Figure 2
LIVING STANDARDS COMPARED
Source: Margaret Wynn, Family Policy,
Penguin Books, 1972, p 165.
3. HOW THE
BUDGETS FOR
CHILDREN WERE
ESTABLISHED
3.1 Budget standards for children explained
A budget standard calculates the average expenditures
required by specified household types, each week or month, to
purchase a predefined living standard. Although different households
make different choices, experience in countries which have used
budget standards for many years has shown that the total amounts
of money spent (at a pre-defined standard) tend to be similar.
The budget standard for a child comprises the
direct costs of his/her food, clothing etc—either individual
consumption (eg clothing) or shared consumption (eg food). The
budgets for children aged 4 and 10 years, in Annex 3 to this report,
are drawn from the FBU's budgets for working families with two
children at January 1998 prices, which have been uprated to October
2000, using the Retail Prices Index. [16]
The budget for the boy aged 16 years uses the same basic assumptions
as the budgets for younger children. The budget standard costs
(eg clothing, personal care and leisure) are adjusted for the
older child. Pocket money, Christmas presents and birthday presents
are not highlighted. Instead, they are included implicitly in
the detailed lists of each child's food (eg sweets), toys and
activities.
3.2 FBU research method: January 1998
budgets, parents and children
When calculating budgets for a complete household,
the method is in the following ten stages:
Stage (1): Select the household types for
which budgets are to be drawn up.
These are shown in Table 1. As with the DSS
Tax Benefit Model Tables, [17]
all the household types are hypothetical, not actual families.
All are assumed to live in local authority housing in York. And
all are in paid work (full-time or part-time).
Table 1
HOUSEHOLD TYPES
FAMILY (a): One man, one woman, boy aged
10 years, girl aged 4 years
— Two earners, one works 38.5 hours,
one works 17 hours a week
— One earner, 38.5 hours week
— One earner, 17 hours week
FAMILY (b): One woman, boy aged 10 years,
girl aged 4 years
— One earner, 38.5 hours week
— One earner, 17 hours week
Stage (2): Select the locality where the
households are assumed to live.
As with previous FBU budgets, all the households
live on the outskirts of York, which also serves as a secondary
pricing centre, in addition to supermarkets with branches across
the UK.
Stage (3): Identify the goods and services
to be included in the budgets.
These comprise budget standard expenditures
and variable expenditures (Table 2). The former are specified
baskets of goods and services which, at a given living standard,
are assumed to be the same for all households of the same composition.
The latter comprise core variables (ie housing, fuel and transport)
and lifestyle variables (ie tobacco, alcohol, pets and charitable
giving). The costs of the core variables are a function of house
size, heating system, travel-to-school costs and so forth. The
lifestyle variable are illustrative. Although unnecessary for
survival, they can reduce stress and promote social inclusion.
In Table 2, the bold type indicates the costs which include purchases
for the children. For example, leisure goods include toys, some
of which may be purchased by the children with their pocket money.
Table 2
LCA BUDGET COMPONENTS (CHILD-RELATED COMPONENTS
IN BOLD)
| Budget standard |
Variable expenditures |
| expenditures | Core variables
| Lifestyle variables |
| Food | Housing
| Pets |
| Clothing | Fuel
| Alcohol |
| Personal care | Transport
| Charitable donations |
| Household goods | Childcare
| Tobacco |
| Household services | NHS charges
| |
| Leisure | Insurances/pensions
| |
| Debts/ fines/ maintenance
| |
| Job-related costs (other than childcare)
| |
| Seeking work costs |
|
| | |
| | |
The FBU's food budget standards represent the level of expenditure
required to attain a given standard of consumption and dietary
adequacy. The LCA food baskets represent a pattern of consumption
characteristic of households on low incomes in the UK, and are
based on National Food Survey and Family Expenditure Survey data.
They contain a balance of foods which will promote short- and
long-term health in adults and children. They are based on Department
of Health and Health Education Authority guidelines. And they
refer to foods which are widely available, at low prices, using
Sainsbury and KwikSave national price bases.
Stage (4): Identify the required quality of the items
to be included
Taking into account life-times and prices, the cheapest items
may not be the best value, in which case more hardwearing alternatives
are selected, even though their prices are slightly higher.
Stage (5): First consultations with discussion groups:
Consumer preferences
Stage (6): Price every item in the budgets
All prices include VAT, where it is payable.
Stage (7): Establish life-times for the durable items
The weekly cost of each durable then becomes its price divided
by its life-time in weeks.
Stage (8): Second consultation with discussion groups:
draft budgets discussed
Stage (9): Expenditure totals calculated for each household
type.
Stage (10): Grossing up for tax. For the complete
budgets (parents + children) each household's total expenditure
is grossed up for income tax and NI contributions, less all social
security benefits to which the family is entitled. The resulting
figures show the gross earnings required to reach LCA level.
3.3 FBU research method, October 2000: children only
3.3.1 No discussion groups were held, nor were the budgets
grossed up for income tax and NI contribution.
3.3.2 First, the costs of each child were disaggregated
from the January 1998 household budgets, then the budgets for
children were uprated from January 1998 to October 2000, using
the Retail Prices Index and the same components and subcomponents
as the RPI. For example, because the different categories of food
in the FBU food budgets are linked to separate categories of food
in the RPI, price changes in bread, cereals, cheese, eggs etc
are uprated separately.
4. FINDINGS AND
COMMENT
4.1 Summary of findings
The disaggregated costs of each child are summarised in Table
3. The costs of childminding are based on weekly costs averaged
over one year, assuming an hourly childminding charge of £2.20
(rounded figure). The costs of institutionalised childcare would
be considerably higher.
Table 3
THE COSTS OF CHILDREN AT LCA LEVEL: SUMMARY INCLUDING
CHILDCARE AT REGISTERED CHILDMINDERS OCTOBER 2000, £ WEEK
| Living Costs | +
| Childminding costs* | =
| Total costs |
| Child | £ week
| | Hours | £ week
| | £ week |
| Girl aged 4 years | 27.74 |
| none | 0.00 |
| 27.74 |
| Girl aged 4 years | 27.74 |
| 29.3 | 64.21 |
| 91.95 |
| Girl aged 4 years | 27.74 |
| 13.4 | 29.30 |
| 57.04 |
| Boy aged 10 years | 36.60 |
| none | 0.00 |
| 36.60 |
| Boy aged 10 years | 36.60 |
| 11.5 | 25.13 |
| 61.73 |
| Boy aged 10 years | 26.60 |
| 3.2 | 7.09 |
| 43.69 |
| Boy aged 16 years | 55.94 |
| none | 0.00 |
| 55.94 |
| | |
| | | |
*Based on an average hourly childminding charge (rounded)
of £2.20.
Source: Annex 3
4.2 Four causes for concern. The Family Budget
Unit is not directly involved in public policy issues, its purpose
being to inform the public in matters relating to living standards,
living costs and the economic requirements of UK households. The
following comments may nevertheless be of interest:
4.2.1 Narrow margins. The margins between
the LCA budgets and the net incomes of low-income households with
children are extremely tight, yet many households face higher
costs than those assumed here. Also, most households, particularly
two-earner households, aim above the LCA standard, in the direction
the MBA standard. In Scandinavia and North America, MBA, or its
equivalent, is often the only standard measured. The FBU embarked
on the LCA standard because of the relatively low pay and living
standards of UK households. Organisations like Age Concern and
Child Poverty Action Group had difficulty relating to the MBA
standard, because most of the households they represent live below
it.
4.2.2 High dependence on means-tested benefits.
Arguably, minimum wage plus child benefit, plus income tax allowances
/ convertible tax credits, plus housing benefit and council tax
benefit should be sufficient to bring all working families to
LCA level or above, with minimal dependence on Working
Families Tax Credit and little chance of being caught in the poverty
trap. Instead households with children on average earnings or
above (particularly women), face implied marginal tax rates of
70 per cent, compared with 40 per cent for the highest earners
in the land.
4.2.3 Working Families' Tax Credit /Children's Tax
Credit /Employment Tax Credit.
The June 2000 edition of Tax Benefit Model Tables
shows a lone mother with two children, (rent £47.37 a week,
council tax £11.10, childcare costs £150.00) facing
an implied marginal tax rate of 70 per cent (or more) until her
gross earnings reached £640 a week (£33,280 a year).
[18] A couple with three
children, rent £99.90, council tax £14.50, no childcare
costs, faces an implied marginal tax rate of 70 per cent until
their gross earnings reach £470 week (£24,440 year).
[19]
When examining the proposed changes, the Select Committee
may wish to request similar Tables, detailing the effects on net
incomes of WFTC, CTC, ETC (apart and together).
Annex 8 illustrates the situation in April 2000. On gross
weekly earnings between £138.60—£157.00 (Figure
1) the net weekly income of two-parent households increased by
11 pence for each extra £ of gross earnings. On gross weekly
earnings between £158—£376 (£19,552 a year),
net weekly income increased by 30-31 pence for each extra £
earned. The position of lone mothers with childcare costs to pay
(Figure 2) is worse. Assuming childminding costs of £86.96
a week, lone mothers required gross weekly earnings of £538
(nearly £28,000 a year) before they gained more than 30 pence
out of each extra £ earned.
Is this acceptable? Will integrated child credit and employment
tax credit increase or reduce the levels of earnings required
to escape the poverty trap? And if so, by how much?
4.2.4 Households below Average Earnings Statistics
(HBAI). Some of the figure-work in the Treasury Paper Tackling
Poverty and Making Work Pay, [20]
for example Chart 2.1, appears to be based on studies which incorporated
HBAI equivalence ratios in their estimates of relative living
standards. In Annex 9[21],
Heremione Parker has argued that the HBAI equivalence ratios under-estimate
the costs of children, especially babies and toddlers. This is
because the HBAI scales are derived from expenditure data, notwithstanding
the truism that hard-pressed families cannot spend money they
do not have.
5. FOUR POLICY
RECOMMENDATIONS
5.1 That budget standard estimates of the needs and costs
of households, with and without children, be taken into account
by Parliament whenever changes in legislation and/or regulations
affecting household living standards are proposed.
5.2 That the costs of each parent and each child be disaggregated,
according to gender and age, with particular reference to the
nutritional needs of women during pregnancy and lactation.
5.3 That the redistributive and poverty trap effects
of all proposed changes that impact on household living standards
be made explicit.
5.4 That equivalence ratios derived from Family Expenditure
Surveys cease to be used to measure need —since households
on low incomes cannot spend money they do not have.
16
Hermione Parker (ed), 1998, op cit. Back
17
Department of Social Security, Analytical Services Division, Tax
Benefit Model Tables, June 2000. Back
18
DSS Tax Benefit Model Tables op cit, 1.3f and 1. Back
19
DSS Tax Benefit Model Tables op cit, 1.3f and 1. Back
20
HM Treasury, March 2000, op cit Back
21
Article by Hermione Parker MA in the Parliamentary Brief, Independent
Commentary on British Political Affairs, Vol. 5, No. 10, May 1999,
Item 43, Mr Brown has no children-not printed. Back
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