IFS Child poverty: why did it fall? And why didnt it fall far enough? Mike Brewer Institute for Fiscal Studies 13 th March 2006

© Institute for Fiscal Studies, 2006 Headlines Child poverty fell by 700,000 since 1998/99 BHC and AHC –Represents fall of 21.3% BHC and 17.2% AHC: target was for fall of 25% Key drivers: –fewer children in workless families –reduced risk of poverty for lone parents working part-time –reduced risk of poverty for single-earner couples Several studies thought 50:50 chance of hitting 2004 target AHC. Why were these wrong? 2010 target very challenging –child poverty must fall by half as much again over next 6 years

© Institute for Fiscal Studies, 2006 Child poverty: 1998/99 – 2004/05 Decline: 21.3% BHC, 17.2% AHC

© Institute for Fiscal Studies, 2006 Child poverty AHC at lowest for 15 years (17 years BHC)

© Institute for Fiscal Studies, 2006 Why did child poverty fall? Use a simple decomposition to distinguish between: –Compositional changes –Incidence changes –Population changes Define 9 family types on basis of how many adults and their work patterns

© Institute for Fiscal Studies, 2006 Compositional changes in lone parent families, 1998/99 – 2004/05

© Institute for Fiscal Studies, 2006 Changes in risk of AHC poverty in lone parent families, 1998/99 – 2004/05

© Institute for Fiscal Studies, 2006 Compositional changes in couple families with children, 1998/99 – 2004/05

© Institute for Fiscal Studies, 2006 Changes in risk of AHC poverty in couple families, 1998/99 – 2004/05

© Institute for Fiscal Studies, 2006 Put it all together...

© Institute for Fiscal Studies, 2006 So why did child poverty fall? Fewer children in workless families facing a reduced risk of poverty Reduced risk of poverty for children in part- time lone parent families, and in single-earner couple families Similar for poverty BHC

© Institute for Fiscal Studies, 2006 Why didnt poverty fall far enough? Studies thought 50:50 chance of meeting target AHC (and better chance BHC) –Forecast poverty from 2001/2 to 2004/5, given tax credits and benefit rates, and economic & demographic forecasts Over-stated fall in poverty: –No single obvious cause (eg median income, work patterns, tax credit take-up) –Uncertainty: 6% of children within 5% of poverty line (AHC) –Probably not due to factors highlighted by IFS last year –FRS capturing declining proportion of income from tax credits.

© Institute for Fiscal Studies, 2006 Comparing FRS with HMRCs data on tax credits

© Institute for Fiscal Studies, 2006 What prospects for 2010? Child poverty in 2010/11 to be half its 1998/99 level. Three measures, but relative measure likely to be most challenging Incomes measured BHC using different equivalence scale. This: –Increases level of child poverty –Reduces decline in child poverty since 1998/99 On new measure, child poverty fell by 600,000 since 1998/99, and has to fall by 1 million more by 2010/11

© Institute for Fiscal Studies, 2006 What factors will affect child poverty in 2010? On-going JRF-funded project examining prospects in 2010 and 2020 –Socio-economic and demographic changes –Tax and benefit policies implicit in Governments public finance forecasts –Tax and benefit reform options: –Changes in work patterns –Increase in parents (mothers ?) earnings On current policies, child poverty set to rise

© Institute for Fiscal Studies, 2006 Prospects for 2010

© Institute for Fiscal Studies, 2006 Conclusions Child poverty fell by 700,000 since 1998/99 BHC and AHC –Represents fall of 21.3% BHC and 17.2% AHC: target was for fall of 25% Key drivers: –fewer children in workless families –reduced risk of poverty for lone parents working part-time –reduced risk of poverty for single-earner couples Too early to say why forecasts of child poverty were wrong, but some worries about the way FRS records tax credit receipt 2010 target very challenging, and less than four years to find the money