Select Committee on Work and Pensions Second Report

10  Future support for children

201. A key component of the Government's approach to tackling child poverty is providing financial support for families based on an approach described as progressive universalism. This section will explore this approach and analyse what options are available to the Government for the 2010 target to be met. It should be noted that the income measure of poverty currently used inevitably means that the anti-poverty strategy focusses much more upon poverty alleviation via increasing family income through benefits and tax credits.

Universal benefits

202. Universal support for children is provided through Child Benefit. Take up of Child Benefit is high and the current rate is £16.50 per week for the first child and £11.05 for subsequent children. Child Benefit has not increased in real terms since 1999, compared with relatively large increases in targetted and means-tested financial support. Consequently, fears have been expressed that continuing to uprate Child Benefit using the Retail Price Index instead of in line with earnings will cause it to "wither on the vine."[198] In oral evidence, the Secretary of State reiterated the Government's support for a combination of universal and targetted support for the poorest.[199]

203. Internationally, universal child benefits are still common although a move away from non-means-tested benefits towards tax credits is apparent in many countries, as well as in the UK.[200] Universal benefits are expensive and this is one reason why a targetted approach is favoured by the Treasury as it is more cost-effective in reducing child poverty.[201] To illustrate, in looking to the 2004-05 target IFS modelled the effects of different increases in benefits and tax credits and show that a £3 per week increase in Child Benefit from April 2004 would lift around 200,000 children out of poverty by the 2004-05 target at a cost of £2 billion.[202] This compares with the increase that the £3.50 increase in Child Tax Credit (CTC) which the Pre-Budget Report (PBR) implemented, lifting 160,000 children out of poverty at a cost of £885m.[203] However, it is notable that countries who deliver financial support for children predominantly via non-means-tested benefits, for example, Denmark, Norway and Luxembourg, have comparatively low levels of child poverty but at the cost of high taxation. During the Committee's visit to Denmark, we noted that their child poverty rate of less than 5% was accompanied by generous rates of family allowances.[204]

204. The national strategy on child poverty should re-assert the commitment to retain universal child benefit uprated in future to maintain and enhance its real value as one of the foundations of all future support for children.

Targetted benefits

205. The cornerstone of targetted support for families is the new tax credit system introduced in April 2003. The new system provides support for working and non-working parents, pays support for children to the main carer, is more generous and more effectively targetted, is based upon annual income and aims to improve incentives to save and to work.[205] Currently, 5.9 million families, comprising 3.7 million couple families and 2.2 million lone parent families, are receiving tax credits. These families contain 10.7 million children.

206. The effect of changes in tax and benefit policies between 1997 and 2003-04 is discussed in Section 7. A further issue is the impact on work incentives. Before the new tax credits were introduced, analysis by IFS suggested that, in general, the incentives to enter work increased for the first earner in families, but for second earners in couples the incentive to work had generally been dulled.[206]


207. Paragraphs 127-130 outlined the recent increases in the child element of Child Tax Credit (CTC) and noted that this should mean that the Government will hit the 2004-05 child poverty target. The evidence received during this inquiry, much of it provided before the announcements in the PBR, overwhelmingly suggested that increases in the child element of CTC were necessary for the 2004-5 target to be reached.[207] However, it is worth briefly addressing some of the problems associated with increasing CTC and asking whether further increases are necessary, or desirable, in order to reach the 2010 target.

208. One consideration is what the effects of the introduction of, and increases in, CTC are. In oral evidence, Mike Brewer of IFS commented that, compared to the system in place before April 2003, the new tax credits "…have focused much more on reducing poverty rather than on improving work incentives" but his overall assessment was that the effect of the new tax credits on work incentives has been "…at best neutral and at worst slightly negative."[208] This differs slightly from the more optimistic view taken by Treasury officials:

    "…work incentives for some have improved, for instance second earners. Because the new tax credits work on the basis of your gross income rather than your net income, essentially it means that a second earner going to work gets to keep more of their personal allowance. I think you could say we now have more people in tax credit, so there are more people now facing a marginal deduction rate of 70% ­ that is certainly true. One of the questions, of course, is the balance between the Child Tax Credit which you get in and out of work compared with the income you get going into work. Clearly putting money into the Child Tax Credit increases the proportion of your income that you keep, whether you are working or not working."[209]

209. The Secretary of State also informed us that the Department is "actively considering" the implications of the increases in CTC and the effect on work incentives, and has commissioned IFS to research the issue.[210] It is worth noting that previous research analysing the reasons for the increases in lone parent employment between 1992 and 2002 found that almost half of it could be attributed to policy reforms (in particular, Working Families' Tax Credit and the New Deal for Lone Parents) and that the increase had occurred at the same time as out-of-work benefits increasing significantly.[211] Other issues identified in the oral and written evidence regarding increasing CTC rather than universal benefits included: whether the amount of financial support for children compared with adults was properly balanced and whether the family income was properly shared among all members of the household.[212]

210. Finally, it is also worth noting Holly Sutherland's warning that the more one puts into means-testing the harder it is to move away from it and that putting resources into CTC rather than Child Benefit is more effective if all one wants to do is reduce child poverty using an income measure. In addition, she commented:

    "I would like to say something about the dangers of thinking mechanically about how to reduce child poverty, given that we have a relative measure. If you think mechanically, what you do is you simply put money into means-tested benefits but [which are] sufficiently mean so they do not reach median incomes, and you do not do things like increase the Child Benefit because that affects incomes at the median and you do not do things like increasing the minimum wage because that actually has a contrary effect. There is a real problem, which I am sure all of you can see, with thinking in such a mechanical, engineering-type way about the numbers."[213]


211. Working Tax Credit (WTC) provides in-work support for families with children working 16 hours or more (and for those without children who are working 30 hours or more). Currently, 1.59 million families with children are receiving WTC and the maximum CTC.

212. Contrary to the widespread support for tackling child poverty through increasing the child element of CTC, one organisation, Care, instead favoured increasing WTC. Care argued that tax credits do not deliver enough to raise the equivalised income of two parent families with one worker above the 60% median and therefore "discriminate" against couples. [214] This is because the formula used to calculate equivalised income[215] takes account of the number of adults in the family, whereas tax credits do not. They argued that an enhanced couples credit would be more effective at reducing child poverty as it would be chiefly targetted at those with lower incomes, although they recognise that it might be costly. Care suggests that a couples element of WTC should be double the lone parent element (ie £57.40 compared with £28.70). They argue that this would bring tax credits into line with other benefits.[216]

213. Mike Brewer of IFS and Holly Sutherland were in agreement over Care's point that WTC is not aligned with the equivalised income scale although Holly Sutherland commented that she had "…a different interpretation of what it means one should do." She argued that supporting children is best done through the vehicle that is targetted at children, i.e., CTC, and that supplementing low wages through the tax credits system should be minimised. [217] Officials from the Treasury pointed out that WTC is essentially about work incentives and that lone parents face worse work incentives than couples. In addition, single earner couples do not have childcare costs to the same extent as lone parents which will further reduce a lone parents' income. They also commented that many more couples get the 30 hour element of WTC - currently 1,243,000 couples compared with 452,300 lone parents - "so you could almost think of that 30-hour element as being a predominantly couple-biased element."[218]

214. Subsequent analysis undertaken by IFS modelled the impact of introducing a couples rate for WTC of £875 per year, or £16.80 per week in April 2004 - the amount being of comparable cost (just over £1 billion) to other policy changes modelled such as increasing CTC by £3 per week.[219] This would result in 200,000 children being lifted out of poverty by the 2004-05 target, meaning that the increase would be comparable to increases in CTC. The analysis also shows that increases in the child element of CTC does more to help the poorest children, who tend to live in workless households whereas increases in WTC help those closest to the poverty line.

215. Whether it is better to use CTC or WTC as a tool for tackling poverty is not a straightforward question to answer. The Committee recommends that the Government undertake further research within the next two years to examine fully the impact of recent and possible future increases in Working Tax Credit and Child Tax Credit on child poverty, severe and persistent child poverty and work incentives.


216. The risk of poverty for children in large families is much higher than in small families - a quarter of children in a family with one or two children is in poverty compared with a third of those in a family with three children and nearly half of those in a family with four or more. 43% of all children in poverty live in households with three or more children. The Secretary of State acknowledged this problem and pointed to the analysis undertaken in Opportunity For All which concluded that family size correlates with other factors, such as ethnicity, having pre-school age children, worklessness and potentially high childcare costs, and that more research is needed to fully understand the issues.[220]

217. IFS have looked into how financial support for large families might be provided and they have analysed the effect of the introduction of a new premium in Child Tax Credit for families with three or more children, at a rate of £845 per year. They calculated that, if introduced in April 2004, this would lift 210,000 children out of poverty at a cost of £1.01 billion. Although the large family premium was modelled to include families with annual incomes up to £50,000, as most large families are poor the premium would still be effective in lifting children out of poverty.

218. Child poverty in large families undoubtedly needs to be tackled if the 2010 target is to be met. Whether the introduction of financial support targetted at large families would receive public support is open to question. A more equitable solution might be to ensure that all children receive additional financial support as this would automatically benefit large families. It is apparent that more research is needed. The 1.55 million poor children living in large families urgently require further financial support and without it, the chance of meeting the 2010 target is in jeopardy. The national strategy for child poverty should consider including additional financial support for large families, either through a new large family premium in Child Tax Credit, or additional premia for all children.

Child support

219. The Department's memorandum identified the introduction of the new child support scheme as one of the five key measures supporting the Government's commitment of 'work for those who can, security for those who cannot'. The Department's memorandum states "Reforming the child support scheme will get money to more children more quickly - over a million children will benefit as a result."[221]

220. The new child support system was introduced in March 2003 after a significant delay - it was first intended to be introduced in October 2001 and then in April 2002. Substantial problems with implementation of the new system mean that, by December 2003, only 17,000 clients were receiving maintenance payments under the new system. In oral evidence, the Secretary of State stated:

    "…the frustrations of getting the new system up and running properly so that we can transfer existing cases onto it are certainly some of the biggest that I have encountered since I have been Secretary of State and I share the disappointment of the Committee that faster and further progress has not been made."[222]

221. He also informed the Committee that a recovery programme for the new system was in place and that it was expected to be delivering a satisfactory level of service within six to nine months from the beginning of 2004.[223] He also confirmed that the migration of existing cases is still delayed, with "a very large number" of cases waiting to be transferred to the new system due to significant problems with the IT system.[224]

222. The delayed migration of existing cases is particularly worrying as, under the existing system, just over half (54%) of cases are fully compliant and a quarter of parents with care do not receive any of the maintenance due to their children. The Committee is also very concerned at the poor enforcement levels and the limited use of the enforcement powers that the Child Support Agency have. The Committee recommends that an immediate rescue plan be mounted to ensure that the Child Support Agency cases are all migrated onto the new system by 30 June 2005, and enforcement actions increased massively by 31 December 2005, with an enforcement system which commands greater confidence amongst parents and the public. The policy and administration of the CSA is an area on which the Committee intends to focus in the future.

Options for 2010

223. The Government is committed to halving child poverty by 2010. As discussed in section 7, it seems likely that the target of reducing child poverty by one quarter by 2004 will be met, although it will not be until 2006 that data will reveal whether this has in fact been achieved. What is necessary in order for child poverty to be halved by 2010?

224. As yet, this goal has not been expressed in terms of a precise PSA target. When this is done it is likely to be based on the measurement of child poverty discussed in Section 4. The emphasis on a measure of relative poverty based on incomes before housing costs has been questioned. In this section the task of halving poverty measured both before and after housing costs is assessed.

225. Appearing before the Committee, both Treasury officials and the Secretary of State for Work and Pensions were asked about the Government's plans for progressing from the 2004 target to the goal for 2010. They were not able to offer substantial assistance to the Committee on this matter. Treasury officials responded as follows:

    Mr. Holgate: I think that the sort of spending review mantra applies somewhat to that question as well. We are now dealing with where might we get in terms of increasing employment over the next five or six years. For example, how successful will the Pathways to Work programme be? How much further will we get towards the Government's target of 70% of lone parents in work? Those are the things that we are going to have to estimate or guess, and that will begin to show us the extent to which the Child Tax Credit might have to be operated in order to get to the target that we have set ourselves for 2010.

    Q356 Mr. Dismore: … What proportion of the proposed [reduction] do you think is going to result from increased employment in both lone and two-parent families and what you have to do in order to try and achieve that? Secondly, to what extent is the target going to be met by increasing financial support for this and what will that cost, and what the increased financial support will be for non-working families …and what will this cost?

    Mr. Holgate: …you are, again, quite understandably, begging questions that we will only be able to answer in July.

    Ms John: And even further actually, because there are so many variables that will affect where we are in 2010. We have talked about the difficulty of forecasting what is going to happen in 2004/5. 2010 is more than six-fold as difficult to contemplate.

    Q367 Mr. Dismore: If that is the target date, then you have to start developing policy to achieve it. These must be the key elements of that?

    Mr. Holgate: Yes, but, as I say, I think, perfectly understandably, you are raising questions about the pattern of public expenditure and some quite major decisions about public expenditure for which ministers do not currently have an answer, for a very understandable reason.

226. The Secretary of State was questioned on the same matter:

    Q460 Andrew Selous: So what contribution to the 2010 target will come from a growth in employment compared with increases in benefits and tax credits then?

    Mr. Smith: I asked that very question of my officials in preparation for this session, anticipating that you would ask it, and they said it is very, very difficult to attempt to make any estimate.

    Q461 Andrew Selous: Even ballpark figures?

    Mr. Smith: I asked them for ballpark as well, but they would not be drawn.

    Q462 Andrew Selous: So your officials have no view?

    Mr. Smith: It is not a question of having no view. I think this is an area where actually I will make sure if it is not already happening that it does happen, which is to have some intensive and careful and statistical analysis because it would surprise me if, on a statistical basis, you could not actually make an estimate, but we do not have one to hand and, as I say, I could not extract a ballpark estimate out of them.

227. While it is understood that the matter is currently under review, the Committee is concerned that, if the 2010 goal is to be achieved, a 'road map' should be published setting out how the goal is intended to be achieved and what policy developments are necessary for its achievement. This was suggested by several of those giving evidence.[225] Although there is inevitably uncertainty about the likely situation five or six years ahead, an indicative plan of how the 2010 goal may be achieved will serve to extend awareness of what will be involved and sustain support for this admirable goal.

228. In the absence of any indication of how the Government plans to progress on child poverty beyond 2004, the Committee commissioned Holly Sutherland of the University of Cambridge Microsimulation Unit to assess what was necessary to achieve the 2010 target.[226] In making this assessment it must be recognised that the extent of child poverty is affected by many things. For example, child poverty would fall if better off people and poorer people decided to live together; if earnings for the low paid increased; if people moved from relatively low incomes on social security benefits into employment on higher earned incomes; or if benefits or tax credits improved relative to median incomes. In looking ahead to 2010 there may be changes in:

  • family structure - the number and sizes of two- and one-parent families;
  • employment patterns - will, for example, the target of 70 percent of lone-parents in employment be achieved? and
  • benefits, taxes and tax credits in relation to median incomes.

229. Forecasting all of these would, as the Treasury officials stated, be difficult to contemplate. It is, however, possible to estimate what would be needed to halve child poverty if other things were constant - that is if family structure and employment patterns did not change and benefits, taxes and tax credits remained constant relative to median incomes. On this basis, Sutherland estimates that the extra income needed to halve poverty in 2010 would, in 2004 prices, be approximately:

  • On Before Housing Cost basis    £5 per child (per week)
  • On After Housing Cost basis    £10 per child (per week)[227]

230. The cost of such increases depends on how they are provided.

231. At one extreme this could be provided universally for all children regardless of family income: such universal provision would cost £3.5 million or £7 billion per annum, depending on whether the before or after housing cost basis were used.

232. At the other extreme, the additional income necessary to halve poverty could be confined to those in poverty. Only households in poverty would receive the extra income and once they reached the poverty line they would receive no more. Thus, a one-child family £20 below the poverty line would receive the full increase but if they were only £2 below the poverty line they would only receive an extra £2. This notional system would of course result in 'bunching' of families at the poverty line and create major incentive problems but it indicates the cost of the most highly-targeted approach. The cost of this targeted provision would be £0.5 billion or £1.5 billion per annum, depending on whether the before or after housing costs basis were used.

233. These hypothetical costs suggest three things. First, it seems probable that very substantial further resources will need to be directed towards families with children if child poverty is to be halved by 2010. Second, the extent of resources needed depends on how highly targeted the extra income is towards the poorest families. Third, the extra resources required would, even on a universal basis, be no more than the extra redistributed to families with children in the years up to 2004.

234. If some part of the halving of child poverty were achieved by increasing employment this would reduce the direct costs for the Exchequer. Increased employment may, however, be dependent on increased child care provision or an increase in child care tax credits - both of which have indirect Exchequer costs. No estimates of such costs have been made.

235. To help reach the goal of halving child poverty by 2010, the Committee recommends that support for each of the poorest children - measured on the after housing costs basis - soon be increased by £10 per week.

198   Q 154 Back

199   Qq 494-497 Back

200   Bradshaw J and Finch N (2003) A comparison of child benefit packages in 22 countries, DWP Research Report No 174, Leeds: CDS Back

201   Qq 329-331 Back

202   Ev 128 Back

203   Ev 120 (vol III) Back

204   Annex 3 Back

205   PBR pg 98 Back

206   Brewer M and Clark T (2003) The Impact on Incentives of Five Years of Social Security Reforms in the UK, Institute for Fiscal Studies, WP 02/04 Back

207   Ev 81, 93, 124, 201 Back

208   Q 247 Back

209   Q 334 Back

210   Qq 458-459 Back

211   Gregg P and Harkness S (2003) Welfare Reform and Lone Parent Employment in the UK. CMPO Discussion Paper No 72/03 Back

212   Qq 259 - 260, Ev 5, 124 Back

213   Q 262 Back

214   Ev 98-103 Back

215   Equivalisation is needed to make sensible income comparisons between households. Income data is adjusted to take into account variations in size and composition of households to reflect the fact that a family of several people needs a higher income than a single person to achieve a comparable standard of living. Back

216   Ev 104 Back

217   Q 257 Back

218   Q 299 Back

219   For more detail see Ev 121-123 (vol III) Back

220   Q 477 Back

221   Ev 224 Back

222   Q 498 Back

223   Qq 502-504 Back

224   The issue of problems with the Department's IT systems is currently being investigated by the Work and Pensions sub-Committee and a Report will be published in due course. Back

225   Ev 73-74, 82, 135, Back

226   Ev 216 (vol III) Back

227   Details of her estimates are contained at Ev 159. Back

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