 or 4 generations ago, so perhaps poverty really ought to refer to food, clothing, shelter and medical, education expenses.

    And if we are going to use these relative and shifting definitions of poverty, than the least we could do is to have a massive disclaimer stating that poverty in 1931 was defined *VERY* differently to poverty in 2008.

  5. Time to end the 17% tariff tax on clothing, clothing is a basic necessity. The tariff tax makes clothes more expensive for all of us. Time to increase the tax free income threshold, people living in poverty should not pay income tax. Time to end high EMTRs, people living in poverty should not be kicked for trying to better themselves. Time to cut the tax on petrol, people should not be slugged for trying to get to work. Time to cut payroll tax, employers should not be penalised for creating jobs. Let me count the ways we can help the poor.

  6. Ben and Pommygranate

    Unfortunately it is not easy to come up with a figure for median household income. The number you quoted from the census is simply that – the income of the median household when all households are ranked in terms of their income. However, for the purpose of poverty analysis you need to “equivalise” the income of households of different size, to take account of the fact that $50,000 represents a very different standard of living for one person compared with four people (your point Pommygranate).

    Luckily, the ABS do produce a set of numbers that have been equivalised. This means that the household income of households with more than one person has been adjusted so that it can be more easily compared with the income of a single-person household. On these figures, the median equivalised household disposable income in 2005-06 (the last time anyone looked) was $563 a week (around $29,300 pa).

    The ‘equivalent’ figure for a family of four (assuming both children under 15) is about $1180, 60% of which is $710.
    Now, it’s true that back then an unemployed family of four didn’t have an income that high (more like $600 a week), but most people would regard a 60% median poverty line as a pretty high standard for a household with no-one in work – very few if any countries in the developed world would offer jobless households an income that high.

    One of the main reasons that there are so many extra ‘poor’ people if you pick the 60%, rather than the 50%, median poverty line is that most income support payments in Australia fall in between – that is, age pensioners are not poor on the more austere measure, but are poor if you raise the bar sufficiently.

  7. And Terje, while I agree that in the best of worlds EMTRs would be lower you do understand that the main way of achieving that would be to withdraw people’s income support more slowly, don’t you?

  8. BG – what Mark said. Personally I would not means test any welfare. Instead all welfare would be simply subject to taxation (as most is already). Of course given a clean slate all manner of alternative approaches become viable (eg negative income tax).

  9. Terje… means-testing and tax give exactly the same impact on EMTR. But your approach of tax & welfare creates huge amount of churning. If you instead means-test and don’t tax, then you get the exact same outcome, but without the churning, without the bureaucracy, and without the universal welfare system effecting everybody’s life.

    The “relative poverty” measures used by these organisations is a scam. These people obviously don’t care about poverty at all, or else they would be more honest.

    Their measures are measures of income inequality. It is true that Australia has income inequality. If they wanted an honest debate, they would say that inequality is bad… and we could debate that.

    If they are worried about the standard of living for the poorest people, then we should look at the standard of living for the poorest people, and how it’s changed over time. These poverty frauds would never look at the honest information, because it would undermine their reason for existence.

    It’s disgusting. They are using the emotive word “poverty” as a political play-thing to justify more funding for their pet projects. Meanwhile, they advocate policy that will lead to higher taxes, fewer jobs and slower wages growth.

  10. John,

    A lot of welfare such as family tax benefits can be taken as a tax deduction (ie reduce tax rate) instead of as a cash payment. As such I think the system already attempts to moderates the churn and it does so with some success. However I probably put more emphasis on the political aspect of this type of reform. In terms of both selling it and then in terms of holding the line. Of course if you are not stuck with an incremental approach then I’m all for a negative income tax or some such grand reform.

    The other point that I think matters is privacy. Means testing and income tax are both invasive breaches of personal privacy. A basic income and a flat GST don’t entail beauracrats knowing your personal affairs to the same extent.

    Interesting aside that I learnt just recently. In Norway when you pay personal income tax your final income statement is public information published on the Internet. Everybody can check out how much tax their neighbours pay and what they declare in the way of income. Great for bragging rights, not so great for privacy.

    Regards,
    Terje.

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