Wednesday, 2 August 2017


Jonathan Bradshaw and Oleksandr Movshuk

Social and fiscal policy was used in European countries to mitigate the impact unemployment and falling real wages on child poverty that followed the global crisis. This is shown by comparative decompositional analysis of changes in child poverty in working age households over the recession using EU-Statistics on Income and Living Conditions (EU-SILC) data between 2008 and 2014 (incomes in 2007 and 2013) in the figure below. The decomposition uses national currencies rather than purchasing power parities in order to avoid the impact of severe fluctuations in exchange rates in some countries over the period. The figure shows the change in the contribution to the poverty rate (less than 60% median equivalent income) of reductions in gross market income and how these were mitigated (or exacerbated) by changes to direct taxes and cash benefits over the period.

In all countries changes in market income increased poverty as a result of unemployment and decreased earnings.  However in ten countries cuts or reductions in direct taxes and or improvements or increases in cash benefits mitigated this effect and there was no overall increase in child poverty. However child poverty increased in all the other countries and in Norway, Slovakia, Hungary and Romania this was partly because cash benefits fell (or became less effective) over the period. In most countries reductions in direct taxes paid was more important in reducing child poverty than increases in benefits received.

This analysis really only takes us up to the start of the recession as many countries were still mired in deficit reduction in 2013.

For example we can certainly expect that the UK will be joining the group of countries with increases in child poverty due to the cuts in working age benefits that have been made since 2013. The Institute for Fiscal Studies expects UK relative child poverty to increase from 19% in 2014/15 to 27% in 2021/22 before housing costs and from 29% to 36% after housing costs.


 George Osborne claimed his higher minimum wage for those over 25 pegged to 60% median earnings by 2020 was a "new settlement" - a large scale shift from being a "low wage, high tax, high welfare economy to a higher wage, lower tax, lower welfare".  Lower welfare is still being rolled out in the freezing of working-age benefits, the benefit cap, the two-child policy, cuts in employment and support allowance, the bedroom tax and rent limits in housing benefit. Beatty and Fothergill have estimated that the cumulative loss from these cuts since 2010 is £27 bn/year. Just the post 2015 cuts will by 2021 result in couples with two or more dependent children will losing e £1,450/year and lone parents with two or more will lose £1,750/year .

Rowntree in his first survey of poverty in our City of York in 1898 found that low wages, paid to many in his sample by his father’s chocolate factory, were the main reason why households could not reach his primary poverty threshold, at least for working aged households. At that time there were no taxes on working class wages and there were no family benefits. The first small state supplement to low wages came in the form of family allowances in 1945, but Beveridge was mainly concerned with social security for people out of the labour market.  In 1965 Abel Smith and Townsend in The Poor and the Poorest found that the biggest group of households living below their social assistance threshold were employed families. The result was the progressive expansion of in-work transfers: rent rebates/housing benefit, rate rebates/council tax benefit, family income supplement, child benefit, family credit, working tax credit and child tax credit, and now universal credit. Equal pay legislation came in 1970 but the minimum wage not until 1999 and meanwhile the wages councils which had regulated the wages of some low paid had been abolished by the Thatcher government.

 The association between living standards and wages over the long durĂ©e must certainly fluctuate with the economic cycle. When unemployment has risen, cash benefits have made a larger contribution. It is possible to observe this by creating a time series, at least since 1977, using the Office of National Statistics series The effects of taxes and benefits on household incomes. Figure 1 shows the share of net income contributed by net earnings, cash benefits and direct taxes for the bottom quintile of working age households. When unemployment  increased in the early 1980s and early 1990s the contribution from cash benefits increased. However it is significant that this did not happen in the 2008 recession, at least after 2010 when austerity measures began to dominate policy. By 2015/16 the contribution of cash benefits to the net income of the lowest quintile was the lowest it has been since 1981.
This is partly because unemployment is at a record low level. But it is also the result of the freezing and cuts to working age benefits. The consequence of these cuts is that the Institute for Fiscal Studies expects UK relative child poverty to increase from 19% in 2014/15 to 27% in 2021/22 before housing costs and from 29% to 36% after housing costs.


 Figure 1: Quintile 1: Effects of taxes and benefits on working age household income.  Unemployment rate right hand axis.