Existing policies to tackle child poverty through changes in taxes and benefits are set to reduce the
number of children living in poor families by 1.2 million - a reduction of about one third. That
conclusion - the result of new research by Holly Sutherland and David Piachaud, published in
the February issue of the Economic Journal - is consistent with the Treasury's own estimate. But
the single figure hides the fact that while most households with children are better off under
Labour's policy changes, some become worse off: up to 300,000 children in the poorest
households may see a drop in their incomes.
These changes in income are due to tax and benefit reforms announced since the Labour
government came to power in 1997, including the introduction of the National Minimum Wage.
Most of the impact on child poverty - about two-thirds - is in workless households, with the main
effect coming from the increase in Income Support for younger children and Child Benefit rates.
If welfare-to-work policies are successful in increasing the number of parents in paid work, then
poverty rates could fall further. However this depends not only on job availability but also on
parents being able to take up paid work and on making paid work more attractive financially.
While the generosity of the Working Families Tax Credit has reduced the number of parents
facing marginal effective tax rates of 80% or more, it has increased the number facing marginal
deductions of over 65%. For some, incentives have barely been improved.
Using standard government assumptions about family circumstance, Sutherland and Piachaud find
that a person supporting a spouse and two children by working for 30 hours per week on the
minimum wage would have faced a marginal deduction rate of 96% under pre-Labour policies. In
other words, they would keep four pence of any additional £1 earned. But this rate falls to just
94% under Labour policies, that is, they would keep six pence.
The sustainability of the reductions in child poverty remains an open question. As incomes rise
generally, so does the poverty line, which is defined as half of average income. The effect of the
tax and benefit and minimum wage changes alone is to increase household incomes by a total of
£9.2 billion per year. This itself shifts the poverty line up by 2.4% and the number of children
calculated to be in poverty falls by 1 million instead of 1.2 million. More crucially, if levels of
unemployment or worklessness increase, then the overall improvement in the numbers of children
living on low incomes will be under threat.
While child poverty will be substantially reduced by the government's reforms, it will remain 50%
higher than in 1979 and one of the highest rates in the European Union. If child poverty is to be
abolished in a generation, as the Prime Minister has pledged, then this will require more than the
policy initiatives taken so far. It requires poor families to earn more - which means skills, jobs and
childcare - and to receive more transfers from the state - which means more redistribution.
Sutherland and Piachaud's analysis uses POLIMOD, the Microsimulation Unit's tax-benefit
model, to simulate the effect of the tax-benefit and minimum wage changes announced by the
Labour government between May 1997 and April 2000. These were compared with policy as it
existed in April 1997, uprated by price changes.
ENDS
Note for Editors: Reducing Child Poverty in Britain: An Assessment of Government Policy 1997-
2001' by Holly Sutherland and David Piachaud is published in the February 2001 issue of the
Economic Journal. Sutherland runs the Microsimulation Unit at the University of Cambridge;
Piachaud is at the London School of Economics.
For Further Information: contact Holly Sutherland on 01223-335264 (email:
hs117@econ.cam.ac.uk); or RES Media Assistant Niall Flynn on 020-7878-2919 (email:
nflynn@cepr.org).