Written evidence submitted by the Child
Poverty Action Group (CPAG)
1. INTRODUCTION
1.1 The Spending Review saw significant
cuts to support for low income families, with cuts to benefits
and tax credits from the Spending Review and emergency budget
combined reaching £18 billion per annum by 2014-15.
1.2 Child Poverty Action Group has major
concerns about the specific impacts of many of the cuts, including,
but not limited to:
— Capping of housing benefit;
— Capping of total benefits award;
— Freezing child benefit;
— Withdrawal of child benefit for higher
rate taxpayer households;
— Increasing working tax credit eligibility
hours for couples;
— Cutting the childcare element of working
tax credit;
— Freezing working tax credit;
— Time-limiting contribution based employment
and support allowance;
— Raising the shared room rate age;
— Reducing and localising council tax benefits;
and
— Removing the mobility component of disability
living allowance for people in residential care.
1.3 However, given the stated interests
of the committee, we do not enter into these concerns at length
and have focussed our submission on the processes by which the
Spending Review was conducted, the overall outcomes for child
poverty and fairness, and the economic consequences.
1.4 Before the main sections of this submission,
we would additionally like the Committee to note our strong objections
to the manner in which Child Benefit cut for higher rate tax payers
was announced; the confusion as to how, and if, it can be implemented;
the misleading suggestions that it is targeted at the wealthiest;
and the negative consequences it could have in regard to child
poverty and child wellbeing. Our organisation's principal concerns
are always with the immediate needs of the poorest, but we also
pursue concerns about the current and future wellbeing of all
children and believe that a universal child benefit plays an essential
role due to:
— exceptionally high levels of take-up;
— playing a social security role that prevents
poverty and acts as a lifeline when circumstances change; and
— ensuring that within overall household
budgets, sufficient spending is directed to children's needs.
For single earner families with two children
just above the high earnings threshold, it is equivalent to a
5% rise in basic income tax. Given mortgage liabilities for many
such families, it may lead to examples of material deprivation
as disposable income is significantly reduced. By contrast, a
1% rise in higher rate tax would save a similar amount and be
truly targeted to the wealthiest in proportion to their wealth.
It would have none of the anomalies or difficulties of implementation
and would mean the benefits to children and families of universalism,
which has survived economic ups and downs for decades, can be
retained. It is an illustrative example of the lack of a robust
Fairness Test under which all options are considered.
2. FAIRNESS TEST
AND INCOME
DISTRIBUTIONAL IMPACT
2.1 The Government has made fairness a defining
theme of the Coalition's programme and of the Spending Review.
2.2 The Coalition's programme for government
stated on page 15:
"We will introduce arrangements that will
protect those on low incomes from the effect of public sector
pay constraint and other spending constraints."
2.3 Child Poverty Action Group is one of
a number of charities and organisations campaigning for reductions
in poverty and inequality that jointly sought engagement with
the Government immediately after it took office on its methodology
for ensuring the deficit reduction programme is fair. Our correspondence
with the Prime Minster and Deputy Prime Minister is included as
appendices to this submission.
2.4 We requested that the Government develop
inequality impact assessments for the purpose of ensuring that
the deficit reduction programme does not increase inequality
of incomes, assets and access to services. We invited the
Government to discuss the request with us and offered the engagement
of our organisations in developing assessments that could form
a robust and transparent Fairness Test. Replies to our request
were not made in a timely fashion and when finally received were
insubstantial.
2.5 Child Poverty Action Group has worked
in partnership with the Equality Trust, amongst other organisations,
on its call for a Fairness Test. As a part of this joint work
the Trust submitted a Freedom of Information request to ask for
information covering:
— The guidance issued to government departments
by the Treasury, at the start of the CSR process and since, detailing
if and how they should assess the impact their proposed spending
decisions would have on inequality of incomes, assets and access
to services (or any one of those).
— The methodology used by the Treasury
itself in assessing the impact of the Spending Review decisions
on inequality of incomes, assets or access to services (or any
one of those)..
The request was declined on the grounds that
non-disclosure was in the public interest because, despite there
being a public interest in transparency, the prospect of disclosure
may undermine or restrain submissions on, and reports and analysis
of, spending proposals by departments and officials. This, it
is claimed, may prevent free and frank information being produced
and the unrestrained and unprejudiced examination of spending
priorities.
2.6 The Treasury had invited the public
to contribute views on deficit reduction and proposals for spending
cuts. We therefore believe that this consultation process could
not be meaningfully conducted as members of the public were not
privy to the same information as ministers and officials to help
submit fair proposals. While we know it is principally the role
of the Information Commissioner to make judgements on whether
a non-disclosure decision was taken on good grounds, we hope the
committee will take advantage of parliamentary privilege to question
the Treasury as to why non-disclosure was considered necessary
in this instance.
2.7 We are deeply concerned at the assessment
of the Institute for Fiscal Studies that the Spending Review is
regressive with particularly strong impacts on families with children.
The IFS has acknowledged limitations to its methodology, but the
limitations have been overstated by government in response. The
IFS analysis is built on the foundation of the Government's own
distributional impact assessment, so it is a more comprehensive
account of the expected impact.
2.8 We regret that the Government has reacted
with hostility to criticism from the IFS and others that the Spending
Review is regressive and that the promise that "those with
the broadest shoulders will bear the greatest burden" has
not been met. We believe the Government should recognise the public
interest in engagement with external organisations to jointly
pursue the development of more comprehensive assessments of the
impacts of deficit reduction measures on different socioeconomic
groups.
3. CHILD POVERTY
IMPACT AND
PROGRESS
3.1 The Coalition's Programme for Government
stated on page 19:
"We will maintain the goal of ending child
poverty in the UK by 2020."
3.2 In the Chancellor's oral statement to
parliament, and on page 29 of the Spending Review, it is claimed
that increases in child tax credit "will ensure the Spending
Review will have no measurable impact on child poverty in the
next two years". A footnote explains that the estimate is
calculated using HM Treasury's tax and benefit microsimulation
model, based on 2007-08 Family Resources Survey data projected
to 2011-12 and 2012-13.
3.3 The Treasury has not explained what
"measurable impact" means. The Government publishes
several data sets that are indicators of child poverty, in particular
the annual HBAI (Households Below Average Income) research series,
which includes data for children living in households below the
poverty line both before and after housing costs. Data from HBAI
is also used for measurements on which the targets in the Child
Poverty Act are based:
— Relative low income poverty (below annual
60% median income).
— Absolute low income poverty (below baseline
year 60% median income).
— Persistent low income poverty (below
annual 60% median income for more than three consecutive years).
— Material deprivation combined with low
income (high score on material deprivation survey combined with
below 70% annual median income).
Further explanation is needed from the Treasury
to confirm if the statement that measurable child poverty will
not increase in the next two years applies to all four measurements
used for the purpose of the targets in the Child Poverty Act.
3.4 It is our understanding that the Treasury's
tax and benefit microsimulation model does not take into account
Housing Benefit changes, Employment and Support Allowance changes,
WTC childcare element reduction, or in-year income changes for
tax credits. Emergency Budget and Spending Review changes for
these benefits and tax credits are likely to result in significant
income reductions for many households with children. The exclusion
of these factors from the Treasury's impact assessment on child
poverty allows us no confidence in the accuracy and reliability
of the claim that measurable child poverty will not increase in
the next two years.
3.5 There are further Housing Benefit, Council
Tax Benefit, Jobseekers Allowance and Disability Allowance changes
that impact after 2013. The Treasury has suggested that it cannot
make an estimate beyond 2013 as further decisions will be made
by then that would alter its microsimulation. However, an estimate
is needed of the impact on child poverty beyond 2013 as spending
plans currently stand to help inform the future decisions that
will lead to these changes. In particular, an estimate of the
impact on child poverty beyond 2013 is urgently needed to assist
the development of the Child Poverty Strategy.
3.6 Whilst we accept that there are methodological
challenges in incorporating the impact of some of the excluded
factors, greater efforts should be made. At the very least, it
should be stated whether or not each of these factors is expected
to have an upward pressure on the number of children in poverty.
It may also be possible to produce estimates of the number of
children in poverty consequent to the impact of these changes
if a range is provided with upper and lower figures rather than
just a single figure.
3.7 We do not accept the Treasury's claim
that measurable child poverty will not increase in the next two
years. A large number of significant factors have not been included
in the methodology on which this assessment was based. The Treasury
must fully explain what is meant by "measurable impact"
and must produce a more comprehensive analysis and estimate of
the combine impact of the emergency Budget and Spending Review
on all four measurements used for the purposes of the Child Poverty
Act targets.
3.8 Following the Emergency Budget, the
OBR forecast a reduction in general government employment of 490,000
by 2014-15, with a revised forecast due to be published on 29
November. It is inevitable that some of these job losses will
mean families with children losing earnings and becoming more
reliant on in-work benefits, or fully reliant on out-of-work benefits.
We recognise that jobs are also forecast to be created by the
private sector during this period, but this needs to be balanced
against predictions that the public sector cuts and VAT increase
will also result in the loss of a large number of private sector
jobs. It is important that the Government obtains an estimate
of the extent to which public sector job losses (and where possible
private sector job losses) will have an impact on families with
children. Ministers and the Child Poverty Unit require this information
to assist in planning the employment-focussed elements of the
child poverty strategy due to be published in March 2011.
3.9 Increasing opportunities and incentives
to enter employment is a crucial part of government strategy to
end child poverty. However, our view is that the overall effect
of the welfare spending cuts will reduce work incentives and increase
marginal withdrawal rates for claimants entering work. This is
because cuts have been targeted at tax credit tapers, childcare
subsidy and universal benefits like child benefit and disability
living allowance. Implementation of the Universal Credit, under
which maximum withdrawal rates are likely to be capped, is expected
to take years. Meanwhile, it is wholly unacceptable that marginal
withdrawal rates should increase and childcare support should
decrease, resulting in reduced work incentives, especially given
the stated aim of the Government to reduce marginal withdrawal
rates and increase work incentives.
3.10 The Spending Review stated on page
29: "The Government's longer term strategy on child poverty
will be set out by the end of March 2011 and will take into account
the conclusions of the Frank Field review." While we
appreciate the child poverty strategy is still being formulated,
we had requested that the Government still provide substantial
information alongside the Spending Review on how progress will
made on child poverty during the period to 2015; and to confirm
that spending settlements for key departments will allow scope
for any spending decisions that are necessary as part of the strategy
when it is determined. As this information and confirmation was
not given we ask the committee to request that the Treasury will
confirm some flexibility will be given over the current settlements
in the formulation of the child poverty strategy, so that limitations
on available resources and where the resources are focussed do
not excessively restrict the formation of a robust and evidence-based
strategy.
4. ECONOMIC COSTS
AND RISK
4.1 The government's planned benefit cuts
will reach £18 billion annually by 2014-15. The cumulative
cuts over the period to March 2015 will be tens of billions.
4.2 Benefit and tax credit payments are
income transfers from the wealthiest households to the poorest
households. Economic research suggests that such income transfers
have a strong fiscal stimulus effect because low income
households have a high marginal consumption rate, spending income
immediately in their local economy. It has been estimated that
the economic multiplier associated with income transfers from
wealthy to low income households is around 1.6 and second only
to bringing forward labour-intensive infrastructure spends.[96]
4.3 Cuts to income transfers through benefits
and tax credits can create fiscal hindrance because of the reduction
of spending capacity for households with the highest marginal
consumption rates. The benefit and tax credit cuts represent a
fiscal hindrance programme of tens of billions of pounds
across the parliament, which poses a major risk to the strength
of economic recovery and future growth.
4.4 The Joseph Rowntree Foundation has estimated
the annual cost to GDP of UK child poverty to be £25 billion,
of which £17 billion is a cost to government. The Spending
Review failed to recognise the potential gains to the economy
and to the revenue and spending pressures on government of progress
in reducing child poverty. The Child Poverty Act requires the
Government to consider the affordability of its approach to child
poverty, but the Spending Review has not considered the affordability
implications of associated costs to the economy and Exchequer
of failure to make any progress reducing child poverty for at
least two years. While the Government confirmed that a child poverty
strategy will be published in March 2011, it must also confirm
that reducing child poverty is integral to its goals of deficit
reduction and a secure and sustainable economy.
November 2010
96 For further information see:
I. G Coenan et al "Effects of fiscal stimulus in structural
models" IMF Working Paper WP/10/73, March 2010. This study
concludes that "spending of hand-to-mouth households responds
strongly to transfers in all models"; and it can be conversely
inferred that transfers away from such households will have negative
responses.
II. I Jackson and G Pugh, "The regeneration effects of `fair
wages'", Staffordshire University, New Economics Foundation
and UNISON, 2005. This study looked at the regeneration implications
of increases in care workers wages. It also quotes other local
studies which suggest similar multiplier effects.
III. D Elmendorf and J Furman, "If, When and How: A Primer
for Fiscal Stimulus", The Brookings Institution, 2008. This
study also compares the multiplier effects of investing in tax
cuts, infrastructure spending and benefit increases and finds
benefit increases significantly more cost effective in increasing
demand. Back
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