House of Commons - Work and Pensions

Select Committee on Work and Pensions Written Evidence

Memorandum submitted by the Department for Work and Pensions (CP 30)

SUMMARY

This Government is committed to halving child poverty by 2010 and eradicating it by 2020. That means improving not just the current well being of children, but also transforming their future prospects. The aim is to ensure that, in future, all children are able to lead rich and fulfilling lives in childhood and to realise their potential as adults.

It follows that the Government's strategy to eradicate child poverty must be multi-faceted. It must raise the current incomes of families with children. But it must also ensure that public services help to overcome deprivation and foster future achievement. That strategy is fully described in the Government's annual report on poverty—Opportunity for all.

This memorandum explains:

— what contribution to the broader attack on poverty is being made by the Government's target to reduce by a quarter by 2004-05 the number of children living in low-income households. The target is important for a number of reasons. First, there is now a substantial body of evidence that low income in childhood leads to unsatisfactory outcomes for children in later life. Second, there is a clear sense in which a widening income gap between the poorest children and the rest and social inclusion are at odds. Third, the public's perceptions of poverty are at least partly based on perceptions of relative income. Finally, there was a marked rise in the numbers and proportion of children living in low-income households between 1979 and 1996-97;

493

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— what further work is in progress to keep up the commitment to eradicate child poverty. The Government has begun a crosscutting review of child poverty for Spending Review 2004. This will consider both the welfare reform and public service changes needed to advance faster towards the long-term goal to eradicate child poverty.

INTRODUCTION

This Government is committed to halving child poverty by 2010 and eradicating it by 2020[494]. That means improving not just the current well being of children, but also transforming their future prospects. The aim is to ensure that, in future, all children are able to lead fulfilling lives in childhood and to realise their potential as adults.

It follows that the Government's strategy to eradicate child poverty must be multi-faceted. It must raise the current incomes of families with children. But it must also ensure that public services—especially education and health—deliver equal opportunities for disadvantaged families and so help to overcome deprivation and foster future achievement. It must address the causes of poverty, not just its symptoms. And it must focus interventions on families at greatest risk of falling into poverty and design interventions that build on the factors associated with lifting people out of poverty.

Consistent with this, the essential elements of the Government's strategy are therefore:

— to enable poor families to increase their incomes and to share in rising national prosperity through participation in the labour market;

— to support the incomes of poor families in and out of work and to promote their financial security and well-being;

— to break the cycle of deprivation by ensuring that early years support and schools equip children from poor families to benefit from education and to prosper as adults;

— to ensure that public services deliver high quality outcomes for poor families; and

— to support parents so that they can provide better support for their children.

This strategy is fully described in the Government's annual report on poverty—Opportunity for all—that also sets out progress against a range of key indicators[495] and in Tackling Child Poverty.[496] Given the multi-dimensional nature of poverty it is encouraging to see progress in so many domains for children, even aside from low income, which is described in greater detail later in this Memorandum.

The proportion of children living in workless households has fallen from 17.9% in 1997 to 15.2% in 2003—a fall of over 350,000 children living in a household where no one works.

There has been significant progress in education. For example, the proportion of mainstream schools in which fewer than 65% of pupils achieve Level 4 or above in Key Stage 2 tests has halved since 1997, for both English and maths.

Attainment levels at 16-years are improving. The 2002 target of one GCSE was met and new targets have raised the minimum attainment level to five GCSEs—the percentage of 16-year-olds achieving five or more GCSEs at grades A* to C has increased by 6.5 percentage points since 1997.

Teenage conceptions have fallen by over 10% since 1998, when the Teenage Pregnancy Strategy was launched.

There have been significant improvements in the quality of housing. Since 1996, proportions of those living in housing below the set standard of decency have fallen by 13 percentage points for children.

Opportunity for all—Fifth Annual Report 2003 was published on 18 September 2003. The Committee have been provided with copies of the full report and its summary, which should be regarded as evidence for the enquiry and read alongside this memorandum.

EVIDENCE FOR THE COMMITTEE

This memorandum does not seek to cover the same ground as Opportunity for all. Instead, it aims to focus on a number of key issues highlighted by the Committee's enquiry.

— What contribution to the broader attack on poverty is made by the Government's target to reduce by a quarter by 2004-05 the number of children living in low-income households?

— What progress has been made towards that target so far and what factors bear on its achievement?

— How should child poverty be measured after 2004-05 for the purpose of the Government's eradication aim?

— What further work is in progress to keep up the commitment to eradicate child poverty?

The 2004-05 target on children in low income households

Opportunity for all details fully the Government's strategy for tackling child poverty. Poverty and social exclusion are widely recognised as complex and multi-dimensional problems. As a result the Government's strategy is multi-faceted in its approach—to tackle the root causes of poverty.

As an audit of progress on this strategy, Opportunity for all monitors a variety of indicators of progress for all age groups—55 trends in total. For children and young people, 20 trends are monitored covering education, health, housing, low income, parents' worklessness and teenage pregnancy. Public Service Agreement (PSA) targets underpin indicators in all of these domains and are all part of the strategy to eradicate child poverty.

In terms of low income, the Department for Work and Pensions and HM Treasury share a PSA target to:

Reduce the number of children in low-income households by at least a quarter by 2004,[497] as a contribution towards the broader target of halving child poverty by 2010 and eradicating it by 2020.[498]

Low income is defined for these purposes as having a household income lower than 60% of contemporary median[499] equivalised household disposable income both before and after housing costs.[500] The baseline year is 1998-99 when there were 4.2 million children living below this low-income threshold on the after housing costs measure, and 3.1 million on the before housing costs measure.[501] Because the target is defined in terms of relative income, achieving these reductions depends on faster growth in the incomes of low-income families than in the median income of all individuals.

This target plays an important part in the Government's wider strategy to tackle child poverty. It is important for a number of reasons.

First, there is now a substantial body of evidence that low income in childhood affects children's future prospects, even when other factors, like parental educational background, are taken into account.[502] Children who experience low income during childhood are more likely to: have low self-esteem; play truant at school; achieve less good qualifications on leaving school; be inactive in the labour market in adulthood; and, in the case of young women, to become teenage mothers. This implies that tackling poverty of life opportunities in general must, amongst other things, involve tackling low incomes.

Second, low income circumscribes children's opportunities as children. During our recent consultation on the future measurement of child poverty, many children and young people told us that, for them, poverty meant being marked out as different because they lacked things everybody else had, and not having access to good quality services and activities.[503] There is, in other words, a clear sense in which a widening income gap between the poorest children and the rest and social inclusion are at odds.

Third, the public's perceptions of poverty are at least partly relative. Evidence from the British Social Attitudes Survey shows that many people see poverty as being about more than simple subsistence and perceive poverty as growing even in periods when the absolute incomes of the poorest families rose in real terms.[504]

Finally, there was a marked rise in the numbers and proportion of children living in relative low-income households between 1979 and 1996-97.

Source: Households Below Average Income—An analysis of the income distribution from 1994-95 to 2001-02, Department for Work and Pensions (National Statistics), 2003.

Notes: 60% of contemporary median income threshold. Family Expenditure Survey data up to 1993-94, Family Resources Survey data 1994-95 onwards.

Not only does relative income matter as a factor in its own right affecting children's well-being and development, but also, against this measure, the UK's position by 1997 was not an enviable one—domestically or internationally. By the mid-1990s the United Kingdom had among the highest proportions of children living in relative low-income households among rich nations.

The Government therefore adopted the Public Service Agreement in order to reverse this long-running trend and the social consequences associated with it. When some individuals fall too far behind a typical family they will not be able to take a full part in some of the activities that social inclusion demands. This target therefore represents a commitment from the Government not only that some children should not fall further behind as society overall grows richer, but that they must actually catch up with the typical family.

In 1999, when the Prime Minister originally made his pledge to eradicate child poverty, the Government established a suite of indicators (in the annual Opportunity for all reports) to chart progress in doing so. Whilst the reversal of the long-term rising trend in relative low income highlighted above is a key step towards the eradication of child poverty, the relative low income measure was only one part of the suite of indicators used to monitor long-term progress in tackling child poverty.

Understandably commentators found it difficult to unambiguously audit Government progress on a variety of measures and so the low-income PSA target, originally set in Spending Review 2000, received almost sole attention. Therefore in April 2002 the Secretary of State for Work and Pensions launched the consultation, Measuring child poverty, to seek views on a longer-term measure of child poverty that would be appropriate in monitoring progress towards the pledge to eradicate child poverty.[505] (Annex A provides further detail on the Spending Review 2000 target and Annex B provides further detail on the successor Spending Review 2002 target. Both include the technical notes that accompany PSA targets, which explain the link to the eradication pledge.)

Progress towards hitting the 2004-05 low income target

The Government is committed to reducing levels of educational failure, ill health, teenage pregnancy, abuse and neglect, crime and anti-social behaviour among children and young people. These and other facets of childhood disadvantage are interrelated with experience of low income. Opportunity for all accordingly describes the Government's strategies for tackling each of these problems as part of the overall approach to eradicating child poverty. Within this, recognising the importance of tackling income poverty through effective financial support, the PSA target on low income was designed to reverse the rising incidence of relative low income among children.

Any strategy to reverse a long-running trend needs to start from an understanding of what factors underlay the trend. In the case of the growth in the number and proportion of children living in low-income households, the key factors have been:

— a decline in the returns from work for people with low or no skills. The wage dispersion in the UK has widened since the late 1970s compared to most European countries as demand for unskilled labour has declined.[510]

The Government's strategy to achieve its target to reduce by a quarter the number of children living in low income has accordingly emphasised two main elements. First, measures to raise employment rates through improved work incentives and active help to re-enter the labour market. And second, measures to support the incomes of poor families in and out of work through tax and benefit reform.

Work is the best route out of poverty for those who can work. Accordingly, there are Public Service Agreements bearing on the employment rates of people from ethnic minority backgrounds, from disadvantaged areas, those with low qualifications, the over 50s and disabled people. In most cases these will help to reduce child poverty. But there are two further targets that have a very direct impact on the number of children in low income.[511]

— Reduce the proportion of children in households with no one in work over the three years from spring 2003 to spring 2006 by 6½%.

— Over the three years to spring 2006, increase the employment rates of lone parents significantly and reduce the difference between their employment rates and the overall rate. Furthermore, the Government aims to increase the lone parent employment rate to 70% by 2010.

A summary of the key measures in support of these commitments is summarised in the box below.

Making work possible

The New Deal schemes, which now cover lone parents, young and older workers, disabled people, partners of the unemployed and musicians, are helping more and more people into jobs.[512]

Childcare provision—more than 700,00 new childcare places have been created since 1997, benefiting well over 1.2 million children. We are on track to meet the target of creating new places for 1.6 million children by March 2004.

Jobcentre Plus—providing a single integrated service to all people of working age, offering advice and guidance on the full range of support available to help them move into work. Jobcentre Plus also provides high quality services to employers, helping them to fill job vacancies quickly and effectively with well-prepared and motivated employees.

Work-Focused Interviews—enabling everyone to take advantage of the increasing opportunities provided by the Jobcentre Plus programmes.

Making work pay

  The introduction of the Working Families and Disabled Person's Tax Credits in 1999 to provide improved support for low-income working families and disabled workers.

  The introduction of the National Minimum Wage in April 1999. It will increase in October 2003 to £4.50 an hour, benefiting at least 1.3 million workers and, subject to economic conditions, again in October 2004 benefiting at least 1.7 million.

  Reducing the starting rate of income tax to 10% and cutting the basic rate of income tax to 22%. The 10p starting rate of tax has halved the marginal tax rate of around three million low earners since introduction in 1999.

  National Insurance changes for the low-paid, including the abolition of the "entry fee" and the alignment of the starting point for payment of National Insurance Contributions with the income tax personal allowance.

  The introduction of the Working Tax Credit from April 2003—to extend in-work support beyond those with children to include childless working households at risk of in-work poverty. In July 2003 around 120,000 families without children were in award of Working Tax Credit and a further 260,000 families received help with childcare costs through the childcare element.

Targeting resources at children

  Raising the children's allowances in Income Support and other income-related benefits, including a doubling in real terms of the rates for children under-11.

  Record increases in Child Benefit—the first child rate is now 25% higher in real terms than in 1997.

  The introduction of the new child support scheme,[513] from March 2003. Reforming the child support scheme will get money to more children more quickly—over a million children will benefit as a result.

  The introduction of Child Tax Credit from April 2003—creating a portable system of financial support for children spanning both welfare and work, paid to the main carer. In July 2003, 5.3 million families were benefiting from Child Tax Credit or Working Tax Credit, over 90% of those expected to benefit.[514] Child Tax Credit will combine with Child Benefit to deliver up to £54.10 a week in support for the first child in a family, compared to £27.70 a week in April 1997.

  Sure Start Maternity Grants were increased to £500 from June 2002—five times as much as the Maternity Payments they replaced. They ensure that families on low incomes receive additional help to cover the costs associated with a new baby—providing a valuable boost in the crucial early months.

This strategy has produced results, which are illustrated in the latest available low-income data (for 2001-02). The number of children living in low-income households has fallen to 3.8 million after housing costs and 2.7 million before housing costs.[515] Since 1996-97 this represents a reduction of over half a million, and since 1998-99 (the PSA baseline) a reduction of over 400,000. This progress illustrates not only that the Government has raised poor children's incomes, but also that the gap between them and the rest of society has been narrowed.

Yet this has been achieved against a very challenging backdrop of median income growth.[516] There has been very strong growth in median income between 1998-99 and 2001-02, of 15% in real terms.[517] This has significantly outpaced both real growth in average earnings and real growth in GDP over the same period. It is unusual in the recent past for the relative position of poor families to improve in this way at a time of strong underlying income growth (which makes a relative income target harder to achieve).

It is possible to isolate the effect of rising average incomes by looking at the 1996-97 levels of 60% median income and uprating these in real terms. Doing so illustrates that by 2001-02 there had been dramatic falls in the number of children living in low-income households in an absolute sense—1.6 million fewer before housing costs and 1.8 million fewer after housing costs.[518] Comparing these figures to the reductions seen in relative low income (allowing for average income growth) illustrates just how challenging it was to reduce relative low income in the first three years of this PSA target.

This achievement has been partly built on steadily rising employment rates, with particularly fast growth in the proportion of lone parents working—at 53.4% in spring 2003 compared with 45.6% in spring 1997. And it has been built on the tax and benefit reforms that have rewarded work and improved the incomes of families.

As a result of the Government's personal tax and benefits reforms since 1997, including changes to National Insurance contributions and the freezing of the income tax personal allowance, from April 2003:

— families with children are on average £1,200 a year better off in real terms; and

— families with children in the poorest fifth of the population are, on average, £2,500 a year better off in real terms.

This improvement in the incomes of the poorest families has in turn translated into real improvements in living standards. The material well being of both working and non-working families and both lone-parent and couple families improved across all dimensions between 1999 and 2001. Families entering work showed the greatest improvement in well being.[519]

Hardship and change in work status

Cell percentages

Base: Panel sample interviewed in 1999 and 2001.

Note: Figures for lone parents and couples are reported for those families who remained of the same type. Figures for all families also include those families who altered status.

These gains underline the Government's commitment to hit its target to reduce the number of children living in low-income households by a quarter by 2004-05. The Government expects to see further progress towards this target, as the impact of policies taking effect since 2001-02 is felt. The new tax credits—the Child Tax Credit and Working Tax Credit introduced in April 2003—will in particular make a substantial further contribution. From April 2004, the child element of the Child Tax Credit will be uprated at least in line with earnings rather than prices for the rest of this Parliament.

Progress will also be affected by growth in average incomes in the economy between 2001-02 and 2004-05. The Government is monitoring this closely.

Future measurement of child poverty

The Government is clear that relative low income must continue to be central to the measurement of child poverty after 2004-05, and hence to the Government's eradication commitment. All measures of poverty suffer limitations in one respect or another, either technical or conceptual—there is no universally agreed perfect approach. But the Government is considering whether relative income alone can carry the full weight of measuring child poverty for a number of reasons.

First, there is a risk that it could tempt future Governments to focus policy narrowly on achieving the marginal increases in income needed to move families from one side of what is an essentially arbitrary line to another. (Progress to date on a range of different measures of low income shows that the Government has in fact avoided falling into this trap.[520]) It is clear that such marginal adjustments in income should not be the exclusive approach to relieving poverty. In particular, changes in income at the margin, though important, may have less to offer in terms of children's future prospects than, say, investments in services such as early years, health or education.

Second, an exclusive focus on relative income may not necessarily cause policy responses to focus on those children most at risk of a diminished childhood or restricted future opportunities. It takes no account, for example, of the persistence of poverty—how long a family has experienced low income, or of the extent to which children are deprived of key necessities. But this measure does pick up families and children whose experience of low income is transitory—because, for example adults are sacrificing income in the short-term in order to study for qualifications or because of temporary unemployment between jobs.

And, third, a relative income measure can give perverse readings when underlying incomes in the economy are either growing strongly or shrinking. Spurts of growth in median income can register as rises in poverty and falls in median income as improvements in poverty. This could undermine the credibility of a relative income measure in the eyes of the public.

Against this background, the Government initiated a consultation[521] in April 2002 on the measurement of child poverty for the long term. This was with a view to identifying a measure for the future which would ensure policy was effectively targeted, would enable the Government to be held to account for progress and which would carry conviction with the public. The consultation document foreshadowed four main options for the future:

Opportunity for all;

— constructing an index which combined those indicators into a single figure;

— adopting a "consistent poverty" measure—similar to the approach used in Ireland—combining relative low income and deprivation; or

— adopting a core set of inter-related or "tiered" indicators on all of which the Government would expect to make progress.

The consultation was well received and generated thoughtful and lively debate. It embraced academic seminars as well as workshops with children, young people and adults who have experienced poverty.

In the light of it, the Government published an interim response in May 2003.[522] This reiterated the Government's conviction that income had to be central to any measure of poverty, but that income alone may not provide a wide enough measure. It was clear from the consultation that there is no "perfect" measure, and that there are drawbacks with all approaches. The response document indicated that, subject to this, the Government intended to take forward further methodological work on the options of multi-dimensional indicators, a tiered approach and on deprivation. This includes considering how to incorporate relative income into a long-term measure. That work is now under way and the Government has indicated that it will announce its preferred approach to the future measurement of child poverty by the end of 2003.

Keeping up the commitment

The Government will closely monitor the latest data to ensure that the necessary policies are in place to achieve the PSA target on low income amongst children. Alongside other targets aimed at breaking the cycles of disadvantage that can blight children's opportunities, this is a central element of the Government's commitment to eradicating child poverty.

Opportunity for all provides extensive detail of the policy enhancements that the Government has already pledged. For example, the Government has already committed to increase the per child element of Child Tax Credit in line with earnings, not prices, for the rest of this Parliament. And the Child Trust Fund will provide an initial endowment of £250 for all children and £500 for children from low-income families.

The child poverty review, announced in Budget 2003, will set out what further action is required to halve child poverty by 2010 and eradicate it by 2020. It aims to ensure the welfare system and the range of public services work together. Among the specific issues it will look at are: increasing employment opportunities; improving the effectiveness with which current investment in public services tackles material deprivation; improving life chances; and dealing with the crisis points that families often face, all with an eye to the particular issues facing families in deprived areas. Budget 2003 also announced reviews of childcare and financial support for 16-19-year-olds that will help to shape plans to be announced in Spending Review 2004.

A new Minister of State for Children, Young People and Families has been charged with the responsibility for ensuring that services for children are joined up effectively across government. The Green Paper Every child matters sets out the Government's proposals for action in parenting and family support, early intervention by agencies responsible for children, and accountability and integration of those functions.

Research supports our emphasis on work as the best route out poverty. But as we move forward in implementing our strategy we are increasingly learning that some groups may find it more difficult to work than others. Or, depending on the household structure, number of workers in a household, hours worked and level of earnings, some may still suffer in-work low income.

Large families, households with a disabled adult or child, and ethnic minorities are three such groups that, on average, face additional barriers to work. Many of the barriers they face are interrelated. Although we have been able to identify associations among them all, it is certainly not clear that research has identified principal causation or solutions. So the Government will increase its focus on these issues in order to examine the policy implications in the context of the overall strategy to eradicate child poverty.

493 Including changes to National Insurance contributions and the freezing of the income tax personal allowance. Back

494 In March 1999 the Prime Minister originally pledged to eradicate child poverty in a generation (see Rt Hon Tony Blair MP, March 1999, Beveridge re-visited: a welfare state for the 21st century, in Robert Walker (ed), Ending child poverty: popular welfare for the 21st century, The Policy Press). Later in 1999, the Chancellor of the Exchequer formalised the end-date as 2020 and announced the milestone of halving child poverty by 2010. Back

495 The current edition is Opportunity for all-Fifth Annual Report 2003, Department for Work and Pensions, 2003, Cm 5956. Back

496 Tackling Child Poverty giving every child the best possible start in life, A Pre-Budget Report Document, 2001, HM Treasury. Back

497 The Technical Note appended to the PSA specifies the end-date as 2004-05 (Annex B). Back

498 2002 Spending Review-Public Service Agreement 2003-06, Cm 5571, July 2002. Back

499 Median income is the point in the distribution where 50% of individuals have incomes above that level and 50% have incomes below that level. Back

500 Income is used as a proxy for living standards. Equivalisation is a process that adjusts household disposable income to take account of family size and structure. This reflects the common sense notion that a household of two adults and two children need a larger cash income than a household of two adults to achieve a comparable living standard. Back

501 Households Below Average Income-An analysis of the income distribution from 1994-95-2001-02, Department for Work and Pensions (National Statistics), 2003. Back

502 See, for example, John Ermisch, Marco Francesconi and David Pevalin, 2001, Outcomes for Children of Poverty, DWP Research Report 158. Back

503 <hi1.e>Measuring child poverty consultation: preliminary conclusions, Department for Work and Pensions, 2003. Back

504 John Hills, 2001, "Poverty and social security: What rights? Whose responsibilities", in British Social Attitudes Survey: the 18th report-Public Policy, Social Ties. Back