Child poverty cumulative impact assessment: update

3. Updates

3.1 Policy changes

Since the last update in June 2023, the modelling has incorporated the introduction of the advanced rate of Scottish income tax and the increase in the top rate from April 2024, along with the council tax freeze in 2024-25. Following our approach of modelling the impacts of entire policies rather than policy changes, the impacts of these policy changes on child poverty levels are not measured by the policy package, though such impacts are not expected to be appreciable.^[4] As noted, any changes to policies within the package are incorporated in those policies.

Recent UK Government policies have also been included in the model, namely the cut to National Insurance Contributions (NICs) from January 2024 and the one-off increase in the housing element of Universal Credit from April 2024. These policies are likewise expected to be immaterial in terms of aggregate levels of child poverty. The Autumn Statement also announced a set of labour market measures and reforms to disability benefits, but the impacts of these measures cannot be known ex ante and are therefore not modelled.

3.2 Economic context

Economic growth over the past year was stronger than the OBR anticipated in March 2023, when it produced the previous set of forecasts. However, the medium-term outlook has worsened as inflation is now expected to remain higher for longer, counteracting larger expected pay rises and dampening income growth more broadly. In real terms, average household income is set to remain below its pre-pandemic level until 2027. While this represents an improvement in the forecast since March, it still amounts to an unprecedented fall in living standards, the impacts of which will vary across society.

The implications for the headline measures of child poverty are not straightforward. Higher rates of inflation will directly raise the absolute poverty line, leading to higher rates of poverty on this measure. The effect on relative poverty is more ambiguous, potentially feeding through to higher housing costs but also to higher benefit rates. On the other hand, the relative poverty line is based on median income, so we may expect stronger nominal wage growth to be associated with higher rates of relative poverty, depending on how this growth is distributed.

3.3 Input data

The most consequential change since our last update is to the input data of our model. Up to now, the modelling has been based on a three-year pool of the Family Resources Survey (FRS), covering 2017-18, 2018-19, and 2019-20. Data from 2020-21 has not been used as the FRS was unable to obtain a representative sample in that year due to the impacts of Covid-19 on the data collection process. For the first time, we are able to incorporate FRS data for 2021-22, which is considered to be representative of the Scottish population. To maintain an adequate sample while excluding 2020-21, we follow the official poverty statistics in using a two-year pool of 2019-20 and 2021-22.

While the resulting sample is sufficiently large for our purposes, it is smaller than in previous modelling – primarily due to the switch from a three-year pool to two-year pool, and secondarily because the FRS still achieved a smaller size in 2021-22 than was typical before the pandemic.^[5] The pandemic also affected the composition of the 2021-22 sample, which as in 2020-21 was collected through telephone interviews rather than the usual face-to-face mode. DWP have mitigated any resulting bias by altering their weighting methodology and are confident that the data are more robust than in 2020-21. However, unobservable changes may have persisted, and DWP caution against making certain comparisons. These factors increase the uncertainty surrounding our estimates.

The inclusion of new input data also has a notable impact on our method for calibrating the outputs of the model to the official poverty statistics. Normally, this involves an upward adjustment in modelled poverty rates, but less of an adjustment is required when using the latest data. This acts to lower our projections for child poverty; indeed, it explains most of the change in our estimates since the last modelling update in June 2023.

This should be borne in mind when interpreting the results: the improvement primarily reflects a modelling update, rather than an upgrade in the economic outlook or the impacts of new policy decisions. Furthermore, while the calibration method itself has not changed, and while fluctuations in the opposite direction are possible, Section 4 shows that alternative methods can result in higher projected poverty rates using the latest data. This underscores the uncertainty of our estimates.