We discovered this morning that the proportion of children living in relative poverty is at its lowest level since the 1980s. Great news of course, but this headline masks a much more complicated – and worrying – picture.
Falls in this headline poverty measure – which captures those children living in households with incomes less than 60 per cent of the median – can be divided into two phases. Before the financial crisis, reductions owed much to a concerted policy focus and some sizeable spending on family policies. Tax credits in particular both incentivised single parents into work and provided a boost to incomes for low earners. At the same time an ever greater proportion of children in poverty were from working families.
Long term falls in relative child poverty and rise of in-work poverty
Notes: Estimates presented are on a Before Housing Cost basis
Once the crisis hit, relative poverty fell sharply. But this was only because the incomes at the median – the benchmark for this relative measure – were falling more quickly than those at the bottom. Absolute poverty – which is measured against a fixed income benchmark – rose in this period. The implication is that more of us were struggling, even as the headline poverty rate continued to fall.
Since 2011 declines in the child poverty rate have slowed significantly. Rates may now be lower than at any time since the 1980s, but the long downward drift appears to have ended.
With a further £12 billion of cuts to working-age welfare planned over the next two years, the medium-term outlook for child poverty looks starker still. For example, our research has shown that a family could lose up to £1,700 a year as a result of the mooted £5 billion cut in child tax credits – two-thirds of the cut would be drawn from the incomes of the poorest 30 per cent of households.
So, if the government wants to be in a position to repeat its claim about falling child poverty rates over the rest of the parliament, what might it do? Much of its emphasis has been on ‘taking the low paid out of tax’. Indeed, it is legislating to explicitly link the personal allowance (the point at which individuals start to pay income tax) to the earnings achieved when working 30 hours at the minimum wage. But this is a mis-sold policy if the focus is meant to be on low earners. Gains are overwhelmingly skewed towards better-off households, with roughly three-quarters going to those in the top half of the income distribution. The five million lowest paid earn too little to pay tax and will gain nothing from further tax cuts.
Increasingly the rhetoric from the government has focused on the need for employers to pay their staff more – reducing the burden on the state to pick up the pieces via in-work tax credits. This is certainly a useful approach. Action on the minimum wage and living wage would be welcome and could bring some modest fiscal savings. But the government appears to have its approach the wrong way round – floating the idea of cutting the generosity of tax credits on the assumption that this will somehow force employers’ hands. Yet our research found no evidence that tax credits act as a subsidy to employers. Simply cutting support is almost certain to do little more than take money away from those on the lowest incomes.
But there is one government programme which does have the potential to help in the fight against poverty: Universal Credit (UC). This flagship welfare reform programme is designed to make sure that work pays by boosting incentives and encouraging progression at work. The ambition has much to admire, but our recent review has shown that its current design is flawed and needs a major reboot if it is to fulfil its potential to raise living standards.
New work allowances – a key feature of UC that allow people to start working without having their benefits reduced – are expected to encourage more people into work. But weak incentives to earn more (workers can keep as little as 24 pence of each additional pound they earn) could lead to more parents becoming trapped at low levels of pay and a greater dependence on in-work support – the very outcome the government wants to prevent.
And while UC is very good at getting at least one person in a household into work, it is less effective at boosting employment within households – an important way to tackle in-work poverty. Our review has called for more support for second earners in couples with children to tackle this problem.
With some simple changes to the design of UC, significant strides could be taken in boosting employment and the earnings of low income families. The current dichotomy, with cuts to both tax and benefits, risks creating a two-tier system, in which the low paid are left ever further behind, stuck in poverty and held back from sharing in future growth. A rebalancing of the incentives UC creates – to better support single parents and second earners in couples with children – would provide a clear route to improved living standards.