Better work incentives are the key to reducing child poverty
The UK still has a higher proportion of children living in workless households than any other member state of the EU-27. This is the result of an unfortunate combination of two circumstances: first, the UK has a high overall rate of economic inactivity; second, households with children are overrepresented among the inactive.
A governmental PR department would probably present it this way: “Ten years ago, in a benign economic climate, 2.2 million children lived in households with no member in gainful employment. Today, in a severe recession, this figure is down to 1.8 million.” But it is also true that after ten years of extensive and costly policy efforts to raise employment rates, especially among lone parents, the UK is still at the bottom of the pack.
It is a bit strange that this fact is not really among the flagship arguments of the anti-child-poverty advocacy community. Instead, they emphasise that more than half of all children in relative poverty live in “working poor” households.
This statement is true when looking at snapshots of relative low income, but it overlooks the dynamics. Those who are in employment exit relative low income much more frequently than those who are not – which is hardly surprising. The chances of experiencing a pay rise or finding a better-paid position are higher inside the labour market than outside. Work continues to be the most promising route out of poverty and low-pay.
Therefore, in the longer run, child poverty should be understood and approached in very different ways than is done today. But as a first-aid measure, we should consider a substantial increase in the personal tax allowance, and likewise for National Insurance contributions.
For example, Tom Clougherty at the Adam Smith Institute proposes a near-doubling of the tax-free allowance to £12,000 per person. This would decrease tax revenues by £18.9bn, but it could well be a good investment. It would make work, even in low-skilled jobs, more attractive to those currently outside the labour market. To those half-way inside, it would boost incentives to go further, by disentangling tax liability and tax credit withdrawal to some extent. Old-fashioned economic incentives could, once again, prove a more powerful force than well-intentioned government projects.