Is the Government right to question the IFS’s ‘static modelling’?
The Government’s rebuttal to today’s damning IFS report has been to claim:
The IFS acknowledge that Universal Credit will substantially reduce child poverty. It will make work pay for the first time, tackling in-work poverty and lift over one million people, including 450,000 children, out of poverty. Our wide-ranging reforms will have a dynamic impact on some of the poorest families, encouraging people into work, many for the first time, and improving the life chances of children at an early age.
They are partly right. The IFS do acknowledege Universal Credit (UC) will have some positive concequences. But the press release accompanying their report is titled ‘Universal Credit not enough to prevent a decade of rising poverty’ – suggesting they question its overall impact.
The IFS have ‘compared the scenario in which Universal Credit is not introduced with the scenario in which Universal Credit is fully in place in 2014’. This shows UC will lower relative child poverty by 450,000. But before UC is even introduced (in 2013) the IFS also expect a further 200,000 children to move into relative poverty. And between 2015-2020 they expect child poverty levels to rise further, despite UC’s existence. Furthermore, the report concludes that the Coalition’s tax and benefit reforms to date will increase relative child poverty by 300,000 by 2013. There is therefore no suggestion in the report that UC is the answer to reducing child poverty rises – its impacts do not even offset the cuts that the Government has already introduced.
The remaining question is therefore whether Universal Credit can be expected to have any ‘behavioural impacts’ beyond those the IFS have modelled (i.e. significant moves into work among the parents of children who would be, under the IFS model, in poverty). The Government have published little analysis of what they believe these impacts could be, but in their White Paper on UC DWP do state that ” we anticipate that there will be savings from the dynamic labour supply effects, with Universal Credit reducing the number of workless households by as much as 300,000″ further recognising, in carefully worded language, that they “believe that there is no reason why this increase should not be brought about within two to three years of implementation .”
So, if UC led the number of workless households to fall by 300,000 by 2016, as the DWP expect, would the IFS’s analysis substantially change? There are currently 3.88 million UK households with at least one member aged 16 to 64 where no-one is currently working, and 1.84 million children live in such a household. If that level fell by 300,000 it would clearly have some impact on child poverty rates. But there is much we don’t know about the Government’s figure: how many of the households have children? How many children does each households have? And is the presumption that all of the 300,000 will move into work that is paid enough, and provides enough hours, to move the household out of poverty (once incomes are equivalised for household size)? As there is no published modelling we don’t know, but some quick analysis gives a few indications:
- ONS statistics show that 27% of workless households have children in them, a percentage that, if applied to the DWP’s 300,000, would leave 81,000 households with children.
- In addition of all working-age adults in work we know that 28% are in poverty.
- Deduct this percentage to the 81,000 and you are left with a speculative total of 58,320 households with children in them who will, according to the DWP’s stated assumptions, move into work that pays them enough to leave poverty.
- Assume that each household has 1.9 children – that gives you 110,808 children leaving poverty.
So, it seems a fair assumption that even the most optimistic analysis of UC’s impacts only suggests that around an additional 111,000 children are set to be lifted out of poverty – a change that would still leave poverty levels in 2020 significantly above 3 million.
Even worse, the reality is that the Government’s analysis of UC’s potential impacts is already likely to be significantly overstated. The key determinant of labour market prospects over the next decade will be the number of jobs that are being created – a measure that is currently heading down with employment rates not forecast to even recover to pre-recession levels for many years. In addition many believe that the most likely impact of UC will be that some people will reduce their hours, and some will be able to work for a few hours when previously they could not. Neither outcome has significant impacts on poverty rates.
And it is also worth remembering that the IFS research is based on the same figures and assumptions that are used for modelling the public finance figures – so it seems a little odd for the DWP to criticise IFS for using the Government’s own chosen method of attempting to assess long-run trends in employment and public spending.
The irrefutable conclusion is that the IFS’s analysis is correct – if current policies remain in place 24% of children in the UK will be in poverty by 2020.