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16 December 2002

Poverty: the uphill struggle

Gordon Brown is generous to the poor. Alas, it's only just enough to make things better

By Donald Hirsch

New Labour’s target of abolishing child poverty in 20 years stands out as an ambitious goal for a party often accused of scaling down ambitions for social change. Moreover, the long-term dream has been translated into real political aims. First came the promise to halve child poverty by 2010; later came another specific promise to cut it by a quarter by 2004.

The latest analysis – the first full account of what happened to poverty in Labour’s first term and why – shows that progress has been made towards these aims, albeit slowly. A Joseph Rowntree Foundation study, by Holly Sutherland of the University of Cambridge and David Piachaud of the London School of Economics, looked closely at what caused the number of children in poverty (defined as those living in families with less than 60 per cent of median income) to fall modestly, from 4.4 million in 1996/97 to 3.9 million in 2000/01. More importantly, the study tells us why the billions that Gordon Brown, the Chancellor, poured into extra benefits and tax credits for children did not make more of an impact, and how much difference the further billions promised will make by the first deadline in 2004.

The top line of the graph shows that, by 2003, the government will have increased spending sharply on benefits and tax credits for families with children, from £12bn in 1998 to £21bn. Poor families benefit most from this rise. However, part of the money was needed just to keep up with rising living standards; the actual increase, relative to GDP, is a more modest though still substantial 20 per cent.

Well under half the rise had come on stream by the final year of Labour’s first term. The main reason for the 10 per cent fall in child poverty in that term was that so many more children had parents in work in 2001 than in 1997 – over that period, headline unemployment halved.

Looking ahead, there is good news and bad news. The good news is that the sharpest rise in children’s benefits is yet to come. The bad news is that all those extra billions will be enough to reduce child poverty only by another 6 per cent or so, unless they are supported by more employment growth. The projection shown in the graph assumes stable employment rates; with an economic downturn, they could worsen. Even with stable employment, child poverty will have fallen by somewhat less than the target one-quarter by the start of 2004.

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The significance of all this is that reducing relative poverty can be achieved only through bloody-minded persistence over a long period with policies that both create jobs and improve benefits and tax credits. In a boom like the one just ended, poorer groups need to do well just to keep up with a rapidly rising norm. In recessions, the norm is steadier, but rising unemployment can push people back into poverty.

The impact of a modest downturn may be less serious than implied by unemployment figures, because the long-term trend is for more women to seek work and therefore for total employment to rise. However, the long-term trend for wages to become more unequal (reflecting growing rewards for skills) makes tackling poverty an uphill struggle. In Labour’s first term, this trend had no effect on poverty rates, but this was the period when Britain first got a minimum wage. Any effect it had on lifting the lowest-paid workers out of poverty was outweighed by widening pay differences further up the scale.

Will the use of tax credits and benefits to whittle away at poverty survive tougher economic times? Brown’s continued tenure at the Treasury should give poorer children hope that it will. He is the Chancellor who has managed not only to give unprecedented cash to children but also to give an unprecedented proportion of it to the poor, while keeping the middle classes sweet.

The Institute for Fiscal Studies has recently calculated that next year will be the first time since its introduction that child benefit accounts for less than half of all the money that the government gives to families with children. For years, pundits asked how support centred on this “universal” benefit could become more targeted at the poor without offending Middle England. The answer has been not to cut or tax child benefit, but to swamp it with means-tested payments. Yet even the new means-tested child tax credit coming in next April will not feel like a poverty handout: the 85 per cent of families earning below £50,000 a year will all get at least a tenner a week, and at least £26.50 including child benefit – a sum not to be sniffed at. A more targeted system still would speed up the laborious process of reducing child poverty. But to sustain such a long-term mission, wide political support is essential. This requires a fine balancing act, in pursuit of a fine aim.