© Institute for Fiscal Studies Child poverty, tax and benefit policy and the labour market since...

© Institute for Fiscal Studies

Child poverty, tax and benefit policy and the labour market since 1998-99Robert Joyce


Overview

Background

Child poverty trends

Explaining the trends

The effects of tax and benefit reforms

Subgroup analysis

Conclusions


Policy background

In 1999 the Labour Government announced:

• Target to ‘eradicate’ child poverty by 2020-21.

• Interim targets for 2004-05 (75% of 1998-99 level) and 2010-11 (50% of 1998-99 level).

Child Poverty Act (2010) commits current and future governments to 2020 target.

Relative poverty,UK (BHC)

Absolute poverty,UK (BHC)

Material deprivation and relative low

income

% Million % Million % Million1998–991999–002000–012001–022002–032003–042004–052005–062006–072007–082008–09

Change since 1998–99Change since 2004–05

IFS projection for 2010-11Target for 2010–11 n/a 1.7 n/a n/a n/a 1.3


Child poverty since 1998-99

Sources: Calculations based on Family Resources Survey, various years; Department for Work and Pensions (2010). UK poverty levels for the years 1998/99 through 2001/02 draw on the DWP’s

imputed estimates of poverty levels in Northern Ireland over this period.




income

% Million % Million % Million1998–99 26.1 3.4 26.1 3.4 20.8 2.61999–00 25.7 3.4 23.4 3.12000–01 23.4 3.1 19.1 2.52001–02 23.2 3.0 15.2 2.02002–03 22.6 2.9 14.1 1.82003–04 22.1 2.9 13.7 1.82004–05 21.3 2.7 12.9 1.7 17.1 2.22005–06 22.0 2.8 12.7 1.6 16.3 2.12006–07 22.3 2.9 13.1 1.7 15.6 2.02007–08 22.5 2.9 13.4 1.7 17.2 2.22008–09 21.8 2.8 12.4 1.6 17.1 2.2

Change since 1998–99Change since 2004–05









income


Change since 1998–99 –4.2 –0.6 –13.6 –1.8 –3.7 –0.4Change since 2004–05 +0.5 +0.1 -0.5 -0.1 -0.0 -0.0









income


Change since 1998–99 –4.2 –0.6 –13.6 –1.8 –3.7 –0.4Change since 2004–05 +0.5 +0.1 -0.5 -0.1 -0.0 -0.0

IFS projection for 2010-11 18.2 2.4Target for 2010–11 n/a 1.7 n/a n/a n/a 1.3






Would the reduction in child poverty have been as big using other poverty lines?

Cheapest way of reducing a binary poverty measure is to slightly raise incomes of those just below poverty

line.

In practice, difficult to target resources that precisely.

Have policy-makers been focusing efforts on a narrow set of children?...


Child poverty under various poverty lines in 1998–99 and 2008–09 (Great Britain)

0%

10%

20%

30%

40%

50%

60%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Income as a percentage of national median

Cum

ulat

ive

prop

ortio

n of

chi

ldre

n

1998–99

2008–09

Source: Family Resources Survey 1998-99 and 2008-09.


Cheapest way of reducing a binary poverty measure is to slightly raise incomes of those just below poverty

line.

In practice, difficult to target resources that precisely.

Have policy-makers been focusing efforts on a narrow set of children?...

• Do not see striking evidence of this.

• Child poverty would have fallen using any poverty line from 43% to 100% of the median.

Would the reduction in child poverty have been as big using other poverty lines?


1. Will investigate (direct) impact of tax and benefit reforms over period.

2. Will look at which groups have driven trends, and suggest possible reasons for this with help of labour market

data (Labour Force Survey).

Note that the tax and benefit system and labour market trends are likely to interact.

Explaining the trends


% growth in nominal entitlements to state support for example families with children

Source: Calculations using the IFS tax and benefit micro-simulation model, TAXBEN.

Notes: The table shows annual changes in maximum entitlements to benefits assuming no private income (except the working lone parent, who is assumed to earn an amount that is below the

personal income tax allowance and the primary threshold for National Insurance contributions) ignoring housing benefit and council tax benefit and the value of free school meals. Shaded cells mark

instances where entitlements grew faster than the BHC poverty line.

Couple,3 children,

no work

Lone parent,1 child,no work

Lone parent,1 child,

part time work

Growth in poverty

line (BHC)

Change in BHC child

poverty rate (ppts)

1998–99

1999–00

2000–01

2001–02

2002–03

2003–04

2004–05

2005–06

2006–07

2007–08

2008–09







Couple,3 children,

no work



part time work

Growth in poverty

line (BHC)

Change in BHC child

poverty rate (ppts)

1998–99 2.4 –3.8 –5.5

1999–00 9.3 8.6 9.3

2000–01 13.4 8.8 18.1

2001–02 9.1 6.4 7.2

2002–03 4.1 3.2 4.2

2003–04 8.6 6.6 7.4

2004–05 6.0 4.6 5.0

2005–06 2.5 2.0 3.1

2006–07 3.1 2.7 3.0

2007–08 3.7 3.3 3.7

2008–09 6.9 5.4 6.2







Couple,3 children,

no work



part time work

Growth in poverty

line (BHC)

Change in BHC child

poverty rate (ppts)

1998–99 2.4 –3.8 –5.5 3.8 -0.9

1999–00 9.3 8.6 9.3 5.0 -0.4

2000–01 13.4 8.8 18.1 5.9 -2.3

2001–02 9.1 6.4 7.2 6.3 -0.2

2002–03 4.1 3.2 4.2 3.7 -0.5

2003–04 8.6 6.6 7.4 2.4 -0.5

2004–05 6.0 4.6 5.0 4.0 -0.8

2005–06 2.5 2.0 3.1 3.5 +0.7

2006–07 3.1 2.7 3.0 4.1 +0.4

2007–08 3.7 3.3 3.7 4.3 +0.2

2008–09 6.9 5.4 6.2 3.6 -0.7


The (direct) impact on child poverty of direct tax and benefit reforms since 1998-99

We simulate child poverty in 2010-11 under various direct tax and benefit systems:

1. The actual 2010-11 system (‘baseline’ projection).

2. The 2010-11 system as it would be if left unreformed since a particular year (‘counterfactual’ projections).

Comparing results from 1 and 2 gives estimate of direct impact (in 2010-11) of all reforms since that year.

We do this for each year since 1998-99.

Does not account for behavioural responses.


What if...?

...the direct tax and benefit system had not been reformed since 1998-99?

First have to define ‘no reform’. Definition will affect result!

A few reasonable possibilities. We use two:

• 1998-99 default uprating - parameters of direct tax and benefit system uprated in way that was default in 1998-99.

• GDP uprating – all such parameters indexed to nominal GDP.


Child poverty in UK in 2010-11 under various direct tax and benefit systems

Source: authors’ calculations using Family Resources Survey 2007-08 and 2008-09, TAXBEN, and updates of the assumptions set out in

Brewer, Browne, Joyce and Sutherland (2009).

Direct tax and benefit system in 2010–11

Simulated child poverty in 2010–11 (BHC)

1998–99 default uprating GDP uprating

% Million % Million

Actual 2010–11 system 18.2 2.4 18.2 2.4

Memo: actual 1998-99 level 26.1 3.4 26.1 3.4








% Million % Million

1998–99 uprated 31.8 4.2 28.2 3.7

Actual 2010–11 system 18.2 2.4 18.2 2.4









% Million % Million

1998–99 uprated 31.8 4.2 28.2 3.7

2004–05 uprated 22.0 2.9 18.6 2.5

Actual 2010–11 system 18.2 2.4 18.2 2.4









% Million % Million

1998–99 uprated 31.8 4.2 28.2 3.7

2004–05 uprated 22.0 2.9 18.6 2.5

2007–08 uprated 21.4 2.8 19.8 2.6

Actual 2010–11 system 18.2 2.4 18.2 2.4



Financial work incentives and tax and benefit reforms since 1998-99

Since 1998-99 reforms have tended to:

• Strengthen incentive for lone parents to be in work (Working Families Tax Credit introduced in Oct 1999).

• Weaken incentive for potential second earners in couples to be in work (tax credits means-tested and

assessed at family level).

• Weaken incentives for working parents to increase their earnings, and more so for couples (introduction of

child tax credits and working tax credits in 2003-04).

Reforms since 2004-05 have had negligible effects on financial work incentives for parents.


Direct tax and benefit reforms since 1998-99

Direct impact of reforms was to reduce child poverty a lot.

This is mostly, or entirely, due to reforms before 2004-05 and after 2007-08.

Period in which tax and benefit reforms did little (or nothing) to reduce child poverty coincides perfectly with

period in which it rose.

Suggests very strong link between those reforms and child poverty over time.


Fall in child poverty between 1998-99 and 2004-05 aided by falling poverty risk for both lone parents and

couples.

Rise after 2004-05 due to rising poverty risk for children of couples.

Acted to increase child poverty by 1.4 ppts (approx. 2between 2004-05 and 2008-09.

Particularly due to one-worker couples, whose earnings seem to have tailed off...

Child poverty by family type and work status (Great Britain)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

Men in 1-earner couples Women in 1-earner couples

Men in 2-earner couples Women in 2-earner couples

1998-9

9 level =

1


Median real earnings amongst parents in couples, 1998-99 to 2008-09 (workers only)

Source: Labour Force Survey

Notes: Years are financial years. Figures are 3-year moving averages for the whole of the UK


Fall in child poverty between 1998-99 and 2004-05 aided by falling poverty risk for both lone parents and

couples.

Rise after 2004-05 due to rising poverty risk for children of couples.

Acted to increase child poverty by 1.4 ppts (approx. 200,000) between 2004-05 and 2008-09.

Particularly due to one-worker couples, whose earnings seem to have tailed off...

Higher lone parent employment also important (1998-99: 46%; 2008-09: 56%).

Acted to reduce child poverty by 0.7 ppts (approx. 100,000)

Child poverty by family type and work status (Great Britain)


Families with 3 or more children explain most (approx. 85%) of reduction in child poverty since 1998-99.

Two reasons:

Poverty risk for such children fell from 40% in 1998-99 to 32% in 2008-09 (was 30% in 2004-05).

Such children (i.e. large families) became less common – reduces poverty because they have relatively high poverty risk.

Child poverty by number of children in family (Great Britain)


Fall in child poverty since 1998-99 driven by families with younger children.

Poverty rate for children in such families has to large extent converged with that for families with older children

(used to be much higher).

We show that tax and benefit reforms over the period have driven this convergence.

Child poverty by age of youngest child in family (Great Britain)


Reduced poverty risks in North West, North East, Yorkshire, Scotland explain majority of total reduction in

child poverty between 1998-99 and 2004-05.

• Parental employment rates increased a lot in those regions over that period.

Increased poverty risk in West Midlands acted to increase child poverty by 0.7 ppts (approx. 100,000) since

2004-05.

• Only region to experience rise overall since 1998-99 – up by 7 percentage points (sensitive to particular base year).

• Likely reason: only region where employment rate amongst parents lower in 2008-09 than 1998-99 (big fall in 2008-09).

Child poverty by region (Great Britain)


Conclusions

Child poverty has fallen a lot since 1998-99.

But progress towards targets stalled after 2004-05.

Very strong evidence that tax and benefit system has been major driver of trends since 1998-99.

Unsurprising, given measure of poverty and scale of ambition.

Labour market trends for parents important as well.

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