Child and working-age poverty from 2010 to 2020
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Child and working-age poverty from 2010 to 2020 Mike Brewer, Professor of Economics, ISER, University of Essex and Research Fellow, Institute for Fiscal Studies
(drawing on work by James Browne, Rowena Crawford, Carl Emmerson, Wenchao Jin, Robert Joyce and Gemma Tetlow, Institute for Fiscal Studies. For originals, see www.ifs.org.uk)
What’s coming up
• Background
– Poverty
– Fiscal crisis and changes to welfare benefits
• How we produce our forecasts• How we produce our forecasts
• Poverty in 2010 to 2015, and 2020
– Impact of coalition government’s tax and benefit changes
• Conclusion
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Relative child poverty, 1961–1998
15%
20%
25%
30%
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0%
5%
10%
15%
1960 1970 1980 1990 2000 2010
Notes: Years refer to calendar years until 1993, financial years thereafter. Incomes measured before housing costs have been deducted.
12 years to half child poverty
Relative child poverty, 1961–2009
15%
20%
25%
30%
Spent lots of money, and poverty fell by a quarter from 1998 to 2009
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0%
5%
10%
15%
1960 1970 1980 1990 2000 2010
Notes: Years refer to calendar years until 1993, financial years thereafter. Incomes measured before housing costs have been deducted.
Child Poverty Act (2010)
• Requires (???) government to achieve specific levels of poverty in 2020
– Relative child poverty must be less than 10%
– Absolute child poverty (< 60% of 2010 median income) must be less than 5%
– Less than 5% of children must be suffering material deprivation and relative
low income (<70% of median income)
– Persistent poverty target yet to be defined– Persistent poverty target yet to be defined
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Relative poverty working-age adults without children, 1961–2009
15%
20%
25%
30%
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0%
5%
10%
15%
1960 1970 1980 1990 2000 2010
Notes: Years refer to calendar years until 1993, financial years thereafter. Incomes measured before housing costs have been deducted.
The fiscal crisis in the UK
45
50
55
% of GDP
All spending: no action Current receipts: no action
Northern Rock nationalised: Feb 2008Lehman Bros collapse: Sep 2008
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30
35
40
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
% of GDP
Sources: Office for Budget Responsibility; IFS calculations.
Sep 2008
The fiscal crisis in the UK
45
50
55
Percentage of national income
All spending: no action Current receipts: no action
All spending: March 2011 Current receipts: March 2011
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30
35
40
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
Percentage of national income
Sources: OBR; IFS calculations.
Composition of fiscal tightening (% GDP)
1.7%1.0%
0.5%
Tax
Investment spend
1.0%
2.0%
Investment spend
Public services
Benefit spend
Debt interest
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The paper
• Aim: forecast relative & absolute poverty amongst children & working-
age adults
• Method
– Start with ‘base data’ on distribution of private income and household
characteristics: 2008–09 Family Resources Survey
– Up-rate financial variables using official forecasts (to 2015) or own
assumptions (to 2020)
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– Re-weight data to reflect socio-demographic change, including employment
changes, using (mostly) official forecasts
– Simulate tax liabilities, and benefit entitlements, given stated government
policy and usual rules for indexing tax and benefit system
– Adjust incomes for non-take-up / non-reporting of means-tested benefits and
to align with official statistics
Issues
1. Aligning simulated income distribution with actual income distribution
2. Simulating future changes to benefit system
3. Use of re-weighting to reflect employment and demographic changes
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1. Aligning simulated income distribution with actual income distribution (2008-9 FRS)
300,000
400,000
500,000
600,000
Number of ch
ildren
Simulated
0
100,000
200,000
300,000
£0 £50 £100 £150 £200 £250 £300 £350 £400 £450 £500
Number of ch
ildren
£/week
Simulated
Take-up
Actual
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2. Simulating future changes to benefit system
• Lots of changes have been announced, and some are not easy to reflect in microsimulation model
– Making medical tests “tougher”
– Savings affecting families whose incomes change
– Savings that vary by local area
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– Increase in female state pension age (behavioural response)
– “Universal Credit”
3. Re-weighting to reflect employment and demographic changes
• Control for
– Population by region
– Population by age and sex
– Population who are Asian
– Population who are in work
– Number of 1-person and 2+ person households
– Number of households in London and Scotland
– Number of families with children in England, Scotland, Wales, NI
– Number of lone parent families
• Uses algorithm in Gomulka (1992) implemented in Stata
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3. Re-weighting to reflect employment and demographic changes (simulated 2015)
250,000
300,000
350,000
400,000
0
50,000
100,000
150,000
200,000
£0 £50 £100£150£200£250£300£350£400£450£500£550£600
No reweighting
Actual
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Results coming up ...
• 2010–11 to 2013–14
– Large fall in living standards
• 2014–15 and 2015–16
– Universal Credit introduced– Universal Credit introduced
• 2015–16 to 2020–21
– Economy growing, employment rising
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Poverty, 2009-2015
20%
22%
24%
26%
Poverty rate
Children (relative)
Children (absolute)
Working-age without children (relative)
Working-age without children (absolute)
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12%
14%
16%
18%
2008 2009 2010 2011 2012 2013 2014 2015
Poverty rate
Notes: 2008 and 2009 figures are actual. Years refer to financial years. Incomes measured before housing costs have been deducted.
Poverty forecasts to 2020 under current policies
20%
22%
24%
26%
Poverty rate
Children (relative)
Children (absolute)
Working-age without children (relative)
Working-age without children (absolute)
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12%
14%
16%
18%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Poverty rate
Notes: 2008 and 2009 figures are actual. Figures for 2016 to 2019 interpolations between forecasts for 2015 and 2020.Years refer to financial years. Incomes measured before housing costs have been deducted.
Relative poverty: impact of reforms since 2010
20%
22%
24%
26%
Poverty rate
Children (on stated policies)
Children (no reforms)
Working-age adults without children (on stated policies)
Working-age adults without children (no reforms)
…but impact of indexation change grows
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Notes: 2008 and 2009 figures are actual. Figures for 2016 to 2019 interpolations between forecasts for 2015 and 2020.Years refer to financial years. Incomes measured before housing costs have been deducted
12%
14%
16%
18%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Poverty rate
change grows
Universal Credit helps reduce poverty…
More cuts take effect in 2013
Variants and sensitivities
Child Working-agenon-parents
2015 baseline 22.2 15.9
Lower employment and earnings
21.5 15.8
earnings
Progressive earnings growth
22.4 15.6
Average annual growth in median
2020 baseline 24.4 17.5 +0.5
Higher earnings 25.9 17.5 +1.2
Fall in workless households
24.4 17.1 +0.6
Full take-up 22.8 16.3 +0.6© Institute for Fiscal Studies
Prospects for child poverty targets
15%
20%
25%
30%
Relative poverty rate
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0%
5%
10%
15%
1960 1970 1980 1990 2000 2010 2020
Relative poverty rate
Relative poverty
Absolute poverty
Notes: Years refer to calendar years until 1993, financial years thereafter. Forecasts for 2016 to 2019 interpolations between forecasts for 2015 and 2020. Incomes measured before housing costs have been deducted.
Summary
• GDP fell considerably in 2008 - 2009, but impact on living standards delayed until 2010 - 2012
– Earnings falling in real terms
– Large welfare cuts and tax rises
• Poverty forecast
– Expect absolute and relative poverty to rise in next 3 years
– From 2014, Universal Credit slows rise in poverty, but overall effect of post-2010 changes outweighed by other welfare cuts
– Poverty in 2020 highest for 20 years
– Poverty fairly insensitive to general changes in employment/earnings
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Spare slides
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3. Re-weighting to reflect employment and demographic changes
20,000
25,000
30,000
35,000
60+
45-59
30-44
25-29
0
5,000
10,000
15,000
Men, 2010 Men, 2015 Men, 2020 Women, 2010
Women, 2015
Women, 2020
25-29
20-24
16-19
16-19
10-15
0-9
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3. Re-weighting to reflect employment and demographic changes
20,000
25,000
30,000
35,000
0
5,000
10,000
15,000
Households, 2010
Households, 2015
Households, 2020
In work, 2010
In work, 2015
In work, 2020
All
1 person
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Main cuts to welfare benefits and tax credits, 2010-11 to 2014-15
• Child-related benefits
– Non-means-tested child benefit removed from richest
– Tax credits more closely focused on the poorest
• Disability and sickness benefits
– Tougher medical tests, more means-testing– Tougher medical tests, more means-testing
• Rental subsidies (housing benefits)
– Less generous, especially for large families and/or central London
• Change in inflation measure used to index benefits each year
– CPI usually lower than RPI as excludes most housing costs, and through “formula effect”
• Meanwhile: basic state pension to be linked to earnings and pensioners spared impact of most cuts
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Main cuts to welfare benefits and tax credits, 2010-11 to 2014-15
£12,500
£15,000
£17,500
£20,000
/yr saving in 2014-15
Not broken down (uprating change)
Council Tax Benefit
Housing Benefit
Disability Living Allowance
-£2,500
£0
£2,500
£5,000
£7,500
£10,000
£bn/yr saving in 2014
Disability Living Allowance
Employment and Support Allowance
Other benefits for families with children
Tax credits (mostly for children)
Child benefit
State pension and pension credit
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Problems with the current system of welfare benefits
£250
£300
£350
£400
£450
£500
Benefit inco
me, £/w
k
Jobseekers Allowance
Rapid withdrawal; weak incentives
Receive three different means-tested benefits/TCs
Multiple (simultaneous) withdrawal; weak incentives and horrible interactions
Different in-and out-of work benefits
£0
£50
£100
£150
£200
£250
0 5 10 15 20 25 30 35 40 45 50
Benefit inco
me, £/w
k
Hours/wk @ £6.50/hr
Working tax credit
Housing benefit
Child tax credit
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Assumes: couple with 2 children, 1 earner @ £6.50/hr, £80/wk LHA or eligible rent
Proposed reform
£250
£300
£350
£400
£450
£500
Benefit inco
me, £/w
k
Jobseekers allowance
Working tax
Earnings disregard
Slower withdrawal
Same entitlement to benefits if do not work
Single system: no horrible interactions, less churn between programmes, and less chance of non-take-up
Faster withdrawal, so weaker incentives to earn more
No “notch” at 24 hrs/wk
£0
£50
£100
£150
£200
£250
0 5 10 15 20 25 30 35 40 45 50
Benefit inco
me, £/w
k
Hours/wk @ £6.50/hr
Working tax credit
Housing benefit
Child tax credit
Universal Credit
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Assumes: couple with 2 children, 1 earner @ £6.50/hr, £80/wk LHA or eligible rent. Ignores child benefit.