JRF: Child poverty could rise to a new high under current benefit adjustment rules

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Wednesday, 09, Apr 2008 12:00

A steady growth in income inequality is being produced by the annual adjusting or uprating of benefits, tax credits and tax allowances according to a new report published by the Joseph Rowntree Foundation today (9 April) in the week the latest upratings are implemented. The first major study to analyse the long-term impact of upratings in both the benefit and the tax system, the report finds that far from helping to meet the government’s goal of eradicating child poverty, the existing uprating rules on their own could result in child poverty rising to unprecedented levels within 20 years.

The impact of benefit and tax uprating on incomes and poverty report shows how the main reason for this situation is that most benefits and tax credits rise only in line with inflation and therefore fall behind increases in average incomes. Extra measures such as those announced in this year’s Budget can help counteract the effects of this uprating system on child poverty. The report’s authors argue however that such ad hoc rises are not a substitute for a fair system that routinely ensures that the incomes of the least well-off people keep up with the average.

Tax allowances and thresholds also rise more slowly than earnings, helping the government to raise more money. People on both higher and lower incomes lose out from the slow uprating of taxes and benefits, but those on the lowest incomes bear the greatest burden. If nothing else changes in the next 20 years, the worst-off fifth of the population could lose about 17% of their income compared to only 5% lost by the best-off fifth.

Report author Holly Sutherland said: “This is one of the biggest decisions in British politics every year, but remains little discussed. Adjusting many benefits in line with prices rather than household incomes in general has had and will continue to have a growing detrimental impact on the worst-off people. For example, if the amount of Job Seeker’s Allowance received by a single unemployed person had kept pace with average earnings since 1971, it would be double the value it is now.”

If this system were to run un-checked for the next 20 years, there would be a very considerable reduction in the proportion of national income spent on benefits, despite an increase in the proportion raised in tax. Resources available for public spending would rise but the cost would fall disproportionately on people on low incomes. Relative poverty would rise as the income of the poorer non-pensioner population would fall behind the population as a whole. For children, the poverty rate would rise from18% to 33% in two decades, assuming nothing else changed.

Sutherland added: “In contrast, pensioners will be largely protected from any increasing risk of poverty due to the decision to align pension benefits with earnings growth. A similar approach to annual increases in all other benefits and tax credits would insulate children and working-age adults from a steadily rising risk of poverty.

“The pressure to meet new public spending demands within limited public revenues may rule out such comprehensive linking of benefits and tax credits to the growth in national income. But the cost of raising this money through uprating taxes and benefits more slowly than earnings growth is borne disproportionately by those on lower incomes."

ENDS

Notes to Editors:

The full report, The impact of benefit and tax uprating on incomes and poverty by Holly Sutherland, Martin Evans, Ruth Hancock, John Hills and Francesca Zantomio is published by the Joseph Rowntree Foundation. It is available as a free download from www.jrf.org.uk. Holly Sutherland and Francesca Zantomio are from the Institute for Social and Economic Research at the University of Essex, Martin Evans is from the University of Oxford, Ruth Hancock from the University of East Anglia and John Hills from the London School of Economics.

The study used three types of microsimulation modelling to establish the effects of alternative uprating regimes after 20 years: POLIMOD, CARESIM and LOIS. A full explanation can be found in the full report and findings.

The Joseph Rowntree Foundation is one of the largest social policy research and development charities in the UK. It supports a research and development programme that seeks to understand the causes of social difficulties and explore ways of overcoming them.

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