IFS Recent trends in poverty Luke Sibieta Institute for Fiscal Studies 28 th March 2006

© Institute for Fiscal Studies, 2007 Whats coming up? Poverty fell during Labours first two terms –Most for pensioners and children –Longest sustained fall in poverty of recent times Relative poverty rose in 2005/06 –For all groups except pensioners –New high amongst working-age non-parents Absolute poverty also rose Low growth in benefit and tax credit rates

© Institute for Fiscal Studies, 2007 Defining Poverty for HBAI GB up to 2001/02, UK from 2002/03 –Focus on rates rather than numbers Relative notion of poverty –Proportion of individuals in households below 60% of the contemporary BHC and AHC median Income-based Sensitive to choice of threshold Snapshot: no account of length

© Institute for Fiscal Studies, 2007 Poverty fell in Labours first two terms

© Institute for Fiscal Studies, 2007 Poverty rose in 2005/06

© Institute for Fiscal Studies, 2007 Across all thresholds? 70% of AHC Median 60% of AHC Median 50% of AHC Median 40% of AHC Median Rate

© Institute for Fiscal Studies, 2007 Across all thresholds? 70% of AHC Median 60% of AHC Median 50% of AHC Median 40% of AHC Median Rate Labour 1 Change (-0.3)

© Institute for Fiscal Studies, 2007 Across all thresholds? 70% of AHC Median 60% of AHC Median 50% of AHC Median 40% of AHC Median Rate Labour 1 Change (-0.3) Labour 2 Change (-0.2)

© Institute for Fiscal Studies, 2007 Across all thresholds? 70% of AHC Median 60% of AHC Median 50% of AHC Median 40% of AHC Median Rate Labour 1 Change (-0.3) Labour 2 Change (-0.2) Change in 2005/ (+0.4)

© Institute for Fiscal Studies, 2007 Across all thresholds? 70% of AHC Median 60% of AHC Median 50% of AHC Median 40% of AHC Median Rate Labour 1 Change (-0.3) Labour 2 Change (-0.2) Change in 2005/ (+0.4) Rate

© Institute for Fiscal Studies, 2007 Across all thresholds? 70% of AHC Median 60% of AHC Median 50% of AHC Median 40% of AHC Median Rate Labour 1 Change (-0.3) Labour 2 Change (-0.2) Change in 2005/ (+0.4) Rate Labour to date (-0.1)

© Institute for Fiscal Studies, 2007 What about children? 2004/05 Target –Cut number of children in poverty by ¼ compared with 1998/99 –Narrowly missed –Used slightly different measure of child poverty 2010 Target –Cut child poverty by ½ compared with 1998/ Target –Eradicate child poverty

© Institute for Fiscal Studies, 2007 Further adrift from 2004/05 target

© Institute for Fiscal Studies, 2007 Further adrift from 2004/05 target

© Institute for Fiscal Studies, target looks very challenging

© Institute for Fiscal Studies, 2007 How much might 2010 target cost? Child poverty needs to fall by 1.1 million more to meet target Before Budget we estimated they were 1 million short in 2010/11 under current policies Measures announced in Budget estimated to lift a further 200,000 out of poverty –Still 800,000 left Our estimates suggest that to have a 50/50 chance of doing will require £4 billion of new public expenditure

© Institute for Fiscal Studies, 2007 For whom has child poverty risen? Focus on number of children in poverty (BHC) Look at 100,000 rise in 2005/06 Can decompose the rise in child poverty into: –A changing risk for specific family types –The changing composition of families with children

© Institute for Fiscal Studies, 2007 Decomposing the 100,000 rise in child poverty

© Institute for Fiscal Studies, 2007 For whom has child poverty risen? Focus on number of children in poverty (BHC) Can decompose the rise in child poverty into: –A changing risk for specific family types –The changing composition of families with children Increased incidence of poverty amongst couples with children Lower incidence of poverty amongst lone parents offset this Few compositional effects

© Institute for Fiscal Studies, 2007 What about severe child poverty? 40% of AHC Median 40% of BHC Median %4.9%

© Institute for Fiscal Studies, 2007 What about severe child poverty? 40% of AHC Median 40% of BHC Median %4.9% %5.3%

© Institute for Fiscal Studies, 2007 What about severe child poverty? 40% of AHC Median 40% of BHC Median %4.9% %5.3% %5.5%

© Institute for Fiscal Studies, 2007 Pensioner poverty continues to fall

© Institute for Fiscal Studies, 2007 Working-age non-parents

© Institute for Fiscal Studies, 2007 Absolute poverty Does relative poverty matter if absolute incomes are rising in real terms? Lets look at a measure of absolute poverty Absolute notion of poverty –Proportion of individuals in households below 60% of the 1996/97 BHC and AHC median

© Institute for Fiscal Studies, 2007 Absolute poverty falls up to 2004/05

© Institute for Fiscal Studies, 2007 Rises in 2005/06, but not by much

© Institute for Fiscal Studies, 2007 Why have we seen these patterns? Low or negative income growth in lower part of income distribution Sampling error? –Rise in absolute (AHC) and relative poverty (BHC or AHC) are statistically significant Slow growth in earnings and self-employment income? Low growth in benefit and tax credit rates?

© Institute for Fiscal Studies, 2007 Benefit and Tax Credits in 2005/06 Child element of child tax credit uprated with earnings, BUT… Family element frozen in nominal terms Working Tax Credit and Child Benefit only went up with RPI Very small changes in other benefit rates

© Institute for Fiscal Studies, 2007 Summing up Relative and absolute poverty rise Ends longest fall in poverty of recent times Still much lower then its level Poverty amongst working-age non-parents at increased by the most Need to find new money to achieve 2010 target –Difficult in a tight CSR