Poverty and inequality: looking pre- and post- pandemic

Tomorrow we will see the latest statistics on income and poverty in Scotland and across the UK. Unfortunately, these statistics won’t be able to tell us about the impact of coronavirus on household incomes as the data will be for the 2019/20 financial year. It will be another year until we have official data on the impact of the pandemic.

What will the data tell us?

This data will effectively give us the pre-pandemic baseline on average incomes and poverty. That may not sound particularly exciting, but given the seismic changes that have happened in the last year, having data that fits quite neatly into the period up to the start of the pandemic related restrictions will help with understanding the magnitude of what happened once the pandemic took hold.

The pandemic will no doubt have lasting consequences on the economy, with a roll call of famous high street names being one of perhaps the most noticeable changes that will greet us once things open up. However, it’s important to remember, despite the enormous upheaval of the last year, that things won’t carry on like this and will return to something that more resembles the economy pre-pandemic than the eye of the storm that was 2020/21.

Indeed, the OBR are expecting a rebound in consumption and output through 2021 and GDP to have reached its pre-pandemic level by the second quarter of 2022. The outlook for unemployment is perhaps the most uncertain, and this will probably remain above pre-recession levels for some time.

Uncertainty is the key watchword just now. However, for those interested in the long-term prospects for the economy, the pandemic will need to be seen in context as an almighty shock, but one that will hopefully recede within a few years for most of us. In this sense, the pre-pandemic data is as good a benchmark as any to plan for future policy delivery.

Tackling child poverty can’t wait

The Scottish Government has a number of long-term ambitions for Scotland. One of these relates directly to the data that will be released tomorrow: the aim is to significantly reduce child poverty. The targets for doing this are set out in the Child Poverty (Scotland) Act 2017, and an interim set of targets are due to be met in the financial year 2023/24.

The data out tomorrow will tell us how the Scottish Government was progressing towards meeting its targets related to child poverty pre-pandemic.

Within the next 12 months, the Scottish Government will be required to update its Tackling Child Poverty Delivery Plan. To help understand the scale and scope of the ambition that this plan needs to realise, the Poverty and Inequality Commission asked the Fraser of Allander Institute alongside Manchester Metropolitan University to start to analyse a) the scale of polices required to meet the targets and b) the wider impacts on the economy of meeting the targets. These are some of our preliminary findings.

The good news is that, based on the assumption of broad economic recovery over the next few years, our analysis shows that meeting these targets is possible with the powers that the Scottish Government currently hold. However, it will require substantial investment to make it a reality.

For example, if the Scottish Child Payment was used alone to meet the target, a payment of £40 a week would meet the interim target and cost in the region of half a billion a year.

Other options are on the table. The Scottish Government does have powers over active labour market support to help parents overcome barriers to paid work, and this is one area that is already being implemented by the Scottish Government, but it would have to be scaled up considerably if it is to get enough parents either into work, or working enough hours, to meet the interim targets.

Housing costs are another area that the Scottish Government is already trying to ease the pressure on, and for some families, taking the pressure off rents would make the difference between being in poverty or not. However, this can only go so far. Even if we eliminated rents for all parents in poverty, we would still remain a good distance away from the interim targets underlining the need to use multiple policy levers to meet the challenge, rather than just relying on one.

Clearly, more can and needs to be done across a range of areas to meet the interim targets. To meet the 2030/31 targets, where relative poverty needs to be below 10%, will require much more and investment in more than one area will be required. For example, our analysis found that increasing hours or work for every parent in poverty so that they were working full time would not, on its own be enough to meet the final targets (and indeed we should not assume that every parent in poverty is able to work).

Relying solely on the Scottish Child Payment would necessitate a payment of £165 a week to make enough of an impact on those that are currently far below the poverty line. Clearly, the optimum solution has to come from targeting and combining levers so that they have optimal cumulative impact so that not just one lever has to be relied upon.

There are other levers beyond those mentioned here already, including disability and carer benefits (which will be fully transferred during the next parliament), doing more with employers (within the public sector too) to make the case for improved pay and conditions and thinking about how skills and training can be used to support progression opportunities.  These all need to part of the planning going forward.

Wider costs and benefits of reducing child poverty

Our modelling also used the Fraser of Allander’s CGE (computable general equilibrium) model to look at how meeting the targets would impact on the wider economy. Getting more money into the pockets of those on the lowest income has knock-on benefits in the wider economy as people on lower incomes are most likely to spend rather than save additional money. Getting more people into jobs and/or increasing hours also has positive knock-on implications in terms of economic activity.

However, there are other impacts to consider, particularly once the way in which new policies are funded is taken into account.

For example, if the Scottish Child Payment was increased to £40 a week to meet the interim target a 1 percentage point increase in income tax across all bands should be enough to meet this obligation, but this may come with its own economic costs if it leads to behaviour change amongst those that will be asked to contribute more.

Parents who receive the benefit may themselves change their behaviour, and may feel they can work less because of the additional money received from the government. This may be particularly the case if the marginal benefits of working are low (for example, due to a combination of low pay and high childcare costs).

The costs and benefits of making an investment like this, paid for by additional tax revenue, are never going to be entirely predictable. There may be substantial gains in terms of productivity by reducing poverty by improving health and wellbeing amongst parents now, and long-term benefits to educational attainment from reducing the number of children affected by poverty. In terms of parents’ decision making a higher Scottish Child Payment may actually make work more viable – for example, it may mean they can afford commuting costs.

In addition, as articulated by the Joseph Rowntree Foundation in their own research on meeting the child poverty targets, the vision of a Scotland where children can grasp their potential and where their parents aren’t constrained by the stress, strain and limitations of a life in poverty is one that many will sign up to, even if there is a small price to pay in terms of economic growth.

Looking forward

More work is required in the next year to explore the detail and to best design a way forward – for example, to fully understand the trade-offs and optimal policy combinations. We hope to be part of this work in the run up to the next Scottish Government Tackling Child Poverty Delivery Plan.

The key point from our analysis is that even if the statistics tomorrow do not point to progress pre-pandemic, there are actionable solutions that government, alongside businesses, can be getting on with that make meeting the child poverty targets a reality once the Covid-19 crisis recedes.

Authors

The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.

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