The Government strongly believes looking at relative income in isolation is not a helpful measure to track progress towards our target of eradicating child poverty.
In times of economic growth, the relative poverty line tends to rise. While the economy grew from 2003-04 to 2008-09, the Government spent over £300 billion in working-age welfare and tax credits, yet the proportion of the population in relative income poverty remained broadly flat and the previous government's target to halve the number of children in relative poverty by 2010-11 was not met.
In times of recession the relative poverty line tends to fall. In 2010-11, 300,000 children moved out of relative poverty largely due to reductions in median incomes. Absolute poverty remained unchanged. It cannot be right that we can move children out of poverty through a recession.
The Government is currently consulting on better measures of child poverty that will better reflect the reality of child poverty in the UK today.
In the autumn statement (2012), it was announced that in light of the national economic situation, certain working-age social security benefits and payments, certain elements of tax credits, and child benefit, would be uprated by 1% rather than by prices (as measured by the consumer prices index ('CPI')) for the tax years 2013-14, 2014-15 and 2015-16.
While it is not possible to accurately project the trajectory of household earnings, it is likely that in-work families with children will benefit from the steady earnings growth forecast by the Office for Budget Responsibility(1). Indeed for some families this increase in earnings may be enough that their income rises in real terms (i.e. after inflation is taken into account) even after the smaller increase in benefits.
Where subject to an uprating, rates of benefits and tax credits will rise in cash terms. For instance, an out-of-work lone parent with two children receiving income support, child tax credit and child benefit would see a cash increase of around £4 a week over the two years covered by the Welfare Benefits Up-rating Bill. However, because the relative poverty income line moves each year in cash terms, too, some families will move below this line over the period.
We estimate that the uprating measures in 2013-14, 2014-15 and 2015-16 will result in around an extra 200,000 children being deemed by this measure to be in relative income poverty compared to uprating benefits by CPI. As earnings growth and inflation projections change these estimates will change. In addition, these impacts are not forecasts of the level of child poverty and do not indicate what will happen to trends over time. It is misleading to look at the impacts of uprating in isolation. The Government is investing in tacking the root causes of child poverty through making work pay.
Work is the best route out of poverty. Universal credit will reduce poverty by making work pay and providing an effective route out of poverty.
Universal credit will improve work incentives by allowing individuals to keep more of their income as they move into work, and by introducing a smoother and more transparent reduction of benefits when they increase their earnings. Improving work incentives will reduce the number of families where no one in the household goes out to work, and in the long-run will end cycles of poverty and worklessness:
We estimate that up to 300,000 more people will enter work as a result of the introduction of universal credit through improved financial incentives alone. The increase in employment driven by improved incentives under UC is expected to reduce poverty and make an important contribution to reducing child poverty. At least half of expected extra people in employment are parents, and around half of these parents are expected to move into jobs of over 16 hours per week.
We estimate between one and 2.5 million extra hours will be worked by those currently in work once universal credit is fully implemented. The vast majority of these extra hours will be worked by parents.
Universal credit will also re-focus entitlements on lower income in-work households and should increase take-up of universal credit compared to the current complex system of benefits and tax credits.
Around 3.1 million households will have higher benefit receipt under universal credit as a result of changes in entitlement and take-up—focusing on the lower income groups: 75% of the gainers are in the bottom 40% of the income distribution. The average impact of universal credit across all households is an increase of £16 per month.
The introduction of universal credit will significantly improve the take-up of unclaimed entitlements, a powerful tool in tackling poverty. It will be easier for people to understand the level of benefit to which they are entitled compared to the current complex system of benefits and tax credits. In addition, there will be an 'automatic passporting' effect for people who currently claim some, but not all, of the benefits or tax credits to which they are entitled; a claim for universal credit will much more readily ensure that claimants receive amounts associated with their children and their housing costs.
Before taking account of the expected increase in numbers of people in work as a result of universal credit, and excluding the impact of the minimum income floor for the self-employed, the introduction of universal credit is estimated to reduce the number of individuals in relative income poverty by some 600,000; including around 250,000 children and around 350,000 adults.
In the specific case of universal credit, the estimated number has shifted compared to previous estimates for a number of reasons. Critical is the shift in the “poverty line” itself. If the poverty line used in the October 2011 impact assessment were applied to the new analysis the number apparently shifted above the line as a result of universal credit would be some 200,000 higher. The simplification of rates for under-25s also reduces the impact by around 100,000.
The positive and dynamic behavioural effects of universal credit are important elements in a consideration of the poverty effects. The minimum income floor for the self-employed is expected to encourage those reporting very low self-employed income to increase their earnings to levels expected of employees in similar circumstances. However, before taking account of any expected behavioural change among the self-employed affected, modelling estimates that universal credit reduces the number of individuals in relative income poverty by some 400,000; including more than 150,000 children and around 250,000 adults. Again, these estimates do not take account of the expected increase in numbers of people in work as a result of universal credit and the consequent impact on poverty.
Estimates of poverty effects are dependent on projected changes in demography from the Office for National Statistics, and the economy from the Office for Budget Responsibility, including earnings growth and inflation rates. As these projections change, the estimated numbers below various income thresholds will also change.
The estimates of poverty impacts of universal credit are based on a comparison of universal credit fully in operation with the benefit and tax credit system projected forwards to 2014-15. This is not comparable with the estimates of poverty effects of uprating changes where the impact is assessed in 2015-16 assuming the current benefit and tax credit system is still in place, i.e. it does not take into account universal credit or personal independence payment. Full details of the methodology for estimating the impact of universal credit and uprating can be found in the published impact assessments(2).