Memorandum submitted by the Institute
of Fiscal Studies (CP 19)
CHILD POVERTY IN THE UK, AND THE EFFECTIVENESS
OF THE GOVERNMENT'S STRATEGY TO ERADICATE IT
SUMMARY
Using the Government's preferred definition;
child poverty is at its lowest level since 1989, at 3.8 million
children. But if the current rate of decline in child poverty
persists for three more years, the Government will miss its child
poverty target for 2004-05 by around 300,000 children. Our current
estimates suggest that meeting this target through increases in
the per child element of the child tax credit could cost up to
£1.7 billion a year on top of the already substantial increases
in spending on families with children enacted by the Labour government.
This perhaps slower than anticipated decline
in child poverty illustrates how difficult—or, at least,
how costly—it is to reduce poverty when economic growth
is strong, and incomes of households in the middle of the income
distribution are growing quickly.
It is important that a focus on a single poverty
line does not obscure the changes in the overall distribution
of income for households with children. Under the current Government,
real incomes have risen at (almost) all points of the distribution
for individuals in households with children.
Less heartening, estimates of the poverty gap
have increased since 1996-97. This is due in part to the significant
proportion of the poorest individuals in the HBAI survey who are
not receiving means-tested benefits. The incomes of these individuals
have fallen further behind the poverty line as incomes across
the rest of society have risen. Though in many cases this will
reflect genuine need, some of these individuals may not be as
poor as they seem, either because they are experiencing incomes
that are very low only in a very transitory sense, or they because
have their incomes measured with error by the FRS survey. Whatever
the reason, their presence make it very unlikely that child poverty
could ever be abolished on the Government's currently favoured
definition.
Achieving a definition of child poverty that
is acceptable to government, accords well with popular opinion,
and can be accurately and objectively quantified is probably impossible.
There is a risk that the current high-profile target to reduce
poverty defined by low incomes is skewing the policy response
away from improved public services for children towards increased
cash transfers to their parents. For this reason, we would prefer
the Government not to set targets for reducing child poverty exclusively
but to also set "floor" targets for what it regards
as the most important outcomes for children.
INTRODUCTION
1. This note focuses on what has happened
to the incomes of households with children since 1996-97, what
the Government needs to do to meet its child poverty target in
2004-05, and how the Government should measure child poverty.
It summarises and builds on analysis in M. Brewer, T. Clark and
A. Goodman (2003), "What Really Happened to Child Poverty
in the UK Under Labour's First Term?", Economic Journal,
113 (June), pp F240-F257, and M Brewer and G Kaplan (2003), "What
do the child poverty targets mean for the child tax credit?",
in IFS Green Budget 2003, www.ifs.org.uk/budgetindex.shtml.
PROGRESS TOWARDS
THE 2004-05 CHILD
POVERTY TARGET
2. The Government has a specific, quantified,
target for 2004-05: "the target for 2004 will be monitored
by reference to the number of children in low-income households
by 2004-05. Low-income households are defined as households with
income below 60% of the median, as reported in the Households
Below Average Income (HBAI) statistics . . . Progress will be
measured against the 1998-99 baseline figures and methodology."[219]
It is, though, unclear whether the Government would prefer to
measure income before housing costs (BHC), or after housing costs
have been deducted (AHC)[220].
In practice, ministers' statements have tended to focus on progress
on the AHC measure, and we focus on progress towards that particular
target in this note.[221]
3. There were 4.2 million children in poverty
in 1998-99 on this definition, so there will need to be fewer
than 3.2 million children in poverty in 2004-05 for the Government
to meet its target. The level in 2001-02 is 3.8 million, down
400,000 since 1998-99, continuing the downward trend that began
in 1996-97 (see Table 1. Figures 1 and 2 show the proportion of
children in poverty under these same measures since 1979.222).
4. It is possible to calculate whether the
changes in child poverty are statistically significant. Almost
all year-on-year changes are not statistically significant, meaning
that they could merely have reflected sampling variation.223 But
the cumulative decline in child poverty since 1996-97 and since
1998-99 is comfortably statistically different from zero.
[222]
[223]
5. Though not directly targeted by government,
there have also been declines in the numbers below 50% and 70%
of the median AHC income.
6. When poverty is measured BHC, the pattern
of changes over the most recent years varies depending on the
poverty line chosen: on the targeted measure (the number below
60% median BHC income) child poverty remained unchanged in the
last year of the data, but has fallen by 500,000 since 1998-99
(a drop of around 15%) (see Table 2). Looking at the other two
poverty measures shown in Table 2, child poverty fell in the last
year of the data on one (the number below 50% of the median),
and rose on another (the number below 70% median). All BHC measures,
though, show falls in child poverty since both 1996-97 and 1998-99.
7. This general pattern of poverty changes
suggests that Government policies have not just moved people from
just below to just above an arbitrary poverty line; instead, the
numbers below all the poverty lines monitored have been declining.
8. The available data now spans the first
three years of the six-year period highlighted by the Government
for its PSA target (1998-99 to 2004-05). The target is for a reduction
of a quarter in child poverty, and so far, measuring income AHC,
child poverty has fallen by 10%. This means that the Government
needs to reduce child poverty by more in the second three years
(2001-02 to 2004-05) than it has managed so far.
9. We can compare the observed decline in
child poverty since 1998-99 to a hypothetical path to the target
in which child poverty declines by an equal amount in every year:
see Figure 3. This shows that the fall in child poverty to date
has been slower than this hypothetical path, and so the Government
is "behind schedule" in this sense. If the current rate
of decline in child poverty persists for three more years, the
Government will miss its child poverty targets for 2004-05 by
around 300,000 children. However there is no reason why the Government
should reduce child poverty equally in six consecutive years.
10. Looking across a number of poverty lines,
the Government is having more success in reducing poverty for
lower poverty lines. Although there is no explicit target for
the number of children below 50% and 70% of the median, the Government
is considerably more than halfway towards reducing the number
of children below 50% median by one quarter (both AHC and BHC),
but a long way off this in reducing the number whose incomes are
below 70% (see Tables 1 and 2).[224]
WHAT WILL
IT TAKE
TO MEET
THE TARGET?
11. Analysis carried out by researchers
at the IFS in January 2003—before the HBAI data for 2001-02
was available—suggested that taking into account tax and
benefit changes already announced, but yet to be reflected in
the HBAI data, the Government would fall short of meeting its
child poverty target measured AHC.[225]
12. That analysis has not yet been fully
updated to reflect data from 2001-02, though we plan to do this
soon. In the meantime we can reach some tentative conclusions.
Based on data from 2000-01, our central estimate was that the
Government would miss its target in 2004-05 by 200,000 children.
Between 2000-01 and 2001-02, child poverty fell by just 100,000,
and this means that the Government is now further behind schedule
to meet its target in 2004-05. This means that the Government
is likely to miss its target by a larger amount than our original
research based on data from 2000-01. We now expect that it will
miss its target by somewhere between 200,000 to 400,000 children.
13. What measures might be needed to help
the government hit its child poverty target in 2004-05? In earlier
work, we estimated the number of children that would be taken
out of poverty by various increases in the per-child element of
the child tax credit. We assumed these increases would take place
in April 2004, and would be additional to the increase in line
with earnings growth which has already been included in the public
finance forecasts. We compared the use of the per child element
of the child tax credit to child benefit or the family element
of the child tax credit. The results are shown in Table 5.[226]
14. Our estimate that the Government will
fall short by between 200,000 and 400,000 means that the Government
is now likely to miss its target even if it raises the per child
element of the child tax credit by £3 a week above average
earnings growth. To be sure of meeting the target, we estimate
that it could need to raise the per child element of the child
tax credit by £4, or if the shortfall is at the upper end
of the range, by £5 a week above average earnings growth.
An increase in the per child element of the child tax credit of
£5 a week would cost the exchequer £1.7 billion a year.
15. Reducing child poverty through increasing
child benefit or the family element of the child tax credit could
cost around twice as much because they would also benefit well-off
families with children, and not just those on low-to-middle incomes.[227]
Given the structure of the new tax credits, the child element
of the child tax credit is one of the most efficient ways for
the Government to hit its child poverty targets. Another reform
which would offer a relatively efficient way to reduce child poverty
is increasing the adult rates of income support and JSA (income-related).
This change would benefit those lone parents and couples with
children who are out of work and in poverty, but we think it unlikely
that the Government would pursue this option because of the knock-on
consequences for those of working age without children (and, perhaps,
for those aged 60 or over). Indeed, the adult rate of income support
and JSA(income-related) has not been increased in real terms since
its introduction in 1988.
16. There may be factors, though, other
than the cost to the Treasury and the need to reduce child poverty
for the Government to consider when considering whether to increase
the per child rate of the child tax credit. For example:
— has the Government got the balance
between spending on children and spending on adults right? Government
spending on transfers to parents has increased by over 50% in
real terms since 1997, a rate of increase that is unprecedented
historically.[228]
The poorest families now receive more for their first child than
a young job-seeking adult is entitled to receive for him or herself.[229]
— what will be the impact on work incentives?
Increases in the child tax credit have negative effects on parents'
incentives to work; these could be offset with changes to the
working tax credit, but this would increase the cost.[230]
17. As we discuss below, though, by setting
a target that defines a child as poor on the basis of its parents'
incomes, there is a risk that the Government will simply increase
spending on tax credits when the money might be more effectively
spent on public services for children.
BEYOND THE
HEADLINE MEASURE
OF CHILD
POVERTY: WHAT
IS HAPPENING
TO INCOMES
AMONGST LOW-INCOME
HOUSEHOLDS WITH
CHILDREN?
18. It is important that the focus on the
Government's target for 2004-05 does not obscure the changes in
the overall distribution of income for households with children.
19. IFS research has shown that the reduction
in child poverty is unambiguous in the sense that there are no
sensible poverty lines defined as fractions of the median by which
poverty has increased.[231]
In fact, real incomes have risen under the current Government
at (almost) all points of the income distribution for households
with children. This means that there have been genuine and substantial
increases in incomes for almost all households with children,
including many of the poor.
20. However, although incomes of households
with children have risen across the distribution, and the number
of children in poverty has fallen, the average poverty gap amongst
households with children increased between 1996-97 and 2000-01
on a number of poverty lines (see Table 7)[232].[233]
21. One reason for this increase in the
poverty gap is that the "richest of the poor"—ie
those on means tested benefits—have seen the biggest increase
in their incomes, with many moving above the poverty line. By
contrast, income growth amongst the "poorest of the poor"
has been relatively low. Part of this reason is that not all of
the poorest children have been gaining from the very large increases
in means-tested benefits and tax credits: less than 60% of children
with incomes below 40% of median income are in households in receipt
of a means-tested benefit. Instead, a relatively large proportion
of these children are in households where at least one member
is full-time self-employed, and many are in families where someone
is in work.
22. If we could be sure that the FRS survey
(the basis for the HBAI data-set) was recording incomes accurately,
then we should be very concerned at this apparent problem of acute
poverty associated with non-take-up of benefits. But this is not
the case. Non-take-up of means-tested benefits certainly exists,
and some children classified as poor by HBAI are in households
awaiting the outcome of a claim for a means-tested benefits, suggesting
that administrative delays make their contribution to child poverty.
But there are a group of children in the HBAI dataset in households
who appear poor and are not receiving means-tested benefits that
may be less of a policy concern, for two reasons:
— The FRS records only snapshots of
income, and some "rich" families may look "poor"
purely on the basis of a reported weekly income which is low or
even zero temporarily. Although this group may be entitled to
claim benefits during their short period of low incomes, they
are less of a public policy concern than those with more permanent
low incomes.
— There may also be some in the HBAI
data whose incomes are wrong simply because their incomes have
been reported, or perhaps recorded inaccurately.
23. Whatever the cause (which we believe
merits further research), there are two implications for the Government's
child poverty target:
— there are 1.2 million children in
households in measured poverty but not receiving the main means-tested
benefits, and this places a real limit on the ability of tax and
benefit increases to reduce child poverty significantly in the
future;
— some of these children would probably
not be counted objectively (should such a thing be possible) as
poor.
24. Overcoming these problems would involve
either changing the HBAI methodology, or further progress on finding
a better measure of child poverty.
MEASURING CHILD
POVERTY
25. The Government has yet to specify how
we might tell whether poverty has been abolished in 2020, and
what measure of poverty is due to be halved by 2010. In the meantime,
the authors have observed civil servants attempting to argue that
it is not intellectually incoherent for the Government to be committed
to halving something that it does not yet know how to measure.
In our view, though, if the Government wishes to set meaningful,
quantifiable targets, then it must be explicit on how it is going
to measure progress.
26. We do not have views on what the measure
of child poverty should be adopted by the Government: this is
inherently a political decision on which we do not feel able to
give advice. But we would like to make some observations on:
— the choice between relative and absolute
income measures of poverty;
— measuring material deprivation;
— the distinction between defining
child poverty and setting government targets.
ABSOLUTE VS
RELATIVE POVERTY
LINES
27. Despite unprecedented increases in spending
on transfers to households with children, child poverty remains
high, on a historical basis, on the Government's preferred measure.
This is an excellent reminder of how difficult—or, at least,
how costly—it is to reduce poverty defined in relative terms
when economic growth is strong, and the incomes of households
in the middle of the income distribution are growing quickly (median
household income grew by 15% in real terms between 1998-99 and
2001-02: see Table 6). If the Government had decided, as is the
custom in the US, for example, that poverty is defined by failing
to attain a standard of living that does not change over time
(in other words, if it chosen a poverty line fixed in real terms,
sometimes called an absolute poverty line), then it could have
claimed far greater success in reducing child poverty. The number
of children in households below 60% of 1996-97 median AHC income
has fallen from 4.3 million to 2.5 million, a decline of 42% (see
Table 3). However, if the Government continues to believe that
poverty is a relative concept, then it should continue to focus
on the measures of child poverty that are defined in relative
terms. Recent Government press releases are focussing attention
on progress measured by an absolute, rather than relative, poverty
line, and this is, at best, inconsistent with its stated goals.[234]
MATERIAL DEPRIVATION
28. The DWP's initial conclusions to the
responses to its consultation on child poverty included stated
that "there was a lot of support for including some measure
of material deprivation. This is a technically complex area and
we will carry out further methodological work and discussion with
experts to try to reach agreement on the most appropriate methodology
and some of the more subjective areas."
29. A definition of poverty that captures
material deprivation is attractive in the sense that it accords
more closely with the popular perception of poverty than a definition
based on income alone, and for this reason it can be a powerful
tool for capturing the public imagination. However, we do not
think that it is appropriate for the government to monitor or
target it as an official measure. In particular those measures
that have attempted to measure material deprivation rely on subjective
concepts such as self-reported inability to afford particular
items; they are forced to make a number of arbitrary judgements,
such the number of necessities one needs to lack to be considered
poor; the methods for determining which items are necessities,
and how this is up-graded over time as society changes can also
be criticised. This means that these studies have been perhaps
less transparent than the work that lies behind the creation of
the HBAI data-set and report.[235]
SETTING CHILD
POVERTY TARGETS
30. In our view, part of the reason that
the Government wants to tackle child poverty is that children
in poor households experience a different sort of childhood to
those not in poor households, and that this experience is overwhelmingly
a negative one, with persistent impacts. Indeed, the fact that
poverty makes you "different" was one of the messages
that arose from the DWP's consultations and workshops with children.
31. The policy approach encapsulated by
the Government's PSA target for 2004-05 is, effectively, to reduce
the inequalities in the incomes of households with children, particularly
at the bottom end of the income distribution, by direct redistribution
and the promotion of paid work. An alternative approach, however,
would be to move the focus away from one exclusively based on
income, and towards one which also takes into account children's
outcomes.
32. For example, the Government could set
targets for the children's outcomes about which it is most concerned—such
as those set out in Opportunity for All—rather than just
for their parents' incomes. Ideally, such targets would be expressed
so that they would be designed to reduce the inequality in children's
outcomes, not simply the average, or the outcomes for the high-attaining
minority.
33. Such an approach would reduce the incentive
within government to direct money towards boosting parental incomes
at the expense of improving services (including schools, health
and housing) for poor families with children. Rather, the incentive
would be to channel money through whichever means improves children's
outcomes the most effectively. To choose a simplistic comparison
of the by way of example, the cost of increasing the per child
element of the child tax credit by £5 a week would allow
the Sure Start scheme to be more than tripled from its coverage
in 2003-04, but expanding Sure Start is unlikely to have any impact
on the HBAI measure of child poverty (at least in the short-run).
34. Which policies improve children's outcomes
most effectively is an important research question. At the moment
we have little research evidence on the relative effectiveness
of income supplementation compared to improving public services
(eg reducing class sizes). However the body of research evidence
from the US (taken as a whole) suggests that the direct impact
of additional income paid to poor parents on children's outcomes
such as educational attainment and health is relatively small[236].
35. An approach which sets targets across
a number of outcomes would emphasise the role of the public services
in performing a redistributive function—for example, by
continuing to spend more money on schools in deprived areas, so
that the education outcomes of poor children improve relative
to those of rich children.
219 HM Treasury (2002), "Technical Note for HM
Treasury's Public Service Agreement 2003-06, www.hm-treasury.gov.uk/mediastore/otherfiles/tech-notes.pdf.
The median household is the one for which half the rest of the
population has an income higher than it does and half has an income
lower. Back
220
It does not specify whether self-employed households are to be
included. Back
221
For example, HM Treasury (2001), "Budget 2001: Investing
for the Long Term", p.87, Box 5.3. http://www.hm-treasury.gov.uk/budget/budget-2001/budget-report/bud-bud01-repindex.cfm Back
222
Comparable figures from 1994-05 to 2000-01 can be found in M
Brewer, T Clark and A Goodman (2002), The Government's Child Poverty
Target: How Much Progress Has Been Made?, IFS Commentary 88, or
M Brewer, T Clark and A Goodman (2003), "What Really Happened
to Child Poverty in the UK in Labour's First Term?", Economic
Journal, June 2003, vol 113 no 488, pp F240-F257. Back
223
See Brewer, Clark and Goodman (2002), op cit for
full results. Bootstrapping involves recalculation of statistics
for each of a series of random samples drawn from the original
sample, as a way of approximating the distribution of statistics
that would be calculated from different possible samples out of
the underlying population. In this way, the range of effects of
sampling variation is approximated. For more on this methodology,
see Davison and Hinkley (1997), Bootstrap methods and their application.
Cambridge: Cambridge University Press. Back
224
These poverty measures are monitored in Opportunity for All,
the government's official audit of poverty and social exclusion:
see Department for Work and Pensions (2002), Opportunity
for All: Fourth Annual Report 2002, Cm 5598, London: HMSO. Back
225
This analysis estimated the impact of tax and benefit changes
due to be implemented between 2001-02 and 2004-05. See
M Brewer and G Kaplan (2003), "What do the child poverty
targets mean for the child tax credit?", in IFS Green Budget
2003, www.ifs.org.uk/budgetindex.shtml. That work also concluded
that the government would hit its target exactly measuring incomes
BHC, based on data from 2000-01, but child poverty measured BHC
incomes did not change between 2000-01 and 2001-02, and this suggests
that hitting the target in 2004-05 measured BHC is now a little
less likely. Back
226
This analysis is based on the income distribution in 2000-01,
up-rated to approximate the income distribution in 2004-05. More
recent data is now available, but we do not think that it would
change the results of the analysis substantially. Back
227
In approximate terms, the poorest half of families with children
would gain from increases in the child element of the child tax
credit. All families with children would gain from an increase
in child benefit, and am increase in the family element of the
child tax credit would benefit all but the richest half a million
families with children. Back
228
See S Adam, M Brewer and H Reed, The Benefits of Parenting:
Government Financial Support for Families with Children Since
1975, Commentary no 91, IFS, London, 2002 (www.ifs.org.uk/taxben/c91.pdf) Back
229
The weekly jobseeker's allowance (JSA) for an adult under 25
will be £43.25 from April 2003, compared with £54.25
in child-related payments that will be received by a non-working
family on income support or JSA for their first child. This gap
will widen as the child element of the child tax credit increases
in line with earnings growth. Back
230
There are two impacts: increases in any part of the child tax
credit reduce the need for parents to work; and increases in the
per-child element of the child tax credit widen the range of incomes
over which parents' marginal effective tax rate increases by 37%,
which reduces the cash gain from working more. Back
231
See Brewer, M Clark, T and Goodman, A (2003), op cit. Back
232
The poverty gap is difference between the poverty line and household
income, where this is positive. The poverty gap can be scaled
by dividing it by the poverty line multiplied by the number of
poor households, and we call this the "poverty gap ratio". Back
233
See Brewer, M Clark, T and Goodman, A (2003), op cit. Back
234
See, for example, HM Treasury Press Release 101/03, and
DWP Press Release entitled "Lower Incomes Rising Fastest",
13 March 2003. Back
235
We should declare a vested interest: for a number of years, IFS
researchers have worked with officials from the DWP each year
to check their processing of the HBAI data-set. Back
236
See Mayer, S (1997), What Money Can't Buy, Cambridge:
Harvard University Press. Back
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