Child poverty

62.  In 1999, the then Prime Minister committed the Government to the goal of ending child poverty "within a generation". The pledge was underpinned by a series of targets and milestones to reduce the number of children in low-income households by at least half by 2010/11 and eradicate child poverty by 2020.

63.  The Government has said it will judge its success in meeting the 2010 child poverty primarily through reference to the number of children in relative low-income households, defined as households with incomes below 60% of median income before housing costs. The Government has also said it will use two additional indicators to measure progress against tackling child poverty in the coming years:

• The number of children in absolute low-income households, defined as households with incomes of less than 60% of median income held constant in real terms from a 1998-99 baseline; and
• The number of children in relative low-income households and in material deprivation: the introduction of a material deprivation indicator for child poverty is designed to provide a wider measure of living standards and reflects the view that tackling child poverty is about more than simply raising income levels.[183]

64.  The baseline for progress against the target to halve the number of children in relative low-income households by 2010-11 was the Government's estimate that 3.4 million children were living in relative poverty in 1998-99.[184] This meant that child poverty levels needed to be reduced to 1.7 million in order for the Government to meet its 2010-11 target.

65.  Since 1998-99 600,000 children have been lifted out of relative poverty, whilst absolute child poverty has halved.[185] The Government calculates that measures announced since Budget 2007 will lift a further 500,000 children out of relative poverty.[186] This left the Government, prior to the Pre-Budget Report, needing to reduce child poverty by a further 600,000 children in order meet its 2010-11 child poverty target.[187]

66.  The key child poverty measures in the 2008 Pre-Budget Report included:

• Bringing forward the Government's commitment to increase the child element of the Child Tax Credit by £25 above indexation in April 2010 to April 2009; and
• Bringing forward the increase in Child Benefit from £18.80 to £20 a week for the first child and from £12.55 to £13.20 a week for subsequent children from April 2009 to January 2009.[188]

67.  Mike Brewer, Director, Institute for Fiscal Studies, told us that "there were some measures for families with children announced in the PBR, but that they all take effect in 2009". He went on to say that "there was nothing specific for families with children in 2010, which is the year the Government has the quantified target for", concluding that "the small rise in the continuation of the rise in the personal allowance and the slight extension, have a negligible impact on child poverty, so essentially the PBR did nothing for child poverty in 2010".[189] In written evidence the TUC described the Pre-Budget Report as a "missed opportunity, leaving a lot still to be done in the Budget of next Spring".[190] The Child Poverty Action Group (CPAG) also referred to the 2008 Pre-Budget Report as a "missed opportunity" with respect to child poverty. They explained that the child poverty measures it contained would do little to reduce child poverty because:

The spending measures on poor families are limited. While bringing forward increases on child benefit to January 2009 and child tax credit to April 2009 will improve families' positions, these will not affect the child poverty target (original plans would have had this spending in place by the target year)[191]

68.  Treasury officials confirmed that the Pre-Budget Report would have only a negligible impact in terms of meeting the child poverty target, telling us that this was because "the measures announced in the PBR are about bringing forward increases which would otherwise have taken effect either in April 2009 or in April 2010".[192] Whilst the child poverty measures in the Pre-Budget Report will not significantly advance meeting the 2010 child poverty target, the Chancellor insisted it would provide additional support to families. He told us that:

People with children will benefit from the increased child benefit rate that will come in January [2009]. In addition to that the child tax credit increase has been brought forward so they will benefit from that as well, so I do not agree with your assertion that it [the 2008 Pre-Budget Report] is not helping people on low-incomes[193]

69.  Mike Williams, Director Personal Tax and Welfare Reform, rejected the suggestion that the Government would fail to meet the 2010 child poverty target. He told us that "as we [the Government] made clear in the PBR Red book, Ministers are going to take stock of where we have to go on the 2010 and 2020 targets in the Budget".[194] The Chancellor reaffirmed the Government's commitment to tackling child poverty, telling us that the 2010 target "is an extremely important target to us". The Chancellor went on to say that he could not make the decision now as to what additional monies the Government would spend on alleviating child poverty in the 2009 Budget, but would "make a decision in the Spring as to what I can do".[195]

70.  The Pre-Budget Report states that the Government will introduce a child poverty bill in 2009. It intends to launch a consultation asking stakeholders how legislation in this area can best reflect its long-term ambition to eradicate child poverty.[196] The Chancellor referred to this proposed child poverty bill as further evidence that the Government remained committed to reducing child poverty. The TUC welcomed the Government's "plans to put into law their commitment to eradicate child poverty by 2020" but went on to add that "a redoubling of efforts to deliver the 2010 target of halving child poverty on its level of 1998 is necessary. This is, after all, the foundation for this new legislation".[197] CPAG also welcomed the commitment to enshrine the 2020 target in legislation, but cautioned that legislation "would be meaningless without more concrete steps to achieve the 2010 target", noting that "time is running out" for the Government to meet the 2010 target.[198]

71.  Mr Brewer told us that the Government would need to spend an additional £2.8 billion if it was to meet the 2010-11 child poverty target.[199] CPAG broadly concurred saying that "reducing child poverty by half by 2010 will mean additional expenditure of around £3 billion invested in family incomes—a sum of money which they noted was "small indeed in the context of wider economic packages".[200] Treasury officials explained that, whilst they themselves did not forecast such figures, they believed the Institute of Fiscal Studies estimate of £2.8 billion was in "the right ball park".[201]

72.  We welcome the decision in the Pre-Budget Report to bring forward measures on Child Benefit and Child Tax Credit, including the reforms on Housing Benefit and Council Tax Benefit due this autumn, which will provide increased support to families with children. However, we note with concern that the Pre-Budget Report contains no policy measures which will significantly advance meeting the 2010 child poverty target. The Chancellor has told us that the Government remains strongly committed to meeting the child poverty targets, but this needs to be demonstrated through firm action on tackling child poverty in the 2009 Budget, including the deployment of additional resources. We recognise the fiscal position is strained and that resources are limited, but believe meeting the 2010 child poverty target must not be allowed to fall by the wayside.

Fuel Poverty

73.  The Office for National Statistics estimates that excess winter deaths in 2007-08 totalled 25,300, the majority of these deaths occurring among the elderly.[202] In his Budget statement last March, the Chancellor indicated that he would help pensioners who were facing pressures with higher energy bills by raising the winter fuel payment for over 60s from £200 to £250 and for the over 80s from £300 to £400, which would ensure that "9 million pensioner households will be better off".[203] The cost of the payments for winter 2008 was estimated at £575 million.[204]

74.  Mr Mervyn Kohler, Special Adviser for Help the Aged, said that the large number of winter deaths were a "continuing disgrace to a government which is there to protect the most vulnerable in our society."[205] Mr Kohler suggested to us that the Chancellor had missed many opportunities to address fuel poverty in the Pre-Budget Report:

surely this was the moment when he could really have done something significant with the construction industry to improve the energy efficiency of our whole housing stock, improve therefore employment opportunities in that sector and help towards reaching the climate change targets as well as eradicating fuel poverty on the way. [206]

ONE-YEAR COMMITMENT

75.  The Budget 2008 announced that the additional winter fuel payment was a one-year commitment. When we asked Treasury officials in March what action would be taken to help those in fuel poverty in the coming years we were told that the Treasury continued to undertake discussions with the energy supply companies with a view to bringing "something forward for the winter following the winter coming.".[207]

76.   Mr Kohler told us that he was horrified that the increase in the winter fuel allowance had been described as a "one-off" payment by the Chancellor. He pointed out that the increases that people were facing in their energy bills had been higher than the winter fuel allowance and the additional one-off payment—"as "one-off" improvements are not really terribly helpful".[208]

MONITORING ENERGY COSTS

77.  The Pre-Budget Report 2008 stated that "clear and transparent information" was needed for all consumers to "manage their own energy costs through engaging effectively with the energy market".[209] The Chancellor acknowledged that there was "widespread concern that the fall in the price of wholesale energy has not been reflected quickly enough in reduced household bills".[210] The Chancellor told us he had asked Ofgem to publish quarterly reports over the coming year showing the relationship between wholesale prices, estimated hedged wholesale costs and average retail prices for gas and electricity in order to:

make it clearer when companies are passing the benefits of downward price changes through to their consumers and will ensure greater transparency over future price changes.[211]

78.  Mr James Richardson, Director, Public Spending, HM Treasury, said that the new requirements placed on Ofgem reflected "the fact that there is concern around this issue and the Government wishes to ensure that the full facts are in the public domain … so that the full information is available to people who are concerned about these issues".[212]

79.  We asked Ms Teresa Perchard, Director of Public Policy, Citizens Advice, if she thought enough had been done to ensure that the fall in the global price of energy had been passed on to consumers. Ms Perchard acknowledged that Ofgem had undertaken a "major piece of work" which had "highlighted a lot of issues around pricing problems, tariff differentials, excessive pricing for certain things, the same sorts of questions as arise around bank charges and currently the extent to which interest rate reductions will be passed on to users of credit". However, she reflected that the ball was "in the court of the regulator at the moment to act decisively and quickly to protect consumers and I do not think we have seen decisive, quick action by the regulator".[213]

80.  Mr Richardson, for HM Treasury, cautioned that action was not straightforward as energy providers had engaged in hedging behaviour on the energy markets and therefore did not "necessarily buy their inputs on the spot markets at which we have seen prices fall, so understanding those relationships is a complex matter that Ofgem are looking into". He stressed that the Treasury needed to have the facts "to establish whether there is a divergence between the prices that we might expect to be seen in the markets and those that we do see before leaping to conclusions". [214]

81.  We note that the price of fuel has fallen considerably in recent months. Ofgem has a clear responsibility to ensure that energy providers are not taking advantage of British consumers. We expect the Government to act promptly on the Ofgem quarterly reports in order to ensure, by whatever means necessary, that consumers are not charged an inflated price for energy.

TARGETED ASSISTANCE

82.  The Chancellor told the House in his speech on the Pre-Budget Report that "the most pressing energy problem for many families is paying heating bills".[215] As we discussed in our Report on the 2008 Budget, the Winter Fuel payment is not means-tested and currently it is paid by UK residents over the age of 60.[216] Mr Peter Kenway, Director, New Policy Institute, pointed out "that two-thirds of the households in fuel poverty are single adult households, both pensioners and non-pensioners. With the non-pensioner households there is a big overlap with those on incapacity benefit, and so the idea that one should be directing attention towards that group I think is absolutely correct".[217]

83.  In response to this concern the Government had "tripled cold weather payments for this year, up to £25 a week, for those on modest incomes".[218] The Government announced that it expected approximately 600,000 customers to benefit from discounted bills by the end of the year, "as a result of the agreement between the Government and the companies for an additional £225 million spending on reduced tariffs and other social programmes over three years. Around three quarters of these bills will be guaranteed not to have price increases this winter".[219]

84.  Following the 2008 Budget, Ofgem announced in July that suppliers agreed to increase their investment in social programmes to help the fuel poor—those spending more than a tenth of their income on energy—by £225 million between 2008 and 2011. Ofgem released new guidelines to help fuel-poor consumers ensuring that energy companies' social tariffs were equal to their cheapest deals available for customers. Ofgem specified that in future, a supplier's social tariff must be as favourable as the lowest tariff offered to customers in any one area, including online deals. Therefore vulnerable and fuel-poor customers who struggle most to pay their energy bills should be assured of being on the best deal their supplier offers in their area.[220]

85.  The Chancellor was clear that "if sufficient progress is not made in the next few months in closing unfair gaps in pricing between payment methods—the Government will use statutory powers to end unjustifiable pricing differentials".[221] Mr Richardson stressed that the Government stood "ready to consult on legislation to tackle unfair pricing differentials between methods of payment for energy, should that prove necessary. Obviously, our hope is that the discussions between Ofgem and the energy companies bring that matter to a satisfactory voluntary resolution".[222] We note that Ofgem has recently begun a consultation on "new rules to end unfair pricing".[223]

86.  We welcome the progress made to close unfair gaps in energy pricing. For too long vulnerable and fuel-poor consumers who should have been assured of receiving the best deal from their supplier have struggled to pay energy bills. It is important that the Government ensures that the energy companies take urgent steps to resolve this matter quickly and if necessary takes statutory powers to do so.

Marginal deduction rates

87.  Our inquiry also focused on the issue of tax credits and high marginal deduction rates for low-income households. We examined whether low-income households should face such high deduction rates and whether Government reforms announced in the 2008 Pre-Budget Report would increase the number of low-income households facing marginal deduction rates of over 60%.

88.  The Treasury defines the poverty trap as occurring "when those in work have limited incentives to move up the earnings ladder because it may leave them little better off".[224] Marginal deduction rates are used to measure how far people's incentives to increase their incomes are being reduced. They show how much of each additional pound of gross earnings is lost through higher taxes and withdrawn benefits or tax credits. For instance, a marginal deduction rate of 70% means that, for every one pound of additional gross income, 70 pence of that additional pound is taken away, either by taxes or a reduction in benefits. Marginal deduction rates provide one way to measure of the extent of the poverty trap.

89.  The Working Tax Credit supports low-income families with at least one working adult, including families without dependent children where one adult was working over 30 hours a week and aged 25 or over. As we noted in our Report on Budget Measures and Low-Income Households, the Government has made the tax credits system more generous over time. Reforms to the tax and National Insurance system in the 2007 Budget were accompanied by major changes to tax credits. First, the Government announced that, from April 2008, the income threshold at which Working Tax Credit was received in full would increase by £1,200, to £6,420 a year. This change meant that eligibility for tax credits extended in 2008-09 to those single adults without children with incomes up to around £12,900 and to those couples without children with a combined income up to around £17,500. This reform was accompanied by an increase in the tax credit withdrawal or taper rate by 2% to 39% (this means that an award was gradually reduced at the rate of 39 pence for every pound of gross income over the threshold). The effect of the increase in the withdrawal rate is thus to make the rate of descent in payments as income increases slightly more marked, albeit from a higher threshold.[225]

90.  Table 1 shows the number of households facing high marginal deduction rates in excess of 60% as well as how the number of households facing high marginal deduction rates has increased since the 2008 Budget as a result of subsequent policy measures, including the policy changes announced in the 2008 Pre-Budget Report. Almost two million households now face marginal deduction rates over 60%, whilst the number of households facing marginal deduction rates in excess of 70% will increase from 200,000 to 305,000. The number of households facing marginal deduction rates of over 90% has doubled from 30,000 to 60,000. [226]

91.  Over time the number of households facing marginal deduction rates of over 60% has increased sharply—prior to Budget 1998, 760,000 households faced marginal deduction rates over 60% compared to 1,960,000 for 2009-10.[227]

Table 1. The effect of the Government's reforms on high marginal deduction rates[228] [229]

      

Marginal deduction rate	Before Budget1998	2008-09 system of tax and benefits	2009-10 system of tax and benefits
Over 100 per cent	5,000	0	0
Over 90 per cent	130,000	30,000	60,000
Over 80 per cent	300,000	150,000	225,000
Over 70 per cent	740,000	200,000	305,000
Over 60 per cent	760,000	1,875,000	1,960,000

Source: Budget 2008, p 62, Table 4.2, Pre-Budget Report, November 2008, p 94, Table 5.2

92.  The New Policy Institute (NPI) explained that the tax problem for low-income households had two linked but separate elements. One was the amount of tax paid by low-income households. The second was the marginal rate of tax faced by low-income households. NPI said that the key point was that a worker belonging to a family in receipt of tax credits faced a marginal effective tax rate of 70% on their earnings (a consequence of the 39% tax credit taper, combined with the normal rates of income tax and national insurance). They argued that:

It is, quite simply, ridiculous for workers in the lowest income families in the land to be facing by far the highest marginal rates of tax.[230]

93.  Treasury officials accepted that this year's Pre-Budget Report would increase the number of households facing high marginal deduction rates, telling us "that if you look at the position for 2008 as compared to 2009, there has been some slight deterioration".[231] For the Treasury, Mark Bowman, Director Tax Strategy and Delivery, explained that this deterioration was the result of the measure introduced in Budget 2008 to disregard Child Benefit for the purposes of calculating income for Housing Benefit, which gives "increased support to low income families" but also has the effect that there are more people who are on the housing benefit taper and who as a result face these marginal deduction rates".[232] His colleague Mike Williams said that "there is not an easy way of avoiding the effect of the taper creating relatively high marginal deduction rates" and that it was a "consequence of focussing the support that is available on people on lower incomes".[233] Treasury officials were also asked about the consequences for those renting council properties of increases in their housing costs and the consequences in terms of marginal deduction rates for these people. Mike Williams told us that the Treasury "would need to do more research to see … the impact … in terms of putting more people on to [higher] marginal deduction rates". He went on to suggest that the effect would "depend exactly where they are on the income distribution and exactly what rent change they would face".[234]

94.  The Chancellor defended the decisions made on tax credits and the consequences this would have for marginal deduction rates faced by some people.

If you increase people's income through tax credits, through housing benefit or whatever, because these are benefits that get tapered out, when somebody comes off them there can be a problem with marginal deduction rates. Frankly, I think it is better though to provide that extra help for people on those low incomes [235]

95.  Mike Brewer explained that there was no simple solution to the problem of high marginal deduction rates and that "the only way that we cannot have the situation we have at the moment is if you adopt a different set of priorities from the current Government's":

The current Government wants to give large amounts of money to low income families with children and it does not want to give it to high income families with children. Change one of those two rules and you can have a system with lower marginal deduction rates, either by having higher universal child benefit and higher income tax rates; that would be one solution, or by having much less generous tax credits, in which case you would have fewer families on these high tapers.[236]

Peter Kenway, for NPI, told us that it was "an inevitable feature of the tax credit taper that it takes money away from people as their income goes up" but believed the key "question is why it should be that steep". He suggested one way forward would be to reduce the taper rate and said "what strikes us is that this system has not been reviewed and the opportunities for lowering that rate do not seem to have been taken".[237] John Whiting, from PwC and the Low Incomes Tax Reform Group, agreed that one way to ease the problem of high marginal deduction rates on low-earners was to reduce the 39% taper, but also suggested that an alternative approach would be to begin the taper higher up the income scale which he believed would also alleviate the situation.[238]

96.  The increase in the number of households facing marginal deduction rates of over 60% is a direct consequence of decisions made by the Government as to how the tax and benefit system will work. We acknowledge that there is no easy solution to the problem of high marginal deduction rates, and that this results in part from the Government's approach of targeting support on lower-income households. That said, we welcome the fact that the Government has ensured that no household now faces a marginal deduction rate of over 100%. However, we are concerned by the increase in the number of households facing high marginal deduction rates of over 60% and recommend that the Government examine ways to over time reduce the number of households adversely affected by high marginal deduction rates.

Take-up of tax credits and other mean-tested benefits

97.  In our June 2008 Report Budget Measures and Low-Income Households we examined take-up rates for tax credits. We welcomed recent increases in take-up of Working Tax Credit amongst low-income individuals and couples without dependent children, but felt that there was considerable scope for the Government to do more to boost the take-up of Working Tax Credit amongst this group. That inquiry also suggested that there was scope to increase take-up of benefits such as Pension Credit, Housing and Council Tax Benefit. We discuss take-up of pension credit below in the context of measures to alleviate pensioner poverty.

98.  The Pre-Budget Report gave an update on take-up figures, stating that take-up of tax credits is higher than for any previous system of income-related support, with 82 per cent of eligible families claiming what they are entitled to, rising to 96 per cent for those on the lowest incomes.[239]

99.  The Government announced in the 2008 Pre-Budget Report that it was taking steps to increase the take-up of tax credits. The Pre-Budget Report stated that the Government would build upon its initiative, launched last year where HMRC has been working in partnership with other organisations to promote working tax credit (WTC) in innovative ways. HM Revenue and Customs (HMRC) currently reaches over 500,000 employees in 40 organisations and in the coming year will aim to double this coverage, working with employers' Corporate Social Responsibility programmes and using the National Employment Partnership to raise employers' awareness of the WTC. In addition, the Pre-Budget Report announced that HMRC has introduced four new services nationally over the last twelve months to assist customers to claim, renew and manage their tax credit awards. The Government says these initiatives will help up to 400,000 customers each year get the right tax credits award, and by the beginning of next year around 100 Children's Centres will offer tax credits advice.[240]

100.  A number of witnesses told us that problems with take-up of tax credits as well as benefits such as Housing and Council Tax Benefit went beyond raising awareness of their existence. According to Ms Perchard, for Citizens Advice:

One of the big problems that we see at the moment is that you are working with three separate bits of Government to assemble the support for your income … it is not joined up for the individual. The HMRC tax credits helpline does not say 'you are eligible for Housing Benefit and Council Tax Benefit. I am going to fill in a form for you now and the council will complete this in a few days and the money will be in your pocket'.[241]

John Whiting concurred with Ms Perchard that a more integrated and joined-up system between the various branches of Government for the administration of tax credits and other benefits would be a valuable step forward.[242]

101.  We welcome the increased take-up of Working Tax Credit amongst low-income individuals and couples without dependent children, although there is clearly very considerable scope to increase the take-up of Working Tax Credit amongst this group. As we originally said in our Report on Low Income Households, whilst one of the reasons for low take-up of Working Tax Credit amongst this group—lack of awareness of eligibility for Working Tax Credit—can be tackled through publicity campaigns, other factors will be more difficult to overcome. These include making the system more responsive and user-friendly for those with volatile incomes and circumstances. To this end we welcome the increased resources that the Government is devoting to helping tax credit recipients to claim, manage and renew their awards. That said, awareness-raising measures do have a role to play in boosting take-up rates, particularly in correcting the perception that access to Working Tax Credit is restricted to those with dependent children. We will continue to monitor Government progress in this area, including the implementation of Housing Benefit and Council Tax Benefit reforms due this autumn, during our inquiry on the 2009 Budget.

184   Ibid., p 21 Back

185   Pre-Budget Report 2008, p 86, para 5.11 Back

186   Ibid. Back

187   Q 192-193 Back

188   Pre-Budget Report 2008, p 86, para 5.12 Back

189   Q 62-63 Back

190   Ev 89 Back

191   Ev 60 Back

192   Q 195 Back

193   Q 352 Back

194   Q 196 Back

195   Q 310 Back

196   Pre-Budget Report 2008, p 88, para 5.21 Back

197   Ev 89 Back

198   Ev 60 Back

199   Q 64 Back

200   Ev 60 Back

201   Q 197 Back

202   Office for National Statistics, News release: Excess winter deaths remain low in 2007-08,27 November 2008 Back

203   HC Deb, 12 March 2008, col 298 Back

204   Budget 2008, p 9, Table 1.2; HC (2007-08) 430, Ev 31, Q 217 Back

205   Help the Aged News Release, Cold kills 25,000 older people, 27 November 2008 Back

206   Q 65 Back

207   Q 216 Back

208   Uncorrected Oral Evidence, Pre-Budget Report 2008, 4 December, Q 66 Back

209   Pre-Budget Report 2008, p 141, para 7.69 Back

210   HC Deb, 12 March 2008, col 297 Back

211   Pre-Budget Report 2008, p 141, para 7.69 Back

212   Q 218 Back

213   Q 68 Back

214   Q 218 Back

215   HC Deb, 24 November 2008, col 499 Back

216   HC (2007-08) 430, para 55 Back

217   Q 67 Back

218   HC Deb, 24 November 2008, col 499 Back

219   www.number10.gov.uk,Home Energy Saving Programme, Helping Households to Save Money, Save Energy Back

220   Ofgem press release, Social Tariffs must equal Suppliers' cheapest deals, 25 July 2008 Back

221   HC Deb, 24 November 2008, col 499 Back

222   Q 219 Back

223   Ofgem press release, Ofgem consults on new rules to end unfair pricing, 8 January 2009 Back

224   Pre-Budget Report 2008, p 93, para 5.43 Back

225   Treasury Committee, Thirteenth Report of Session 2007-08, Budget Measures and Low-Income Households, HC 326 Back

226   Pre-Budget Report 2008, p 94, table 5.2 Back

227   Ibid., Table 5.2 Back

228   Marginal deduction rates are for working heads of families in receipt of income-related benefits or tax credits where at least one person works 16 hours or more per week, and the head of the family is not receiving pensioner or disability premia Back

229   Figures are cumulative Back

230   Ev 77 Back

231   Q 176 Back

232   Q 355 Back

233   Q 176 Back

234   Q 175 Back

235   Q 355 Back

236   Q 82 Back

237   Q 81 Back

238   Q 82 Back

239   Pre-Budget Report 2008, p 87, para 5.14 Back

240   Pre-Budget Report 2008, p 87, para 5.15 Back

241   Q 84 Back

242   Q 85 Back