Austerity is set to make poverty worse

David Finch

poverty Austerity is set to make poverty worse

Today’s annual poverty update from the DWP is, on the face of it, fairly encouraging.

Despite the poor state of the economy in 2012-13 – the period the latest figures relate to – child poverty edged down slightly, to 17 per cent from 18 per cent in 2011-12. Having fallen quite sharply at the start of the downturn, between 2007 and 2010, relative child poverty is now at its lowest level since the 1980s.

In truth though, the movements are not large enough to be considered statistically significant and the expectation is that things will get worse in the coming years as austerity bites.

Over recent years the challenge posed by child poverty has remained pressing and has increasingly taken the form of poverty among working families. The question today being whether the large upswing in the trend seen in the last two releases, an increase from 55 per cent to 65 per cent of children in poverty being in working households between 2009-10 and 2011-12, has continued?

In fact there was a small reduction down to 63 per cent in 2012-13, but, again this change is so small as to be statistically insignificant, so we cannot say that the proportion this year is any different to the proportion last year. The level is still high in relation to the historic trend so that solving in-work poverty is key to reducing child poverty.

The large improvements in child poverty in the last decade were driven by increased generosity through tax credits targeted at children, and a fall in workless households. But now two-thirds of children in poverty are from households where at least one parent is in work, compared to only two-fifths in 1996.

Over the longer term increases in working age benefits are being capped at 1 per cent and earnings growth has been weak – lower than CPI inflation in almost every month for the past 6 years. The IFS has estimated that by 2020 child poverty will increase back to levels seen at the turn of the century, largely driven by the decision to switch to CPI uprating of benefits (which in the long run will mean that benefit income is expected to grow more slowly than earnings and low income families, dependent on benefits will fall behind).

Not only does the challenge of poverty remain, the nature of the challenge is changing. In the current climate of austerity, and future welfare cuts already planned, low income families cannot rely on improvements to income from that source to lift them out of poverty. Poverty has also become a particular issue for couples where only one parent is in full-time work.

It is not enough to simply get people into work, impressive though the UK’s recent employment performance has been. People need to be able to progress in work too, increasing both the hours that they work and the earnings that they are paid. The performance of earnings has been remarkably poor. Universal Credit and the minimum wage are important tools available to government to help deal with this issue.

The government agrees and set out in its Child Poverty Strategy for 2014-17 that getting people to be paid more is as important as getting them working. However, their most concrete recommendations are about enforcing payment of the current National Minimum Wage. It is unclear how many of these workers are in families with children, but as the Resolution Foundation’s review into the minimum wage showed, the current structures do not do enough to encourage progression and aim for a higher real wage level.

Universal Credit is, slowly, being introduced to improve work incentives and help people to enter and progress in work. But bogged down in IT and delivery issues it is not clear whether the policy itself will do the job it is intended to do.

If encouraging couples with single earners are at risk of poverty then how can we mitigate this? With the option of boosting incomes through benefits seemingly off the table, another option would be to encourage dual earning families. But with that in mind the absence of a second earner disregard in Universal Credit appears anomalous and while income tax is not paid on the first £10,000 of earnings for those on Universal Credit 65 per cent of this could be withdrawn back in benefits through the taper.

Getting childcare support right is essential so that parents can work. Increasing the proportion of childcare costs covered in Universal Credit to 85 per cent has improved incentives, though in the longer term it remains to be seen whether the balance of demand and supply side funding will deliver the affordable and high quality childcare needed.

In-work conditionality will also be an important new tool but it is still not clear how this will operate and could become punitive while not supporting true progression. The introduction of Universal Credit provides an opportunity to develop support for individuals to progress to better earnings over their lifetime.

That is why Resolution Foundation has brought together an expert panel to investigate whether Universal Credit can achieve its aims in an environment that has seen a series of cuts to the welfare budget, unaligned tax policy and policy that is still not fully formed in relation to passported benefits and supporting pay progression.

David Finch is Senior Economic Analyst at the Resolution Foundation

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  • peatstack

    Have you ever been on a trading floor? A foreign exchange desk, for example, bundles up all the little transactions going on throughout the bank in to big ones and deals them with other banks, and as well locking in exchange rates so that the interest bearing accounts can count on their rates no matter of exchange rate moves. The vast majority of the work is bread and butter – just like building. There are more cowboy builders in this country than rogue bankers. But you don’t get on about them because you imagine hollywood stereotypes. I don’t agree that they should have been bailed out; banks are nothing holy, but they are as instrumental in a modern economy as builders. Everyone deserves to have meaningful employment, (and no, i don’t approve of betting shops on the high street – they thieve money from the poorest).

  • Pacificweather

    And so we all engage in the economy, subsidy by subsidy, a pound or a trillion pounds, meaningful employment by meaningful employment, Paddy Power, Libor power, dark pool power or hedge fund power.

  • peatstack

    Honestly i’m a libertarian because it is buddhist; but compassion also includes NHS to lessen suffering and a welfare net to catch those who have fallen off. I don’t endorse any of what you’re on about. Cybercurrencies will seriously undermine the global financial system; much more than welfare numpties and talk. The existing financial system, given such a fierce competitor will have to seriously reform – nothing that you’ve put forward would change a thing. So you’re all blame and no action. You want reform? For all its foibles, the current system feeds the planet and has more persons at a better standard of living than ever before in history. You can do better? WEll, then stop being a victim; make an educational youtube vid about your progressive vision of the future and how to get there. This whining underclass victim thing gets you nowhere; you have no honest suggestions that are implementable, just whining. It must be terrible to feel so powerless; but you chose it in a free world, you chose to be a victim and talk like one. The state incubates victims, people who blame rather than working hard in an unfair world like every one of our forefather’s has done. Yea, dark pools have existed since time began, so what.

  • Pacificweather

    I am as guilty as you. I made money from selling electronics to high speed traders at 3 times the price to the average punter. I am merely pointing out that both ends of the spectrum are subsidised. Living wages and transaction taxes would help society get its money back.

  • Sue Jones

    No, it isn’t simply about relative deprivation any longer. We are seeing absolute poverty again – when people cannot meet their basic needs such as food and fuel. That was almost eradicated with the welfare state. Until now

  • Sue Jones

    No. Poverty is defined now by a person not being able to meet basic needs, such as food and fuel.

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