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 FoundationTagged in: childcare, minimum wage, poverty, Resolution Foundation
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