Can child poverty be challenged without spending more on benefits and tax credits?
There’s an interesting discussion going on about what a future government could do to reduce inequality if the scope for increasing public spending is small to non-existent. In addition to In the Black Labour, a lot of people are referring back to Ed Miliband’s speech to the Social Market Foundation last month:
The fiscal challenges we face mean we need to find new ways of delivering social justice. The last Labour government made Britain a better place. I believe our progress on the NHS, schools and crime shows that. The Blair/Brown approach, with social progress resting on higher investment, was right.
But the failure of the Government’s austerity plan means that the next Labour government is likely to inherit a deficit that still needs to be reduced. So even then resources will have to be focused significantly on paying down that deficit.
And Martin Kettle’s piece in today’s Guardian about “the politics of ‘no more money’” sets out some of the political aspects very well. But, as I argued ten days ago, the scope for reducing inequality without spending more on benefits is limited. That post was mainly based on the OECD’s ground-breaking study of inequality, but there are also lessons to be learned from the last government’s efforts to eradicate child poverty.
I have been reading Richard Dickens’ article “Child Poverty in Britain: Past Lessons and Future Prospects” in the October National Institute Economic Review. The article is an excellent source for a brief description of Labour’s child poverty strategy and policies and their impacts. But the most striking element is the section that tries to evaluate the contribution of different factors to the reduction in child poverty since the late 1990s, an approach called ‘decomposition’. This produces a table showing factors that affected the changes in relative and absolute poverty between 1997/8 and 2008/9:
To read this table, look at the column for relative poverty: 26.2 per cent of children were in relative poverty in 1997/8, by 2008/9, this had fallen to 21.1 per cent. Demographic change and wage levels were pressures that would have increased child poverty, if nothing else had changed. Wage inequality lessened a little, so that helped reduced child poverty and so did changes in ‘work patterns’ (especially a reduction in the number of workless families).
The column for absolute poverty can be read in the same way.
A couple of points emerge from this. One is that getting more people into jobs had some effect on child poverty, but not a huge one. As Dickens comments,
This is disappointing, since the New Labour strategy, and now that of the coalition government, is to reduce poverty through increases in work. This strategy is likely to fail without improving the wages obtained or pay progression in these jobs.
The second point is that more than two thirds of the reduction is down to government benefits (including tax credits); Dickens calls this “the big driver of reduced child poverty.”
Before the last election, David Cameron argued that the “big governent” approach to cutting poverty, increasing tax credits and benefits for children, had failed. The coalition ‘s plan is to rely, like the last government, on “work as the best route out of poverty”, but even more so. The last government may have re-distributed by stealth, but this government is cutting benefits and reversing their initial promises to increase some benefits for children. But it seems that Cameron had, and Osborne has, this entirely wrong: it’s the money spent on redistribution that was mainly responsible. Without the tax credit and benefit increases, under Labour the number of children in relative poverty would have risen by 3.6 points instead of falling by 5.1 and the number in absolute poverty would have fallen by 3.8 points instead of 15.7.
So how will a government committed to fiscal conservatism cut inequality? Chris Dillow, taking up my earlier post, makes the important point that, internationally, there isn’t much correlation between the proportion of GDP spent by governments and how equal a country is. He suggests that we could reduce inequality by making the tax system more progressive, or by changing the institutional landscape – stronger unions, more collectivism, investment in education. But he asks how realistic this is:
Herein, I fear, lies the big challenge for the Left. Although it is technically possible to reconcile small government or fiscal conservatism with greater equality, the UK lacks the cultural underpinnings which would permit this happy combination.
In the same way, we could be fiscally conservative – indeed, we could have a smaller government – but choose to devote a higher proportion of government spending to benefits and tax credits. The most recent British Social Attitudes survey suggested that this may be a hard sell – possibly even harder than not being fiscally conservative – which, I suppose, is another way of making Chris’s point.