Child poverty rose last year as incomes for the poorest third of families fell

Britain’s weak post-crisis living standards recovery went into reverse last year for the poorest 30 per cent of families, as incomes fell in the bottom third fell by between £50 and £150, according to the Resolution Foundation’s flagship annual Living Standards Audit published today (Tuesday).

To establish recent trends in household living standards, the Audit ‘nowcasts’ income and poverty levels for the past year (2017-18). It finds that income growth slowed for all households last year, with a typical middle income household seeing a rise of just 0.9 per cent. This is the weakest since 2012, and a marked slowdown from both the 1.6 per cent rise in 2016-17, and the 2.5 per cent average in the decade before the financial crisis.

While middle income households saw weak income growth, the top 30 per cent of households experienced even slower growth of 0.4 per cent, while disposable incomes actually fell for the bottom 30 per cent of households by 0.3 per cent.

With the middle pulling away from the bottom, child poverty is projected to have increased last year by around 3 per cent. This was driven by benefit cuts that particularly hit low-income families, including the 3 per cent real-terms fall in the value of tax credits and child benefit. In contrast to rises in poverty, inequality has remained broadly flat since 2010-11.

Last year’s increase in child poverty reflects a broader trend since 2011, with government data showing that the proportion of children in poverty has grown by 11 per cent over this period. This has been driven by a longer term rise in children living in poor working families, up from 30 to 39 per cent since 2003-4.

The Living Standards Audit 2018 deep dive into families’ disposable incomes however shows that these figures are likely to understate the recent rise in child poverty, because large underreporting of benefit income means that the impact of benefit cuts are understated.

The analysis highlights a £37bn gap between actual benefit expenditure last year and the lower level of benefit income reported in the government household incomes survey that is used to calculate poverty rates. This gap, which has been growing since the early 2000s, means that almost one in every five pounds of benefit spending is not taken into account in official poverty figures.

By adjusting the survey to match what the government actually spends on benefits, the analysis shows that our picture of poverty over the last 30 years needs to be reexamined. It finds that:

• Child poverty levels are lower once all benefit income is accounted for. The Audit finds that 25 per cent of children are living in relative poverty, rather than the official survey estimates of 30 per cent.
• Child poverty has been rising twice as fast since as official figures show. The proportion of children in poverty has actually grown by 21 per cent between 2011 and 2016, rather than 11 per cent, in part because the growth is from a lower base.
• Falls in child poverty during the 2000s were bigger than previously thought. Child poverty actually fell from 3 million in 1998-99 to around 1.6 million in 2010-11 (rather than falling from 3.3 million to 2.3 million), with half a million more children taken out of poverty than official surveys suggest. This means the target to halve child poverty between 1998 and 2010 was almost met, rather than being missed by 600,000 children as previously thought.

The Foundation says its analysis reinforces the fact that in-work cash transfers are a key component of any poverty reduction programme.

It adds that with Universal Credit (UC) – the government’s main vehicle for such in-work cash transfers – about to enter a critical phase as families claiming tax credits are moved onto the new system, the government should urgently review the planned reductions in UC support so that it becomes a vehicle for reversing recent increases in child poverty.

Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said:

“Reducing child poverty has been a goal of politicians from all parties in recent decades. But our analysis shows that child poverty is likely to have risen last year, and that rises since 2010 have been underestimated in official government data.

“Our analysis shows how important cash benefits like tax credits have been for supporting just about managing families and tackling child poverty since the millennium.

“It’s vital that government and other policy makers understand the positive impact that cash transfers have on low-income families, not least as they are in the middle of a huge multi-year programme of over £14bn worth of benefit cuts. The risk is that, unless the lessons of the past are learned, the future could spell squeezed incomes and further increases in child poverty.”