It's still about child poverty

For ten years, Labour has been shifting resources to the least well off. Why are the poor still with

Ten years ago this month it first became clear that new Labour, for all its revisionism, was genuinely willing to shift substantial public resources to promote social justice. "For the first time that many of us can remember," I wrote in the New Statesman following the 1998 Budget, "the Chancellor made a big, explicit giveaway to poor families, and made it look respectable."

Ten Budgets, one Chancellor and three New Statesman editors later, I am still writing about Labour's efforts to divert resources to poor families. The continuity of this underlying theme is remarkable, backed by a main delivery method introduced in 1998. This is to give tax credits to selected low-income groups, at a favourable rate compared to money spent on benefits. The first group to be so favoured was working families with children. Gordon Brown's tax credit generosity subsequently spread to out-of-work families and to low-income pensioners through the pension credit.

The cumulative effect of this strategy has been to raise the cash support for the average family with children by more than £70 a week for the poorest fifth, compared to less than £10 a week for the richest fifth. The minimum income guarantee for pensioners has doubled in real terms since 1998, while average household incomes have risen by only about a quarter.

Why has this doggedly redistributive Budget practice not led to a transformation of the distribution of income in Britain? In some respects it has - notably a sharp fall in pensioner poverty. One of the least noticed achievements of the present government is to make poverty, almost certainly for the first time in history, less likely after retirement than before it. This Budget's boost in the winter fuel allowance will stop some pensioners slipping back into hardship with recent rises in energy prices.

But when it comes to the big headline target, halving child poverty by 2010 and ending it by 2020, the dream is becoming a nightmare for ministers. Later this month, the latest annual poverty figures are likely to confirm that an initial fall in child poverty has tailed off less than half way to the first of those targets.

The Budget threw what limited spare resources Alistair Darling could find into getting closer to meeting it. The additional amount given directly to poor families with children is very modest - only £1 a week per child more than previously announced. But an imaginative new measure will also help poor working families (which account for half of poor children) to a much greater degree. They will be able to keep up to £17 a week more in housing and council tax benefit, reducing the trap whereby the gain from moving into work is lost by having to pay for more of your rent and council tax. Together with other measures announced in the past year, this should restore momentum to the fight against child poverty. Its reduction by 600,000 since 1999 could grow to about a million by 2010, though meeting the target cut of 1.6 million still looks highly unlikely.

More inequality

Part of the problem has been that the actual scale of these redistributive measures has waxed and waned. But more fundamentally, the cumulative effect of all the redistributive measures of the past decade has been offset by an underlying budgetary system that works in the opposite direction. Both the tax and the benefit system are for the most part uprated, by default, in line with prices rather than earnings. This means that as earnings rise, people pay a growing share of their incomes in tax, and get a falling percentage of earnings when they are not working. A powerful report being published next month by the Joseph Rowntree Foundation will show that the poor get hit hardest by this system, with devastating results for inequality.

Out-of-work families are being given generous child tax credits with the Chancellor's right hand, while his left fist keeps tightly closed around benefits for adults in the same families. Basic income support remains around £60 a week, the same in real terms as a generation ago, while average income is up two-thirds. Little wonder that relative poverty is so hard to crack.

Can Darling help square these circles by raising money under the mantle of green Chancellor? The government is undoubtedly growing more willing to regulate our lives to save the planet, from the bags we put our shopping in to how we pay for our domestic gas. The extension of differential treatment of "clean" and "dirty" drivers through car taxes proceeds apace.

The idea of taxing polluters to pay for social justice is very far from being realised. In the first place it's a risky strategy: the more you succeed in curbing emissions, the less revenue you raise for good causes. And for most of the measures announced, the effect on the Exchequer will be piffling. The only non-negligible sum raised will be from aviation tax, which will bring in £550m more by 2010-2011, equal to a third of the inheritance tax giveaway.

Compare that to the effect of abandoning the fuel escalator in 2000. By raising fuel duty 6 per cent faster than GDP, the government had been increasing tax revenues by a cumulative £1.5bn a year in 2000 prices. Had this continued (and in the unlikely event that the government then survived), it might by now be bringing well over £10bn extra a year, even with a significant reduction in car use. That would be about enough to meet child poverty targets, double funding for the 10 per cent most deprived schools to help them slash class sizes and employ brilliant teachers and still have enough change to pay for a much-needed improvement in funding long-term care for the elderly.

Donald Hirsch is Director at Centre for Research in Social Policy, Loughborough University.

This article first appeared in the 17 March 2008 issue of the New Statesman, Iraq: the war that changed us