© Institute for Fiscal Studies Child poverty, tax and benefit policy and the labour market since Robert Joyce

© Institute for Fiscal Studies Overview  Background  Child poverty trends  Explaining the trends  The effects of tax and benefit reforms  Subgroup analysis  Conclusions

© Institute for Fiscal Studies Policy background  In 1999 the Labour Government announced: Target to ‘eradicate’ child poverty by Interim targets for (75% of level) and (50% of level).  Child Poverty Act (2010) commits current and future governments to 2020 target.

Relative poverty, UK (BHC) Absolute poverty, UK (BHC) Material deprivation and relative low income %Million% % 1998– – – – – – – – – – –09 Change since 1998–99 Change since 2004–05 IFS projection for Target for 2010–11n/a1.7n/a 1.3 © Institute for Fiscal Studies Child poverty since Sources: Calculations based on Family Resources Survey, various years; Department for Work and Pensions (2010). UK poverty levels for the years 1998/99 through 2001/02 draw on the DWP’s imputed estimates of poverty levels in Northern Ireland over this period.

Relative poverty, UK (BHC) Absolute poverty, UK (BHC) Material deprivation and relative low income %Million% % 1998– – – – – – – – – – – Change since 1998–99 Change since 2004–05 IFS projection for Target for 2010–11n/a1.7n/a 1.3 © Institute for Fiscal Studies Child poverty since Sources: Calculations based on Family Resources Survey, various years; Department for Work and Pensions (2010). UK poverty levels for the years 1998/99 through 2001/02 draw on the DWP’s imputed estimates of poverty levels in Northern Ireland over this period.

Relative poverty, UK (BHC) Absolute poverty, UK (BHC) Material deprivation and relative low income %Million% % 1998– – – – – – – – – – – Change since 1998–99–4.2–0.6–13.6–1.8–3.7–0.4 Change since 2004– IFS projection for Target for 2010–11n/a1.7n/a 1.3 © Institute for Fiscal Studies Child poverty since Sources: Calculations based on Family Resources Survey, various years; Department for Work and Pensions (2010). UK poverty levels for the years 1998/99 through 2001/02 draw on the DWP’s imputed estimates of poverty levels in Northern Ireland over this period.

Relative poverty, UK (BHC) Absolute poverty, UK (BHC) Material deprivation and relative low income %Million% % 1998– – – – – – – – – – – Change since 1998–99–4.2–0.6–13.6–1.8–3.7–0.4 Change since 2004– IFS projection for Target for 2010–11n/a1.7n/a 1.3 © Institute for Fiscal Studies Child poverty since Sources: Calculations based on Family Resources Survey, various years; Department for Work and Pensions (2010). UK poverty levels for the years 1998/99 through 2001/02 draw on the DWP’s imputed estimates of poverty levels in Northern Ireland over this period.

© Institute for Fiscal Studies Would the reduction in child poverty have been as big using other poverty lines?  Cheapest way of reducing a binary poverty measure is to slightly raise incomes of those just below poverty line.  In practice, difficult to target resources that precisely.  Have policy-makers been focusing efforts on a narrow set of children?...

© Institute for Fiscal Studies Child poverty under various poverty lines in 1998–99 and 2008–09 (Great Britain) Source: Family Resources Survey and

© Institute for Fiscal Studies  Cheapest way of reducing a binary poverty measure is to slightly raise incomes of those just below poverty line.  In practice, difficult to target resources that precisely.  Have policy-makers been focusing efforts on a narrow set of children?... Do not see striking evidence of this. Child poverty would have fallen using any poverty line from 43% to 100% of the median. Would the reduction in child poverty have been as big using other poverty lines?

© Institute for Fiscal Studies 1.Will investigate (direct) impact of tax and benefit reforms over period. 2.Will look at which groups have driven trends, and suggest possible reasons for this with help of labour market data (Labour Force Survey).  Note that the tax and benefit system and labour market trends are likely to interact. Explaining the trends

© Institute for Fiscal Studies % growth in nominal entitlements to state support for example families with children Source: Calculations using the IFS tax and benefit micro-simulation model, TAXBEN. Notes: The table shows annual changes in maximum entitlements to benefits assuming no private income (except the working lone parent, who is assumed to earn an amount that is below the personal income tax allowance and the primary threshold for National Insurance contributions) ignoring housing benefit and council tax benefit and the value of free school meals. Shaded cells mark instances where entitlements grew faster than the BHC poverty line. Couple, 3 children, no work Lone parent, 1 child, no work Lone parent, 1 child, part time work Growth in poverty line (BHC) Change in BHC child poverty rate (ppts) 1998– – – – – – – – – – –09

© Institute for Fiscal Studies % growth in nominal entitlements to state support for example families with children Source: Calculations using the IFS tax and benefit micro-simulation model, TAXBEN. Notes: The table shows annual changes in maximum entitlements to benefits assuming no private income (except the working lone parent, who is assumed to earn an amount that is below the personal income tax allowance and the primary threshold for National Insurance contributions) ignoring housing benefit and council tax benefit and the value of free school meals. Shaded cells mark instances where entitlements grew faster than the BHC poverty line. Couple, 3 children, no work Lone parent, 1 child, no work Lone parent, 1 child, part time work Growth in poverty line (BHC) Change in BHC child poverty rate (ppts) 1998–992.4–3.8– – – – – – – – – – –

© Institute for Fiscal Studies % growth in nominal entitlements to state support for example families with children Source: Calculations using the IFS tax and benefit micro-simulation model, TAXBEN. Notes: The table shows annual changes in maximum entitlements to benefits assuming no private income (except the working lone parent, who is assumed to earn an amount that is below the personal income tax allowance and the primary threshold for National Insurance contributions) ignoring housing benefit and council tax benefit and the value of free school meals. Shaded cells mark instances where entitlements grew faster than the BHC poverty line. Couple, 3 children, no work Lone parent, 1 child, no work Lone parent, 1 child, part time work Growth in poverty line (BHC) Change in BHC child poverty rate (ppts) 1998–992.4–3.8– – – – – – – – – – –

© Institute for Fiscal Studies % growth in nominal entitlements to state support for example families with children Source: Calculations using the IFS tax and benefit micro-simulation model, TAXBEN. Notes: The table shows annual changes in maximum entitlements to benefits assuming no private income (except the working lone parent, who is assumed to earn an amount that is below the personal income tax allowance and the primary threshold for National Insurance contributions) ignoring housing benefit and council tax benefit and the value of free school meals. Shaded cells mark instances where entitlements grew faster than the BHC poverty line. Couple, 3 children, no work Lone parent, 1 child, no work Lone parent, 1 child, part time work Growth in poverty line (BHC) Change in BHC child poverty rate (ppts) 1998–992.4–3.8– – – – – – – – – – –

© Institute for Fiscal Studies The (direct) impact on child poverty of direct tax and benefit reforms since  We simulate child poverty in under various direct tax and benefit systems: 1.The actual system (‘baseline’ projection). 2. The system as it would be if left unreformed since a particular year (‘counterfactual’ projections).  Comparing results from 1 and 2 gives estimate of direct impact (in ) of all reforms since that year.  We do this for each year since  Does not account for behavioural responses.

© Institute for Fiscal Studies What if...? ...the direct tax and benefit system had not been reformed since ?  First have to define ‘no reform’. Definition will affect result!  A few reasonable possibilities. We use two: default uprating - parameters of direct tax and benefit system uprated in way that was default in GDP uprating – all such parameters indexed to nominal GDP.

© Institute for Fiscal Studies Child poverty in UK in under various direct tax and benefit systems Source: authors’ calculations using Family Resources Survey and , TAXBEN, and updates of the assumptions set out in Brewer, Browne, Joyce and Sutherland (2009). Direct tax and benefit system in 2010– 11 Simulated child poverty in 2010–11 (BHC) 1998–99 default upratingGDP uprating %Million% Actual 2010–11 system Memo: actual level

© Institute for Fiscal Studies Child poverty in UK in under various direct tax and benefit systems Source: authors’ calculations using Family Resources Survey and , TAXBEN, and updates of the assumptions set out in Brewer, Browne, Joyce and Sutherland (2009). Direct tax and benefit system in 2010– 11 Simulated child poverty in 2010–11 (BHC) 1998–99 default upratingGDP uprating %Million% 1998–99 uprated Actual 2010–11 system Memo: actual level

© Institute for Fiscal Studies Child poverty in UK in under various direct tax and benefit systems Source: authors’ calculations using Family Resources Survey and , TAXBEN, and updates of the assumptions set out in Brewer, Browne, Joyce and Sutherland (2009). Direct tax and benefit system in 2010– 11 Simulated child poverty in 2010–11 (BHC) 1998–99 default upratingGDP uprating %Million% 1998–99 uprated –05 uprated Actual 2010–11 system Memo: actual level

© Institute for Fiscal Studies Child poverty in UK in under various direct tax and benefit systems Source: authors’ calculations using Family Resources Survey and , TAXBEN, and updates of the assumptions set out in Brewer, Browne, Joyce and Sutherland (2009). Direct tax and benefit system in 2010– 11 Simulated child poverty in 2010–11 (BHC) 1998–99 default upratingGDP uprating %Million% 1998–99 uprated –05 uprated –08 uprated Actual 2010–11 system Memo: actual level

© Institute for Fiscal Studies Financial work incentives and tax and benefit reforms since  Since reforms have tended to: Strengthen incentive for lone parents to be in work (Working Families Tax Credit introduced in Oct 1999). Weaken incentive for potential second earners in couples to be in work (tax credits means-tested and assessed at family level). Weaken incentives for working parents to increase their earnings, and more so for couples (introduction of child tax credits and working tax credits in ).  Reforms since have had negligible effects on financial work incentives for parents.

© Institute for Fiscal Studies Direct tax and benefit reforms since  Direct impact of reforms was to reduce child poverty a lot.  This is mostly, or entirely, due to reforms before and after  Period in which tax and benefit reforms did little (or nothing) to reduce child poverty coincides perfectly with period in which it rose.  Suggests very strong link between those reforms and child poverty over time.

© Institute for Fiscal Studies  Fall in child poverty between and aided by falling poverty risk for both lone parents and couples.  Rise after due to rising poverty risk for children of couples.  Acted to increase child poverty by 1.4 ppts (approx. 2between and  Particularly due to one-worker couples, whose earnings seem to have tailed off... Child poverty by family type and work status (Great Britain)

© Institute for Fiscal Studies Median real earnings amongst parents in couples, to (workers only) Source: Labour Force Survey Notes: Years are financial years. Figures are 3-year moving averages for the whole of the UK

© Institute for Fiscal Studies  Fall in child poverty between and aided by falling poverty risk for both lone parents and couples.  Rise after due to rising poverty risk for children of couples.  Acted to increase child poverty by 1.4 ppts (approx. 200,000) between and  Particularly due to one-worker couples, whose earnings seem to have tailed off...  Higher lone parent employment also important ( : 46%; : 56%).  Acted to reduce child poverty by 0.7 ppts (approx. 100,000) Child poverty by family type and work status (Great Britain)

© Institute for Fiscal Studies  Families with 3 or more children explain most (approx. 85%) of reduction in child poverty since  Two reasons:  Poverty risk for such children fell from 40% in to 32% in (was 30% in ).  Such children (i.e. large families) became less common – reduces poverty because they have relatively high poverty risk. Child poverty by number of children in family (Great Britain)

© Institute for Fiscal Studies  Fall in child poverty since driven by families with younger children.  Poverty rate for children in such families has to large extent converged with that for families with older children (used to be much higher).  We show that tax and benefit reforms over the period have driven this convergence. Child poverty by age of youngest child in family (Great Britain)

© Institute for Fiscal Studies  Reduced poverty risks in North West, North East, Yorkshire, Scotland explain majority of total reduction in child poverty between and Parental employment rates increased a lot in those regions over that period.  Increased poverty risk in West Midlands acted to increase child poverty by 0.7 ppts (approx. 100,000) since Only region to experience rise overall since – up by 7 percentage points (sensitive to particular base year). Likely reason: only region where employment rate amongst parents lower in than (big fall in ). Child poverty by region (Great Britain)

© Institute for Fiscal Studies Conclusions  Child poverty has fallen a lot since  But progress towards targets stalled after  Very strong evidence that tax and benefit system has been major driver of trends since  Unsurprising, given measure of poverty and scale of ambition.  Labour market trends for parents important as well.