THE PRE-BUDGET REPORT AND FINANCIAL
SUPPORT FOR FAMILIES
133. The Pre-Budget Report (PBR) announced
that the child element of Child Tax Credit (CTC) will be increased
from April 2004 by £3.50 per week, or £180 per year,
benefitting 7.2 million children in 3.7 million families. The
Report states:
"As a result of this new investment, the
Government is on track to meet or exceed its PSA target to reduce
by a quarter the number of children in low-income households by
2004-05 on a BHC basis, comparable to the European child poverty
indicator. The target is more challenging on an AHC basis…Analysis
by the Institute for Fiscal Studies suggests that this increase
will enable the Government to make substantial progress on an
AHC basis."
134. Alongside the increase in the child element
of CTC, the PBR confirmed that the various thresholds in CTC and
Working Tax Credit (WTC), and the family element of CTC (currently
worth £545 per year) would all be fixed at their April 2003
levels. In oral evidence, Mike Brewer of the IFS told us that
this would effectively save the Government £240 million and
dilute the impact of the increase in the child element of CTC.[134]
In subsequent written evidence, he informed us that this saving
had already been allowed for in the spending forecasts of the
previous Budget and that, compared to an indexed base, the effect
of the changes to tax credits from April 2004 is to redistribute
money from 2.9 million middle and high income families with children
to those at the lower end of the income scale.[135]
135. IFS now estimates that the CTC reforms will
lift 160,000 children out of poverty when measured after housing
costs and 210,000 when measured before housing costs, at a total
cost of £885 million. This means that in 2004/05, IFS calculates
that the child poverty rate will be 3.1million AHC and 2.0million
BHC, leading IFS to conclude that
"…the Government should comfortably
meet its target measuring incomes BHC, and is on course to just
hit its target measuring incomes AHC."[136]
136. The
Committee warmly welcomes the additional financial resources allocated
in the 2003 PBR to families with children via the child element
of Child Tax Credit which, we recognise, should ensure that the
2004-05 target will be met.
We hope that this signals the Government's willingness to provide
the substantial investment that will be required to meet the 2010
target.
The effect of policy initiatives
on the child poverty rate
137. Changes in the extent of child poverty are the
result of the interplay of many factors. Among the most important
are:
- Changes in population structure
- the number of children and the extent to which they live in
two - and one-parent families;
- Changes in employment and earnings - the extent
of unemployment and worklessness in families with children and
the extent of very low earnings;
- Changes in benefits, taxes and, more recently,
tax credits for families with children.
138. Estimates have been made by Sutherland, Sefton
and Piachaud of the effect of such changes.[137]
Between 1996/7 and 2000/1 changes in population structure, or
the family composition of children, had a very small effect on
child poverty. Over the same period, the proportion of children
in unemployed households almost halved and the effect of this
and other employment changes was to reduce child poverty by some
2.5% (2.3% before housing costs, 2.9% after housing costs).[138]
Thus, over the four years up to 2000/1 employment changes accounted
for the bulk of the reduction in child poverty. Benefit and tax
changes on balance benefited families with children but for some
of the poorest families on Income Support the rise in benefits
did not keep pace with the rise in median incomes.
139. There have not yet been more up to date analyses
of actual changes in poverty. What can be estimated by micro-simulation
is the effect of the policy changes that have been introduced.
This is done by Sutherland et al converting policies in
each year to a constant price basis and assuming that incomes
are constant; the only change made in the poverty line for this
exercise is that resulting from the policy changes.[139]
On this basis, the reduction in the number of children in poverty
between 1997 and 2003/4 as a result of changes in tax and benefit
policies is estimated to be:
