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The state’s anti-poverty effect

24 February 2012

Poverty rates are usually a measure of personal income. But how can public services affect relative poverty, that is, when the monetary value of public services, known as “extended income” is brought into the equation?

In fact, when public services are taken into account, the poverty rate for 27 OECD countries decreases from 10% to 5%. In Belgium, Ireland and the UK, poverty is reduced by close to 60%, which reflects the value of public services in these countries. The decrease is by about 27% in Estonia and Sweden, where income equality is higher to begin with. While inequality and poverty reduction are not the prime aims of education, health and other in-kind services such as housing and care for the elderly, they do have an impact on income distribution.

Take education. An increase in spending on compulsory education will reduce overall poverty more in countries where poverty is high among families with young children, and where participation in compulsory education is high. In Mexico, Denmark, Norway and Canada, the value of public education increases household income by some 15% or more.

Healthcare also reduces income inequality, particularly since public spending in this sector is concentrated on the elderly who, in general, have below-average incomes. Public health spending increases disposable income by 11% in Poland, Australia and the Netherlands, and reaches 17% in Belgium, France and Sweden. This increase is much more pronounced for the lower income groups and decreases as incomes grow.

Further reading

OECD (2011) Divided We Stand: Why Inequality Keeps Rising –
The Impact of Publicly Provided Services on the Distribution of Resources: Review of New Results and Methods (Social, Employment and Migration Working Paper No 130) –
OECD Database on Income distribution and poverty
OECD work on Income Distribution and Poverty

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