Child and working-age poverty to Mike Brewer and Robert Joyce. Institute for Fiscal Studies

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Child and working-age poverty to Mike Brewer and Robert Joyce Introduction Two definitions of poverty, both in Child Poverty Act: 1. Absolute income poverty: in poverty if household income is less
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Child and working-age poverty to Mike Brewer and Robert Joyce Introduction Two definitions of poverty, both in Child Poverty Act: 1. Absolute income poverty: in poverty if household income is less than 60% of median (in real terms). 2. Relative income poverty: in poverty if household income is less than 60% of median in that year. Incomes are equivalised and measured net of taxes and benefits. In this presentation, will focus on: poverty among dependent children and working-age individuals without dependent children (NB: not pensioners). poverty with incomes measured before housing costs have been deducted. Overview Methodology Poverty forecasts to under current policies The impact on poverty of coalition Government reforms Conclusions Outline of methodology 1. Start with base data on distribution of private income and household characteristics: 2008/09 Family Resources Survey. 2. Up-rate financial variables to expected future levels (Office for Budget Responsibility). 3. Re-weight data to reflect expected socio-demographic change (Office for National Statistics). Give relatively more weight to household types expected to become more common. NB: employment changes modelled in this way. 4. Simulate tax liabilities and benefit and tax credit entitlements, given expected future tax and benefit systems. 5. Adjust incomes to reflect non-take-up (and non-reporting) of means-tested benefits and tax credits. This yields a simulated future distribution of household incomes, from which we obtain results. Aligning simulated poverty with HBAI-measured poverty Can apply these methods to the past ( ), and compare our simulated incomes with officially measured incomes. In practice, micro-simulation output will not perfectly replicate survey data on which it is based. Why? We simulate tax liabilities, rather than using self-reported tax payments. We simulate means-tested benefit/tax credit entitlements, rather than using self-reported receipts (our adjustment for non take-up lessens, but does not eliminate, this problem). How do we account for this? For each household, calculate difference between simulated income and HBAImeasured income in Assume this difference remains same (in real terms) in future years, i.e. add the difference back on to our simulated incomes in future years. Uncertainties and limitations The official macroeconomic forecasts we use are highly uncertain (as the OBR itself makes clear). Behavioural change can not be fully accounted for. The income distribution is dense around the poverty line. Survey data is always subject to sampling error. This is true of our base data and the future HBAI data that we are forecasting. All these limitations are generic to static micro-simulation modelling. With some planned tax and benefit reforms, data is insufficient to identify precise distribution of losses and gains across households. Judgement required about which reforms can be modelled precisely enough Tax and benefit reforms that we do not model Some tax credit reforms: changes to way in which tax credit payments respond to within-year changes in circumstances (estimated saving of ~ 1.2bn in 2013/14). Localisation of Council Tax Benefit (an aggregate cut of 10%) in April 2013 (estimated saving of ~ 0.5bn in 2013/14). Migration of Incapacity Benefit claimants onto Employment and Support Allowance. Reduction in age of youngest child at which lone parents can claim Income Support. Why don t we model them? Not enough information about distribution of losses and gains. Note important differences between distributional analysis by decile group and poverty modelling. NB: In , the set of reforms we model is close to the set the Treasury have modelled. Difference is that we model Local Housing Allowance reforms. Poverty rate Poverty forecasts under current policies 23% 22% 21% Children (relative) Working-age without children (relative) Children (absolute) Working-age without children (absolute) 20% 19% 18% 17% 16% 15% 14% 13% Notes: 2008 figures are actual figures are linear interpolations between 2008 and Years refer to financial years. Incomes measured before housing costs have been deducted. Summary: forecasts under current policies Between (latest year of data) and : Median income, and hence relative poverty line, to fall in real terms. Absolute child poverty stable, relative child poverty to fall by about 300,000 (to approx. 2.5 million, or 19%). Among those of working age without children, absolute/relative poverty to rise by about 400,000/100,000. Between and : Small fall (~1%) in real median income. Relative child poverty unchanged, absolute child poverty up 100,000. Among working-age adults without children, absolute/relative poverty up by about 300,000/200,000. Between and : Absolute/relative poverty up by about 100,000/200,000 children and 100,000/200,000 working-age adults without children. The impact on poverty of coalition reforms What if Government had simply implemented plans for the tax and benefit system that it inherited? Interesting in its own right. Government has claimed no measurable impact from modelled reforms on child poverty to , based on Treasury analysis. Caveats (applying equally to our analysis and HM Treasury s) : Plans the Government inherited are not necessarily what would have happened under a Labour Government. Expected macroeconomic environment is taken as given. In reality, it may have been different without Government s reforms. Poverty rate Absolute poverty: the impact of coalition reforms 23% 22% 21% 20% Children (current policies) Children (no coalition reforms) Working-age without children (current policies) Working-age without children (no coalition reforms) 19% 18% 17% 16% 15% 14% 13% Notes: Years refer to financial years. Incomes measured before housing costs have been deducted. Poverty rate Relative poverty: the impact of coalition reforms 23% 22% 21% Children (current policies) Children (no coalition reforms) Working-age without children (current policies) Working-age without children (no coalition reforms) 20% 19% 18% 17% 16% 15% 14% 13% Notes: Years refer to financial years. Incomes measured before housing costs have been deducted. Summary: impact on poverty of coalition reforms In : Negligible impact on child poverty. Reduce slightly absolute poverty among working-age adults without children, by about 100,000. In : Increase absolute/relative child poverty by about 200,000/100,000. Do not quite agree with Government s claim about child poverty in But increase of 100,000 is smallest that would be measured in official series. Discrepancy accounted for by fact that we model Local Housing Allowance reforms, whereas Treasury did not. Increase absolute and relative poverty among working-age adults without children by about 100,000. In : Increase absolute/relative poverty by about 300,000/200,000 children and 300,000/200,000 working-age adults without children. Prospects for child poverty targets Child Poverty Act sets targets for absolute and relative child poverty in : 5% absolute; 10% relative. Under current policies, in we are forecasting: 20.9% absolute; 20.5% relative. So the required reductions in 7 years after would be: 15.9 percentage points absolute; 10.5 ppts relative. Relative child poverty has not fallen by 10.5 ppts over any period since at least 1961 (when series began). Conclusions Under current policies, we expect absolute and relative poverty to rise in next 3 years, particularly in We estimate that coalition Government s reforms act to increase poverty slightly in , and more clearly in Meeting absolute and relative child poverty targets in looks extremely difficult. Future work (after Welfare Reform Bill) will look at poverty beyond , and how it relates to Universal Credit reform.
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