A mountain to climb

The story of relative poverty in the UK over the last half century is one of dramatic change, as illustrated in Figure 1 above. After twenty years of broad stability, the 1980s radically shifted the landscape. In the late 1970s 6% of the population lived below half mean income. By 1991 this figure had more than tripled: one in five people were poor on this measure, well above the level in most other European countries.

Labour government efforts to fight poverty among particular groups since 1997 have had a visible impact on the shape of the graph, but have succeeded in reversing only part of the damage done to income distribution in the 1980s.

Changes in the poverty rate during the 1960s look small in hindsight, but were bound up with key policy struggles at the time. One important part of the story was the on-off functioning of incomes policies designed to control inflation.

Poverty fell during the pay freeze of 1966-67 but rose sharply between 1968 and 1972 when attempts to control wage growth through incomes policy fell into disarray. Similarly, poverty fell by nearly half between 1972 and 1977, under a policy of flat-rate cash increases introduced by the Conservatives. Flat-rate wage increases allow relative catch-up by those on lower wages, while wage controls can also benefit those on non-wage incomes, such as pensioners.

Until 1980, the basic state pension was increased each year with earnings or prices, whichever was higher. When prices increased faster than wages, the real income of pensioners rose more quickly than that of workers. Figure 1 shows that pensioner poverty fell particularly sharply during the early and mid-1970s.

Developments from the late 1970s onwards would soon dwarf these changes. What lay behind the shift? The upturn in poverty predated the rise to power of Margaret Thatcher in 1979, and the incoming government faced certain pressures beyond their control.

In 1976 the IMF had arrived in the UK, heralding the start of public sector spending cuts. At the same time, global and technological change meant falling demand for unskilled labour and growing premiums for qualifications, changes to which the UK was particularly vulnerable because of a relatively high share of low-skilled workers in the labour force — the price of years of low investment in education and training.

Demographic changes also presented challenges: the share of children living in a one-parent household rose from 7% in 1972 to 15% in 1992. But Conservative policies intended to stimulate growth by reducing public spending and changing work incentives undoubtedly greatly exacerbated these factors. Incomes policies were abandoned for good, and curbs were placed on the powers of the unions, leaving lower-skilled workers less protected from unemployment and falling relative wages.

Unemployment had been historically high in 1979 but soared in the 1980s to a record three million. At the same time, the indexation of state benefits and pensions to average earnings was removed, meaning the income of pensioners and the unemployed would fall steadily further behind the average wage. Changes to income tax and VAT also shifted the burden of taxation from those with high to those with low incomes.

As a result, the better-off one was at the start of the 1980s, the more one benefited from the rapid economic growth of that decade. Annual average income grew by 2.1% at the median between 1979 and 1990, but income for those in the top decile grew by an average 3.8%, compared to less than 0.5% for those at the bottom.

While the UK entered the 1980s with an income distribution similar to that in the Netherlands or Denmark, by the early 1990s the country had moved two-thirds of the way towards the income distribution of the most unequal industrialised country, the USA.

The composition of the poor had also changed. Children and the elderly had roughly the same chances of being poor in the 1970s as an adult of working age. But by 1990 both groups were much more likely to be poor than working-age adults: 27% of children and 33% of pensioners were estimated to live in poverty, compared to a 21% poverty rate overall.

In 1990 John Major became prime minister. The period between 1990 and 1997 saw not only stabilisation but falls in the level of poverty for most groups. Looking at Figure 1, 1992 at first looks a more obvious turning point for poverty than the arrival of Labour in power in 1997. Policy did make concessions to the poorest under Major, with the abolition of the Poll Tax and tax rises after 1992 which hit those on higher incomes harder.

But much of the overall effect can be attributed to the impact of the early 1990s recession. With levels of benefits and pensions no longer linked to earnings, times of economic growth tend to be times of rising relative poverty.

While some of the unemployed will move into work as the economic climate changes, those who remain on fixed incomes see their position deteriorate. Similarly, recession will often see relative poverty fall, as median income stagnates.

The recessions of both the early 1980s and the early 1990s are clearly visible on Figure 1. The Major era was one of relatively low growth for all; those at the bottom saw income rise a little faster than average (an annual average of 1.5% for the bottom quintile compared to 0.9% at the median).

Since 1997 poverty has continued to fall, despite steady economic growth for most of the period. Labour has targeted households with children and pensioners, and poverty rates for both groups have come down substantially.

Measures to encourage parents into work, accompanied by tax credits designed to make work pay, have lifted nearly three-quarters of a million children out of poverty on the measure used in Figure 1. Poverty rates remain higher for children than for the general population, but the gap is narrowing. Pension Credit has ensured that pensioners are now less likely to be poor than non-pensioners for the first time since the early 1980s.

On the other hand, not everyone has benefited from Labour policy. Working-age adults without children have seen real incomes steadily deteriorate and poverty rise as adult rates of income support have kept pace only with prices.

Furthermore, for all groups, there remains a depressingly long way to go to get down from the mountain in Figure 1. One of the challenges is that the link between benefits, pensions and earnings has never been restored, meaning that each year the system needs to run in order to stand still.

And earnings-linking would of course be only a start, as levels of benefits have fallen so far below their relative 1970s level. While Labour has succeeded in redistributing more towards its target groups than many people may have hoped or expected in 1997, the scale of resources needed to move the UK back to the levels of poverty witnessed in the 1970s far exceeds what has been found so far.

In addition, there are arguments that what happened during the 1980s had a long-term impact which income redistribution alone cannot undo. It is well-established that growing up in poverty has a scarring effect, limiting children’s opportunities and outcomes for the rest of their lives.

It is not clear quite why this is the case, but the impact of poverty on children’s educational achievement stands out as the most likely transmission mechanism. Cuts in education funding during the 1980s may have added to the difficulties facing poor children. Many of the children who grew up under Thatcher are now parents themselves, often poorly qualified and not well placed to find skilled, well-paid employment.

Labour has recognised the importance of addressing the long-term causes of poverty, with significant additional investment in education from age three upwards, and some attempts to improve play and learning opportunities for children from birth onwards. But it is not obvious that these efforts have been sufficient to address the scale of the problem, given that large numbers of today’s schoolchildren remain poor and need investment that will compensate for their disadvantage.

For both income redistribution and investment for the future, more resources are needed over the coming decade — and this against the almost certain background of tighter public finances.

Whether the fall in poverty from the early 1990s observed in Figure 1 turns out to be the beginning of a steady downward slope or just a shallow valley depends heavily on the priorities — and imagination — of the next government.

Kitty Stewart is a Research Fellow, ESRC Research Centre for Analysis of Social Exclusion (CASE), London School of Economics.