The non-uprating of child benefits - impact on poverty gaps

Note:  This article gives the views of the author, and not the position of the Social Policy Research Unit, nor of the University of York.
Jonathan Bradshaw and Lindsay Judge write in an article for the North East Child Poverty Commission Blog:

Objectives

This note attempts to illustrate the impact that uprating benefits in line with prices since 2010 would have had on the poverty gap of a low wage family in 2014/15.

Method

It is based on the tax/benefit model developed and maintained by Professor Steve Wilcox and mainly used for the annual UK Housing Review. The model simulates the net disposable income of different family types using different earnings levels, given the existing tax and benefit rules. In this note we have taken one family type – a couple with two children, with one earner, working a range of hours on the minimum wage (from October 2014 £6.50 per hour), the living wage (outside London) as at October 2014 (£7.85 per hour) and £10 per hour. The net disposable income after direct taxes, net rent and net council tax are deducted,  is compared with the after housing costs poverty threshold for a couple plus two children in 2012/13 £364 per week. We do not yet know what the poverty threshold is for 2013/14 or 2014/15. It is unlikely to be very different given what has been happening to benefits and earnings over that period.

A number of assumptions are included in the model:

• Rent= £120 per week.
• Council Tax=£28.95 per week. Council Tax Benefit is assumed to be calculated on the basis of the old national scheme3.
• The 30 hours bonus for Working Tax Credit and Housing Benefit is included after 30 hours.

Base line results

Figure 1 shows the results for the minimum wage case working between 24 and 45 hours per week. The red horizontal line is the poverty threshold. The items below the zero line are deduction from earnings including income tax and national insurance contributions, rent net of housing benefit and council tax net of council tax benefit. Then above the zero line are earnings net of these deductions, child benefit, child tax credit and working tax credit. The poverty gap is the gap between the top of the bars and the poverty threshold. Even working 40 hours per week this family is £25 short of the poverty threshold.

Figure 1: Minimum wage case

The Living Wage and the £10 per hour cases are presented in Figures 2 and 3. It can be seen that in neither case does the net income reach the poverty threshold. The increase in earnings is offset by losses of means-tested benefits and tax credits and extra income tax and national insurance contributions. At 40 hours per week the poverty gaps are £23.23 for the Living Wage case and £19.64 for the £10 per hour case.

The numbers for these and all the figures are given in the appendix.

Figure 2: Living wage case

Figure 3: £10 per hour case

Simulating inflation uprating

CPAG4 has made estimates of what child benefit and child tax credit would have been if they had been uprated since 2010 in line with the RPI and the CPI and in the case of child tax credit if the Chancellor had not reneged on his promise in 2010 to uprate child tax credit by more than inflation. These estimates have been used to adjust child benefit upwards by 13% and child tax credits upwards by 8.5%. Working tax credit has also been uprated by 9.5%5 in Figure 4. The net income is still below the poverty threshold but the poverty gap has now fallen to £7.80 for 40 hours.

Figure 4: Minimum wage case with inflation uprating of child benefit and tax credits

However this does not take account of the non-uprating of housing benefits and council tax benefit scales. In Figure 5 these are uprated by 5.6%. The poverty gap at 40 hours has now fallen to £3.28.

Figure 5: Minimum wage case with inflation uprating of all benefits and tax credits

Conclusion

Families with children with one earner in full-time employment on low earnings cannot reach the poverty threshold. Even if they earn £10 an hour, their net income is short of the poverty threshold because of the very high marginal tax rates in our highly means-tested tax and benefit system. This is why over two-thirds of poor children have a parent in employment. Increasing wage rates without tackling the UK’s high marginal deduction rates is not an effective solution to child poverty.

In-work benefits are much more effective but their effectiveness has been undermined by the Coalition Government decision to freeze child benefit for three years from 2011 and uprate it and tax credits and other working-age benefits by 1% from 2013. The poverty gap for a 40 hour a week minimum wage family increased from £3.28 per week to £25.32 per week. Thus those who were working poor have become poorer.

APPENDIX: Data tables

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NOTES

[1] Professor of Social Policy University of York and Durham University

[2] Senior policy and research Officer, Child Poverty Action Group

[3] Which is likely to make it more generous than what households actually receive from local schemes.

[4] CPAG (2014) POLICY NOTE 2: UPRATING AND THE VALUE OF CHILDREN’S BENEFITS December 2014 http://www.cpag.org.uk/sites/default/files/CPAG-Uprating-childrens-benefits-policy-note-Dec-14.pdf

[5] If a family was claiming WTC without the 30 hour element the tax credit has lost 9.4% of its value over the course of the parliament because the basic element was frozen for 3 years and then uprated by 1%, and the couple/LP element uprated by CPI for first 2 years and then 1% thereafter. If the family was also in receipt of the 30 element they have lost slightly more - 9.6% - of WTC’s value (because that element was also frozen for three years).

York research brings benefits for St Helena

The social security system in one of Britain’s most remote overseas territories is undergoing a partial restructure with the help of academics from the University of York.

The government of St Helena commissioned Professor Jonathan Bradshaw and Professor Roy Sainsbury of the University’s Social Policy Research Unit (SPRU) to contribute to a review of the Island’s 2011 social security reforms.

Now, as a result of recommendations developed at York, St Helena residents will, for the first time, have benefits based on minimum income standards, plus a new system of child benefit payments.



As part of the project, Professor Sainsbury visited the island earlier this year, a journey completed by RAF transport aircraft flight to Ascension Island and a three-day 700-mile voyage to St Helena.

Professor Sainsbury said: “As a result of our recommendations, benefits will be based on the cost of a typical basket of goods which means payments will reflect the actual cost of living on the island.

“Families will also benefit from the new child benefit system – again this is a first for the island and will make a major contribution to alleviating child poverty.”

The benefit reforms have been initiated in advance of the planned construction of a commercial airport, likely to be one of the most significant economic developments in the island’s history.

The work we have done reflects the unique character and economic circumstances of the island and will make a real difference to some of the most vulnerable residents

Professor Roy Sainsbury

St Helena’s population of just over 4,000 is skewed towards older age groups with many younger people leaving to work abroad, placing pressures on the island’s benefits system.

The work carried out by SPRU was overseen by officials from the island’s Health and Social Welfare Directorate. It was managed by Susan O’Bey, Director of Strategic Policy and Planning on St Helena who is currently completing a Masters in Public Policy and Management by distance learning at York.

Professor Sainsbury said: “St Helena is a fascinating island facing social and economic issues caused by its extreme isolation, a declining population and lack of significant natural resources.

“The work we have done reflects the unique character and economic circumstances of the island and will make a real difference to some of the most vulnerable residents.”

Benefits uprating and living standards

Discussion piece by Professor Jonathan Bradshaw *

The decision of the Coalition Government, announced in the Autumn Statement, to uprate most social security benefits and tax credits by 1% per year for the next three years is unprecedented* . It will save £3.8 billion, which is the same as saying that the poorest families will have that amount taken from their incomes. The impact on their living standards will be much starker.
The Consumer Price Index (CPI) is running at 2.8% for 2012 and the Office of Budget Responsibility*  expect that the level of inflation will be over 2% for at least the next three years. However the movement in average prices is not that relevant to low income households because they tend to spend a larger proportion of their budgets on commodities (food, fuel, water) whose prices have been increasing faster, than general inflation* . Thus the Retail Price Index and the Consumer Price Index both underestimate the inflation experienced by people with low incomes receiving benefits*. The real incomes of the poorest are going to fall as a deliberate act of policy. This has not happened since 1931 when it resulted in the collapse of the first Labour Government.

The post war legislation that implemented the Beveridge plan laid down no provision for uprating benefits. But they were uprated, initially on an ad hoc basis. In 1974 it was decided to link so called ‘long-term benefits’ such as pensions and long-term sick and disabled benefits to the higher of the two annual increases as measured by the Retail Prices Index (RPI) and the Average Earnings Index.  The Thatcher government broke that link in 1979 – by linking long-term benefits to the prices index only. In 1983 they introduced the ROSSI index (RPI (All Items) less housing costs) to uprate income-related benefits. In 1992 the definition of ROSSI changed to New ROSSI.  New ROSSI is calculated as RPI (All Items) less rent, local taxes and mortgage interest payments. Since 1983, benefits have been increased in relation to the RPI, ROSSI or New ROSSI.  The actual increase in particular benefits has depended on the index applied and on policy decisions as to the appropriate rate for the benefit. In the 2010 budget the Chancellor announced that from April 2011 most DWP administered benefits would be uprated in line with the CPI. Also, the Government introduced legislation providing for earnings up-rating of the basic State Pension, and in addition, provided a triple guarantee that the basic State Pension will increase by the highest of the growth in average earnings, price increases or 2.5%

Between 1948 and 1979 the basic retirement pension doubled its value in real terms and maintained its value in comparison with average earnings. Under the Thatcher government the basic state pension declined in value in relation to earnings, until the Labour Government rescued it and linked it to movements in earnings from 2001. Over the whole period since 1948 it more than doubled in real terms. It will go up by 2.5% in April 2013 well ahead of earnings and just about maintain its value with average prices. (See Table 1)

Table 1: Single Basic State Pension at April 2011 prices and as a percentage of average earnings

Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

Contrast that with what has happened to the benefit for the unemployed. Between 1948 and 1979 it also doubled in value in real terms. But since 1980 there has been a sustained fall in comparison with earnings and even under the Labour Government the real level of unemployment benefit fell (See Table 2).

Table 2: Single Unemployment Benefit / Jobseeker's Allowance (contributory) at April 2011 prices and as a percentage of Average Earnings

Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

The improvements that the Labour Government made to out of work benefits were concentrated on families with children. Table 3 shows what has happened to the incomes of a lone parent with one child on social assistance. The first act of the Labour Government in 1997 was to cut lone parent benefits, but the outcry resulted in a sustained improvement in real terms and as a proportion of average earnings.

Table 3: Income support for a lone parent plus one child at April 2011 prices and as a percentage of average earnings

Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

The decision to uprate pensions by 2.5% and working age benefits by 1% for three years is going to further exacerbate the absurd differentials in benefit rates that have developed over time. In 1948 a single pensioner received only 10p more than a single person on national assistance. Now a single person receives £71 per week in Job Seeker’s Allowance until they are eligible for Pension Credit when it jumps to £142.70 per week. A lone mother with one child gets £133.21 per week. These differentials clearly have nothing to do with need.

The decision to uprate benefits by less than inflation is justified by the argument that earnings are falling in real terms. Yes, and this meant that for the first time for decades there was some closing of the gap between the living standards of the unemployed and working households. In 1948 the single rate of social assistance was 18% of average earnings and it reached 20% in the late 1960s. In 2011 it had fallen 11% of average earnings.

Figure 4 compares movements in the CPI, RPI, the Minimum Income Standard price index and the single pension and JSA rates since 2000. The Minimum Income Standard price index, (developed by Donald Hirsch), represents the expenditure patterns of a low income person rather than the average. Between 2000 and 2011 the MIS price index has risen by 47% compared with the CPI by 28% and the RPI by 38%. The incomes of single pensioners have risen by 51% but single people on JSA by only 29%. Next April single people on JSA will get an extra 71 pence and their living standards and those of all other non-pensioners supported by benefits and tax credits including the majority who are in employment will fall further.

Figure 4: Movements in CPI, RPI, MISPI and benefits for single pensioners and single JSA. 2000=100

*

[1] Professor of Social Policy at the University of York

[2] Bradshaw, J. and Lynes, T. (1995) Benefit Uprating Policy and Living Standards, Social Policy Reports Number 1, Social Policy Research Unit, University of York: York

[3] http://budgetresponsibility.independent.gov.uk/economic-and-fiscal-outlook-december-2012/

[4] Levell, P. and Oldfield, Z. (2011),The Spending Patterns and Inflation Experience of Low-Income Households Over the Past Decade, Commentary 119, London: Institute for Fiscal Studies

[5] Hirsch, D. (2012) Benefit uprating: a return to human decency, Poverty 141, 6-9.