'One more heave' will not be enough

The government’s recently published poverty numbers (available at www.dwp.gov.uk/asd/hbai.asp) showed that the number of children in poverty actually rose during 2005/6. This rise, together with the failure to meet the target of reducing child poverty by a quarter by 2004/5, means that we are now way off track to meet the government’s target of halving child poverty by 2010.

It is of course important not to read too much into one year’s data. First, the data is from a survey rather than a census, which means that there is inevitably some uncertainty concerning a particular year’s estimates. Second, the rise is the first for a decade and still leaves the number of children in poverty well below what it was when Labour first came into power. Third, the government remains committed to achieving substantial reductions in child poverty.

But even before the latest data, progress was not being achieved at the required rate. Once the 2005 target was missed, child poverty needed to fall faster than it had before — by between 200,000 and 300,000 a year — to achieve the 2010 target. This needed to start happening in 2005/6 but it hasn’t. And there is no sign that, with the current mix of policies, it will start happening now.

In reaction to this, some commentators have argued that the 2010 target can still be achieved if the government puts more money into its flagship policy, namely tax credits. They base this argument on the logic that, as more than half of the children in poverty live in households where at least one of the adults is working, if the incomes of these working adults are raised sufficiently this will have a substantial impact on poverty numbers. Whilst such a policy would no doubt help, particularly for couples (tax credits are currently much more generous for lone parents than for couples), the New Policy Institute has come to the conclusion that such a ‘one more heave’ strategy will not be sufficient.

In particular, this strategy has not worked thus far. Give or take a per cent, child poverty in 2005/6 was no different from what it was four years earlier, before the major reforms to the tax credit system were introduced in April 2003. There has now been plenty of time for this policy to impact on the poverty numbers but the net effect has been next to nothing.

One of the major reasons for this is that, according to our calculations, the number of children in working households who would be in poverty had the tax credits not come into place has actually been rising. In other words, the underlying dynamics of the labour market continue to undermine poverty reduction.

A second reason is that there are many children in poverty — up to a million — where, even though the parents are working, they are not, for one reason or another, in receipt of tax credits. In other words, there is a substantial problem with take-up and targeting.

If ‘one more heave’ on tax credits would be insufficient, then logically politicians should be looking at other policy developments that could also help. Here are three ideas.

The first idea is to do something about low pay, starting with the public sector. The main strategic criticism of the tax credits system is that it provides employers with an excuse, or even incentive, to continue with low pay and it is certainly the case that low pay remains prevalent in the UK: more than five million workers — around a fifth of the total — earned less than £6.50 per hour in 2006.

Relatively few of these workers are in sectors which are exposed to international competition, such as manufacturing or finance; most work in sectors which are essentially domestic markets — shops and restaurants, for instance.

Importantly, more than a fifth of these workers — around a million — are directly employed by the public sector. If these people were paid more, this would not only have a direct impact on the scale of in-work poverty but would also put upward pressure on wage rates in parts of the private sector, starting with low-paid contracted-out staff working in the catering, cleaning and caring professions.

Shouldn’t the public sector be setting an example on low pay rather than being one of the major low pay employers? Currently, the relevant employers, mainly local government and the NHS, are inhibited from addressing this because of the cost, but this cost would be substantially lessened if the consequent savings accruing to the Treasury, through reductions in tax credits and increased income tax, could also be taken into account.

So why can’t pay negotiations in the public sector consider the net costs to the public sector rather than just the gross costs of the pay rises?

The second idea is to do something about those taxes, particularly council tax, which currently start taking effect at very low levels of income. More than half of the children in poverty live in households which have to pay full council tax, largely because households start paying council tax as soon as one of the adults starts working even if they are low paid or not working many hours.

There is something very odd about a strategy which combines targets for child poverty reduction with a policy of taxing many of those who are in poverty. Why couldn’t the income threshold at which households start paying council tax be raised considerably?

The third idea is to raise child benefit substantially. This would directly benefit all children in poverty, whether their parents were working or not. As a universal benefit, it is easy to claim and has no take-up problems.

The reason it has not happened is because, as a universal benefit, families on average and above-average incomes would also benefit and thus substantial tax increases would be needed to fund it.

It would therefore require politicians (and the public) to rediscover the merits of universal benefits, whereby it is the net effect on households (increased tax less increased child benefit) which matters rather than the gross effect (increased tax only). And the scale of the tax increase could also be potentially ameliorated by making child benefit taxable.

To summarise, the government remains committed to its child poverty targets and appears to be supported in this by its political rivals but, after the latest rise in child poverty, everyone agrees that we are well off track to achieving these targets.

I have become very doubtful that simply putting more money into tax credits will be sufficient. Rather, politicians should be looking at other policy ideas that could also help. Low pay in the public sector, council tax thresholds and increases in child benefit are three such ideas.

Guy Palmer is Director, New Policy Institute.