UK: How To Halve Child Poverty By 2010: Options For Redirecting Resources To Reduce Child Poverty

Last Updated: 25 November 2008
Article by Deloitte Government & Public Sector Group

Most Read Contributor in UK, August 2017

How can the Government meet its 2010 target to halve child poverty? This report seeks to set out an aff ordable and realistic way in which the Government can meet its target to halve child poverty by 2010.

We recognise that the context within which the Government is now operating is very diff erent from the early years of pursuing this target, when progress was relatively quick and resources relatively free-flowing.

Public finances are now under severe pressure and progress on child poverty has slipped. The Labour Government needs to demonstrate that child poverty really is its priority, and that meeting the historic challenge it set itself back in 1999 is something for which it is willing to make difficult decisions.

This report analyses the impact of the 2008 10p tax rate compensation package on child poverty and recommends a recycling of resources already spent supporting families. It then suggests three policy options, any of which could help the Government to meet its 2010 target to halve child poverty.

Background

The latest Government figures for 2006/07 show that child poverty increased by 100,000 between 2005/06 and 2006/07, after an increase of 100,0001 the previous year2. There are now 2.9 million children living in poverty in the UK3 . In order to meet the Government's target to halve child poverty by 2010, this must fall to 1.7 million.

After spending decisions already announced, it is estimated that in 2010/11, child poverty will stand at 2.2 million, or 550,000 children in poverty above the Government's own target. The Government must keep its promise to halve child poverty. Barnardo's is working alongside numerous other charities in the campaign to End Child Poverty to ensure that it does.

Options for reducing child poverty

This report focuses on options for meeting the 2010/11 target. Given that this is now only two years away we have concentrated on financial transfers through the tax credit and benefit system.

The policy packages we have examined:

  • are targeted on the population on whom we want to have the most impact, i.e. low income households with children
  • at the very least treat those families in and out of work in the same way, so as not to weaken incentives to work.

The impact of each of the three following policy options has been modelled by the Institute for Fiscal Studies (IFS)4 as if they were introduced in 2008/09, against a baseline that includes the 10p tax rate compensation package announced on 13 May 2008.

The 10p tax rate compensation package

IFS modelling for this report shows the impact on child poverty of the 10p tax rate compensation package to have been virtually nil. This compensation package has cost £2.7 billion this year.

Recommended Cost Saving package

Existing expenditure on tax credits could be redirected to families lower down the income distribution, targeting resources more efficiently to tackle child poverty.

We recommend that the family and baby elements of Child Tax Credit are reduced as income increases, in the same way as the other elements in tax credits. This would save £1.35 billion annually, currently being spent on relatively better-off families.

Three options for meeting the 2010 target

We have developed and modelled three options, each costing an additional £2.7 billion per year. In eff ect, we have looked for ways that the £2.7 billion spent this year on the 10p tax rate compensation package could be spent more eff ectively to cut child poverty.

Our policy options for meeting the 2010 target are:

1. The Per Child option, comprising:

  • The recommended Cost Saving package, Plus
  • A 26 per cent increase in the per child element of Child Tax Credit, bringing it from about £40 per week to £50 per week.

2. The Large Family option, comprising:

  • The recommended Cost Saving package, Plus
  • A 17 per cent increase in the per child element of Child Tax Credit, bringing it from about £40 per week to £47 per week, plus
  • A targeted increase of about £31 per week in the per child element of Child Tax Credit for third and subsequent children.

3. The Choice option, comprising:

  • The recommended Cost Saving package, Plus
  • A 17 per cent increase in the per child element of Child Tax Credit, plus
  • A doubling of the baby element in Child Tax Credit from about £10.50 per week to £21 per week, plus
  • Introducing a disregard, enabling a second earner to earn about £55 per week without Working Tax Credit being reduced.

The analysis

The table below summarises the impact of the 10p tax rate compensation package, our recommended Cost Saving package and these three options.

* IFS modelling shows that a few families will be lifted out of/pushed into poverty through these policies, however using the IFS rounding convention (rounding to the nearest 100,000) the figures are zero.

+ The three policy options assume that the £1.35 billion is re-targeted as recommended and each shows how the £2.7 billion spent on the 10p tax rate compensation package might be used to cut child poverty

Discussion

Further analysis of the impact of all the measures we have modelled is available in our main report, How to Halve Child Poverty by 2010: Options for Redirecting Resources to Reduce Child Poverty, published online at www.barnardos.org.uk/poverty.

Both the 10p tax rate compensation package and our recommended Cost Saving package have a negligible impact on child poverty. However, any of the three proposed policy options would virtually ensure that the Government meets its 2010 target.

The 10p tax rate compensation package

This package has had a positive impact across the income distribution, with the largest gains for those on higher incomes, yet has had virtually no impact on child poverty. Very few households at either extreme of the income distribution have benefited. The gains have been largest for smaller families with one or two children, and for families with two earners.

Recommended Cost Saving package

Our recommended Cost Saving package is designed to recycle money currently spent on relatively better-off families. This package would have virtually no negative eff ect on child poverty. Losers from this package would be concentrated amongst higher earning families. Those households where there are two full-time workers would have the largest losses as a result of this package, compared to non-working households for whom there would be a negligible eff ect on average weekly income. Smaller families would face larger losses than large families.

The graphs opposite illustrate the impact of the Cost Saving package on the tax and benefits system:

The current system of financial support for families+

+ These graphs illustrate the current system of fi nancial support for a single earner couple family with two children.

* The plateau in Child Tax Credit is the family (and baby) element that remains for families on a higher income, after the child element has been tapered away.

The system of financial support for families under the recommended Cost Saving package

The three policy options

All three policy options are strongly redistributive, with large gains for families at the bottom of the income distribution and losses for families at the top. The exception to this is that families in the very top income decile would see only small losses. This reflects the fact that very few receive the family element of Child Tax Credit, so few would lose from the changes to payment of that element; nor would they gain from the more generous elements of the three options as their incomes are too high.

All three policy options would give the largest cash gains to the largest families, although virtually all family types would gain. The Per Child option benefits all families on average, with gains increasing with the number of children in the family. Unsurprisingly, the Large Family option would give the most to larger families. However, families with only one child would lose on average. The Choice option, which gives extra resources to families with a second earner and/or a child under one, would give the most even spread of gains across families of diff erent sizes and these gains would increase with family size.

Across all family sizes, for each of the three policy options modelled here, there would be more winners than losers, with the proportion of families who are winners increasing as the number of children in the family rises.

With regard to employment status, for all three options, families with the least attachment to the labour market would generally gain the most in cash terms.

Under the Per Child option and the Large Family option the largest cash gains would go to couple families with one parttime worker. Families with two full-time workers would see a loss (of an average of a few pounds per week) under the Per Child option and the Large Family option. Under the Choice option, the largest gain would be seen for couple families with two part-time workers, reflecting the policy intention of rewarding second earners through this option.

Lone parent families would see a higher average gain across all three options than couple families. This is important as lone parent families have a higher risk of poverty than couple families. The largest gain would be seen under the Per Child option, with lone parents gaining over £15 a week. Couple families would gain the most under the Choice option (nearly £11 per week).

Conclusion and recommendations

The Government is currently on track to miss its 2010 child poverty target by around 550,000 children. We therefore recommend that:

  1. The Government should not extend the 10p tax rate compensation package into the next financial year. This would save £2.7 billion. The 10p tax rate compensation package has had virtually no eff ect on child poverty.
  2. The Government should amend the tax credit system so that families who are relatively better off – for example those on incomes of £40,000 to £50,000 a year – no longer qualify for help. This would save £1.35 billion without increasing child poverty. This money should be re-invested to help poorer families.
  3. The Government should redirect the £2.7 billion spent this year on the 10p tax rate compensation package towards alleviating child poverty and should redirect £1.35 billion, currently spent on Child Tax Credits for relatively better-off families, towards families in poverty.

This report shows that meeting the 2010 target is not an impossible dream. The Government can achieve it if it is prepared to make some hard choices.

For more information

To view the full report, How to Halve Child Poverty by 2010: Options for Redirecting Resources to Reduce Child Poverty by Barnardo's and Deloitte please click here

For additional information see Institute for Fiscal Studies, 2008. Options for Tax Credit Reform. This document is published online at www.barnardos.org.uk/poverty. If you wish to discuss the issues raised in the report contact Kim Maynard, policy officer, Barnardo's on 020 8498 7737 or kim.maynard@barnardos.org.uk or write to her at Barnardo's, Tanner's Lane, Barkingside, Ilford, Essex, IG6 1QG.

Footnotes

1. Department for Work and Pensions, 2008. Households Below Average Income 2006/07.

2. Before Housing Costs. All figures used throughout this report are on a Before Housing Costs basis to reflect the measure used in the Government's targets.

3. Poverty is defined, in line with the Government's targets, as household income below 60 per cent of median income before housing costs. In 2006/2007, for a couple with two children aged five and 14, this equates to £346 per week, or £17,992 per annum.

4. For further information, see Institute for Fiscal Studies, 2008. Options for Tax Credit Reform. This document is published online at www.barnardos.org.uk/poverty

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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