Select Committee on Treasury First Report

5  CHILD POVERTY

The commitment, PSA targets and progress to date

38. In 1999, the then Prime Minister committed the Government to the goal of eradicating child poverty within a generation. This goal was encapsulated in the 2002 Spending Review in objectives set for the Department for Work and Pensions and HM Treasury within the framework of Public Service Agreements to reduce the number of children in low-income households by at least a quarter by 2004, as a contribution to the broader target of halving child poverty by 2010 and eradicating it by 2020.[100] The commitment to halve child poverty by 2010 and eradicate it by 2020 was subsequently reaffirmed in the 2004 Spending Review.[101] The baseline for progress against the intermediate targets was the Government's estimate that 3.4 million children were living in poverty in 1998-99.

39. We considered the first target of reducing the number of children in low-income households by at least a quarter between 1998-99 and 2004-05 in our Report on the 2006 Budget. As we noted then, although the Government took significant steps towards meeting this target, the target was not met.[102] By 2005-06, the Government had successfully lifted 600,000 children out of poverty since 1998-99, a development which was highlighted by the Chief Secretary in evidence.[103] The Government's proposals in the 2007 Budget—including increasing the child element of Child Tax Credit by a further £150 above earnings indexation—are expected to mean that child poverty will be 200,000 lower than it would have been had no changes to tax credits or benefits been announced in that Budget.[104] At that time, the IFS suggested that, following the measures announced in the 2007 Budget, a further 800,000 children would need to be lifted out of poverty in order for the Government's 2010-11 target to halve child poverty to be met.[105]

Our previous consideration

40. A range of measures are available to the Government to meet its child poverty targets. These include measures to increase the proportion of parents of children in poverty who are in work, measures to increase the availability of affordable childcare, and various forms of financial support for families. In providing financial support for families, the Government has emphasised the importance of a balance between universal support through child benefit and more targeted support through tax credits.[106] The Government has been reluctant to commit to a particular cost of meetings its targets, in part because of the interdependence between the cost of financial support and levels and types of employment.[107] In January 2007, following the 2006 Pre-Budget Report, we recommended that

either in the 2007 Budget or in reporting the outcome of the Comprehensive Spending Review, the Government outline its strategic position with respect to the 2010-11 target. The Government should both set out its progress to date towards achieving the target … and specify how it intends to achieve the target, including the extent to which it expects various measures to contribute towards achieving the target.[108]

41. We reiterated this recommendation following the 2007 Budget, and also recommended that the Government publish its analysis of the impact of improving incentives to work on meeting its child poverty targets.[109]

Setting new targets for child poverty

42. In considering the 2007 Budget measures, we also analysed the case for an additional measure of child poverty that focused particularly on children in families in the very lowest income levels. We recommended that, in publishing the outcome of the Comprehensive Spending Review, the Government set out its latest understanding of the dynamics of the very poor, perhaps in the context of the Government's work on its new deprivation index. We called for further explanation of the Government's views on a possible additional target focused on child poverty in the very poorest households.[110]

43. In publishing the outcome of the 2007 Comprehensive Spending Review, the Government reiterated its commitment to halve the number of children in poverty by 2010-11, on the way to eradicating child poverty by 2020. In the accompanying Delivery Agreement, the Government stated that it would use three indicators to measure progress against child poverty in coming years, as follows:

• Indicator 1: the number of children in absolute low-income households—designed to measure whether the poorest families are seeing their incomes rise in real terms;
• Indicator 2: the number of children in relative low-income households—designed to measure whether the poorest families are keeping pace with the growth in incomes in the economy as a whole; and
• Indicator 3: the number of children in relative low-income households and in material deprivation; the introduction of a material deprivation indicator for child poverty is designed to provide a wider measure of living standards and reflects the view that tackling poverty is about more than simply raising income levels.[111]

44. Mr Chote outlined what he saw as the main elements of the Government's approach to measuring progress in relation to child poverty:

Essentially there are three targets running in parallel, that is the key. There is the material deprivation one … do you have access to goods and services that you would expect et cetera, then there is a relative poverty measure which is the one we typically focus on and then there is an absolute poverty measure which typically is easier to hit anyway, hence the focus mostly still being on the relative income measure although the Government would like to see more emphasis on the material deprivation scores.[112]

45. The material deprivation indicator measures those families who are both materially deprived because they lack certain goods and services and who also have an income below 70% of median household income. Material deprivation is assessed through a series of questions generally starting in the form "Do you and your family have …" or "Are you and your family able to afford …". Questions include:

• Replace or repair major electrical goods such as refrigerator or washing machine when broken;
• Have friends or family around for a drink or meal at least a month;
• Enough bedrooms for every child over 10 of different sex to have his or her own bedroom;
• Swimming at least once a month.[113]

46. Professor Talbot suggested that some of the survey questions used to measure material deprivation had only a limited connection with the economic status of families:

For example, having friends or family around for a drink or a meal once a month I suspect has more to do with social norms and behaviour than it does with material deprivation levels. You have to look through this fairly carefully because there are a number of things in here which have got nothing to do with the material status of the family.[114]

47. We accept the value of an additional target relating to child poverty including a measure of material deprivation, not least in highlighting that poverty is not just about income. However, there is a risk that consideration of material deprivation will move focus away from the most pressing cases of child poverty and, in that context, we are disappointed that the Delivery Agreement does not respond to the recommendations of this Committee for a fuller analysis of the particular issues surrounding child poverty in the very poorest households. It is important that efforts to meet targets do not lead to an insufficient concentration upon the worst forms of child poverty in the very poorest households. We recommend that, in its response to this Report, the Government set out the role played in its strategy by measures concerned in particular with the very poorest households.

Departmental responsibilities

48. As part of the refashioning of Public Service Agreements that we discussed earlier,[115] the PSA targets held jointly by the Treasury and the Department for Work and Pensions have been replaced as part of the 2007 Comprehensive Spending Review by a single Public Service Agreement with an accompanying Delivery Agreement. The previous PSA targets were held jointly between the Treasury and the Department for Work and Pensions, with the latter department generally to the fore in reporting progress in relation to the targets. The Delivery Agreement for the new Public Service Agreement states:

The Chancellor of the Exchequer, the Secretary of State for Children, Schools and Families and the Secretary of State for Work and Pensions will be responsible for child poverty, and in addition the Chancellor of the Exchequer is the lead minister for this PSA … The Senior Responsible Officer within Government for the PSA will be the Director for Personal Tax and Welfare Reform in HM Treasury, who will chair a Senior Official PSA Delivery Board, comprising all lead and supporting departments.[116]

49. Nicholas Macpherson explained the rationale for the Treasury's lead role in relation to the child poverty PSA as follows:

The primary reason the Treasury has led on Child Poverty is that we control the levers which are critical for meeting the 2010 target, as we set the levels of financial support for families. Employment will have an important impact on achieving our goal of halving child poverty, but financial support is the most important lever … The Treasury also led on production of the 2004 Child Poverty Review which contains [the] Government's comprehensive strategy for achieving our child poverty targets. As with the Child Poverty Review, the Child Poverty PSA Delivery Agreement has been coordinated by the Treasury, but with substantial input from a number of departments.[117]

50. On 29 October 2007, the Department for Work and Pensions and the Department for Children, Schools and Families announced the creation of a Child Poverty Unit to be located within the Department for Children, Schools and Families. It was stated that the new Unit would "bring together experts from the Department for Work and Pensions and the Department for Children, Schools and Families with the remit of co-ordinating and developing policy with HM Treasury and across Whitehall that will support the ongoing work to end child poverty". The unit would "act as a first point of contact for stakeholders and interest groups, local and national government departments and government agencies".[118] Mr Macpherson explained the rationale of the division of responsibilities between the PSA Delivery Board to be chaired by a Treasury official and the Child Poverty Unit to be located within the Department for Children, Schools and Families. He said that the former was concerned principally with short to medium term measures to meet the 2010-11 target, which would be principally about transfer payments, while the latter was concerned principally with meeting the longer term target for abolition of child poverty, where the role of wider public services would be more important than such payments.[119] We note the Government's explanation for the decision to assign HM Treasury lead responsibility for the new PSA framework relating to child poverty. However, in view of the decision to establish a Child Poverty Unit located in the Department for Children, Schools and Families, we remain to be convinced that the division of departmental responsibilities will not accentuate the possible tension between the 2010-11 target and the final target to eradicate child poverty.

Measures in the 2007 Pre-Budget Report

51. The 2007 Pre-Budget Report contained a number of measures intended to contribute towards meeting the Government's child poverty targets. First, the Government announced that it would raise the child element of the Child tax credit by £25 a year above earnings indexation, in April 2008, in addition to the Budget 2007 commitment to increase the child element by £150 and that it intended to raise it again by a further £25 above indexation in April 2010.[120] Second, the Government said that it would substantially increase the child maintenance disregards in income-related benefits. The maintenance disregard for Income Support is to be increased to £20 and will be accompanied by an increase in the maintenance disregard in Housing Benefit and Council Tax Benefit, from the current £15 per week to a full disregard.[121] Third, the Government announced that it would roll out the In-work Credit, a £40 per week (£60 in London) payment for lone parents who have been on Income Support (IS), during their first twelve months in employment.[122] The combined cost of these measures is approximately £600 million.[123] The Chief Secretary said the combined effect of these measures, together with the rise of Child benefit in line with Retail Prices Index in April 2008, would be to lift a further 100,000 children out of poverty.[124]

52. The Chief Secretary told us that the Government believed that Child Tax Credit was the most effective way to tackle child poverty:

That [Child Tax Credit] has been and we believe remains the most effective way of targeting children with real need. It is obviously possible to do that through other mechanisms, through increases in child benefit, but it is the government's view that increasing the child element of child tax credit is a very, very effective way of making further progress towards the child poverty target. There are obviously other things that can be done to make that progress. I think it is important. I do not want to be misunderstood in saying that that alone is the only mechanism that we use.[125]

53. Barnardo's agreed that the child tax credit had to be the cornerstone of any strategy to target resources at tackling child poverty. Barnardo's observed that some measures in the 2007 Pre-Budget Report, such as the child maintenance disregard and the in-work credit, would only assist poor children living in lone parent families. Barnardo's noted that, while children living in lone parent families were a significant group at risk of poverty, they were not the only poor children in the United Kingdom. This made child tax credit essential as the most effective mechanism to reach all poor children in the United Kingdom.[126]

54. The 2007 Pre-Budget Report also announced the uprating of all elements of the Working Tax Credit, except for the childcare element, in line with the Retail Prices Index. Mr John Whiting of PriceWaterhouseCoopers believed the Government had taken the decision not to uprate the childcare element in the same way because "there was a substantial increase [in childcare tax credit] last year, including the percentage of childcare costs that was covered by that".[127] This analysis was confirmed by Treasury officials who noted that the upper threshold limits for the childcare element of Working Tax Credit had been increased in April 2005, from £135 and £200 per week to £175 and £300 respectively, while in April 2006 the Government had increased the proportion of childcare support covered from 70% to 80%. The Government stated that it would continue to keep the threshold limits under review.[128]

Prospects for meeting the 2010-11 target

55. The measures announced in the 2007 Pre-Budget Report are expected by the Government to lift 100,000 children out of poverty. Mr Chote confirmed to us that this meant that the Government would have to reduce child poverty by a further 700,000 to meet its interim target of halving child poverty by 2010-11.[129] CPAG pointed out that the rate of progress to be achieved by the measures in the 2007 Pre-Budget Report "will mean we will not succeed in halving child poverty until many years after the target date".[130] Barnardo's also expressed disappointment that the proposed increases in tax credits were less than 10% of the level of investment required if the Government was to meet the 2010-11 target and considered that "the minimal increases in tax credits" announced in the 2007 Pre-Budget Report made it "virtually impossible that the Government will be able" to meet the 2010-11 target in practice.[131]

56. Following the 2007 Budget and the measures announced at that time, the IFS had calculated that the Government would need to spend an additional £3.8 billion a year in order to meet the 2010-11 child poverty target, assuming that additional expenditure was targeted on the most effective measures, principally increases in the child element of child tax credit.[132] Mr Chote acknowledged that the likely annual cost of meeting that target had fallen as a consequence of the measures in the 2007 Pre-Budget Report, although he did not think that the fall was equivalent to the total annual cost of those measures—£600 million—because the new expenditure was not necessarily the best use of resources in the context of meeting the 2010-11 target.[133]

57. The exact extent of progress towards child poverty targets has generally been considered to be linked to the progress in raising the proportion of households with adults in work. However, shortly before the 2007 Pre-Budget Report and Comprehensive Spending Review, the Institute of Public Policy Research (IPPR) announced a finding that, while child poverty among workless households had fallen over the last decade, it had risen amongst working households.[134] Mr Chote believed that the rise in child poverty amongst working households could be explained by the use of a relative income measure to assess child poverty:

The increase in the proportion would presumably be that the growth rate of incomes at that level of the income distribution has been growing less quickly than in the median. You are measuring how far people are falling behind the middle. The success in terms of how people in work towards the bottom of the income distribution are doing relative to the median is not only a function of how much incomes are right at the bottom but what the target is and effectively are they having to run to stand still.[135]

Dr Weale expanded upon possible reasons for this:

I think we have had an element of downward pressure on wages at the low end of the distribution from a combination of international trade competition from low wage economies and also probably from migration. There are also questions of how full-time some of the people who are working are actually working. Indeed, there have to be questions about how many hours a week they are actually working. We have seen a general widening of the income distribution, partly at the top but also downward pressure at the lower part of the distribution and that does have implications for people who work..[136]

58. Treasury officials acknowledged that, because the child poverty target was based on relative income, it was very sensitive to changes in income in the economy as a whole and to changes in employment rates.[137] They referred to possible reasons why child poverty amongst working households could have risen and agreed that one explanation could be that the working adult in some lower income families might only be employed part-time. The Chancellor of the Exchequer told us that he was aware of the IPPR's findings and had already asked his officials to make contact with IPPR to discuss their methodology and conclusions.[138]

59. When the Government first announced its intention to introduce Delivery Agreements, it stated that Public Service Agreements

will … be supported by robust plans for delivery at the outset, to ensure clear accountability throughout the delivery chain and a coherent balance of levers and drivers to support the achievement of outcomes.[139]

We have previously referred to our recommendations that the final form of the child poverty target for the 2007 Comprehensive Spending Review should be accompanied by a new statement of strategy and a clear indication of how resources would be deployed on particular measures.[140] In written evidence, the Child Poverty Action Group voiced disappointment that the Government had failed to "state alongside the CSR how it intends to meet the 2010-11 target to halve the number of children in poverty and where the resources will come from".[141]

60. In response to the suggestion that the Comprehensive Spending Review did not appear to contain the provisions necessary in order to meet the 2010-11 target or outline the Government's strategy as to how the target would be achieved, the Chancellor of the Exchequer explained that before 2010 the Government still had two Budgets and two Pre-Budget Reports to move towards the target.[142] Treasury officials told us:

The fact is that because our target on child poverty is based on relative income it is very sensitive to changes in income in the economy as a whole and to changes in employment rates. Therefore, we tend to look at this from each PBR to Budget to PBR and make incremental changes rather than make one big change.[143]

61. Both the Chancellor of the Exchequer and Chief Secretary spoke of the need also to look at wider Government initiatives to tackle child poverty. The Chancellor of the Exchequer said that meeting the child poverty targets would depend upon a combination of spending money and helping people into work.[144] The Chief Secretary spoke of relevant initiatives such as extending New Deal Plus for lone parents, as well as the resources that "the CSR makes available for skills and for adult learning".[145]

62. The Government's emphasis on longer-term broader measures to tackle child poverty, including increasing the employment rate, particularly amongst lone parents, and improving skills levels, combined with the fact that it has not earmarked resources to meet the 2010-11 target, has led to speculation that the Government may be shifting its focus from the 2010-11 target to the 2020 target to eradicate child poverty.[146] Mr Chote outlined the possible trade-off in that the 2010-11 target could put pressure on the Government to go down the quickest cost-effective route of getting there, which would be to increase transfer payments, whereas focusing on the 2020 target might lead the Government to prioritise investment in longer term social investments but potentially at the cost of making it more likely that the 2010 target would be missed.[147]

63. The Chancellor of the Exchequer assured us that the Government remained committed to meeting the 2010 target, and rejected the suggestion that the target was something that might need to be re-examined.[148] However, the Chief Secretary did say he would not see it as a huge failure if the Government only got 85% or 95% towards meeting its 2010 child poverty target because it would still mean the Government would have made substantial progress towards reducing child poverty.[149]

64. The Comprehensive Spending Review is not accompanied by a clear explanation of the linkage between the Government's target to halve child poverty by 2010-11 and the proposed deployment of resources to meet that target. We are concerned that the Government may have drawn back from a whole-hearted commitment to meeting this target. A failure to meet that target would represent a conscious decision to leave hundreds of thousands of children in poverty for longer than is necessary or desirable. While we accept that there may be a long-run trade-off between meeting the 2010-11 target and longer term ambitions to increase employment, the linkage between child poverty and working households is by no means clear cut. We consider that the Government must either initiate a public debate on that trade-off, or rededicate itself to meeting the 2010-11 target, making clear at the earliest opportunity available both that the necessary resources are available within the Comprehensive Spending Review settlement and that the Government is committed to deploying those resources.

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100   HM Treasury, 2002 Spending Review: Public Service Agreements White Paper, July 2002, para 1, p 31 Back

101   HM Treasury, 2004 Spending Review: Public Service Agreements White Paper, July 2004, para 1, p 37 Back

102   HC (2005-06) 994-I, para 86 Back

103   Q 35 Back

104   Budget 2007, para 5.13, p 107 Back

105   Treasury Committee, Fifth Report of Session 2006-07, The 2007 Budget, HC 389-II, Ev 70 Back

106   HC (2006-07) 115, para 69 Back

107   HC (2005-06) 994-I, para 91 Back

108   HC (2006-07) 115, para 71 Back

109   HC (2006-07) 389-I, para 48 Back

110   Ibid., paras 49-50 Back

111   HM Treasury, PSA Delivery Agreement 9: Halve the number of children in poverty by 2010-11, on the way to eradicating child poverty by 2020, October 2007 (hereafter PSA Delivery Agreement 9: Child poverty), para 2.1, p 5 Back

112   HC (2007-08) 54, Q 123 Back

113   PSA Delivery Agreement 9: Child poverty, pp 25-26 Back

114   HC (2007-08) 54, Q 111 Back

115   See paragraphs 31-34. Back

116   PSA Delivery Agreement 9: Child poverty, paras 3.34-3.35, p 17 Back

117   Ev 24-25 Back

118   Department for Children, Schools and Families press notice, 'New team to tackle UK child poverty', 29 October 2007 Back

119   Treasury Sub-Committee, Uncorrected transcript of oral evidence, HM Treasury's administration and expenditure in 2006-07, 14 November 2007, Q 10 Back

120   Pre-Budget Report and Comprehensive Spending Review 2007, para 5.25, p 78 Back

121   Ibid., para 5.27, p 78 Back

122   Ibid., para 5.12, p 75 Back

123   HC (2007-08) 54, Q 104 Back

124   Q 23 Back

125   Q 22 Back

126   Ev 43 Back

127   HC (2007-08) 54, Q 115 Back

128   Ev 46 Back

129   HC (2007-08) 54, Q 104 Back

130   Ev 34 Back

131   Ev 43 Back

132   HC (2006-07) 389-I, para 47 Back

133   HC (2007-08) 54, Q 104 Back

134   Institute of Public Policy Research press notice, 'Darling should prioritise child poverty', 7 October 2007 Back

135   HC (2007-08) 54, Q 120 Back

136   Ibid., Q 121 Back

137   Ibid., Q 220 Back

138   HC (2007-08) 54, Q 218 Back

139   HM Treasury, Releasing the resources to meet the challenges ahead: value for money in the 2007 Comprehensive Spending Review, Cm 6889, July 2007, para 4.27, p 42 Back

140   See paragraphs 40-41. Back

141   Ev 34 Back

142   HC (2007-08) 54, Q 328 Back

143   Ibid., Q 220 Back

144   Ibid., Q 329 Back

145   Q 45 Back

146   "Ministers are 'falling years behind' on targets to banish child poverty, The Times, 29 October 2007, p 23 Back

147   HC (2007-08) 54, Q 112 Back

148   Ibid., Q 328 Back

149   Q 42 Back

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Prepared 3 December 2007