Tackling child poverty delivery plan: forecasting child poverty in Scotland

Chapter 1. Introduction

Landman Economics and Virtual Worlds were commissioned by the Scottish Government to produce four sets of projections for child poverty in Scotland, required for the Child Poverty (Scotland) Act (Scottish Parliament 2017b), which includes a set of child poverty targets to be achieved by 2030. This report describes the methods we used to forecast child poverty and gives details of our results.

1.1 Outline of the report

This introductory chapter sets out the background to our work. We discuss the Child Poverty (Scotland) Act, and also recent developments in the UK Government’s welfare reforms, as well as recent tax and social security measures announced by the Scottish Government which may have an impact on child poverty in Scotland. We then briefly discuss the key demographic and economic trends in Scotland and the UK.

Chapter 2 discusses our methods. We describe the four child poverty measures contained in the Child Poverty (Scotland) Act and explain how we model them using a microsimulation model (the Landman Economics/ IPPR/Resolution Foundation tax-transfer model) and a large-sample dataset (the Family Resources Survey).

Chapter 3 presents our results. As we discuss below, the Act sets a number of ambitious targets for reducing measured child poverty. Even without the already announced UK-wide cuts to the social security system, relative child poverty in Scotland is forecast to increase from just under 31% in 2017/18 to 35.5% by 2030/31 (the last year which our projections cover). After the implementation of the planned cuts, child poverty in Scotland is forecast to increase further, to 38% by 2030/31. Despite acquiring additional powers over the social security system which are being operationalised in the Social Security (Scotland) Bill (Scottish Parliament 2017c), the Scottish Government has limited social security powers to offset the reductions in social security incomes which are driving our central forecast of a substantial increase in child poverty over the next five years. The tax and social security reforms recently announced by the Scottish Government will not fundamentally change the overall trajectory of child poverty in Scotland.

1.2 The Child Poverty (Scotland) Act 2017

The Child Poverty (Scotland) Act places a duty on the Scottish Government to ensure that four child poverty targets are met during the 2030/31 financial year ^[1] . The four targets are:

1. Less than 10% of children living in relative poverty;

2. Less than 5% of children living in absolute poverty;

3. Less than 5% of children living in combined low income and material deprivation; and

4. Less than 5% of children living in persistent poverty.

All four measures are based on After Housing Costs ( AHC) disposable income.

The Act was passed unanimously by the Scottish Parliament on 8 ^th November 2017 (Parliament 2017a; Southwick and Hutchison 2017).

Chapter 2 below discusses these four poverty measures more fully, and our approach to measuring and forecasting them.

1.3 The Welfare Reform and Work Act 2016

The Child Poverty (Scotland) Act was in part a response to the UK Government’s repeal of significant parts of the Child Poverty Act 2010 ( DWP 2010), which it replaced with the Welfare Reform and Work Act 2016 ( DWP 2016a). That legislation replaced the four income-based targets of the Child Poverty Act with poverty measures based on worklessness and educational attainment ^[2] . The Scottish Government states in the policy memorandum accompanying the Child Poverty (Scotland) Act that it:

Fundamentally disagrees with this approach: in particular, the removal of income-based targets, and the use of alternative measures that do not take income into account. In the Scottish Government’s view, this represents a shift towards characterising poverty as a lifestyle choice rather than addressing the social and economic drivers that cause people to fall into or remain in poverty ^[3] .

1.4 Reductions in the generosity of social security payments

The UK Government’s July 2015 Budget also announced several changes to the social security system which are forecast to have a significant impact on child poverty in the UK (including Scotland). The most important of these in terms of the number of people affected and the overall size of the reduction in social security spending as a result of the reforms are:

• A freeze in the nominal level of most social security benefits and tax credits received by working age families for four years, starting in 2016-17. These include Child Benefit, Jobseekers Allowance, and most parameters of tax credits and Universal Credit. ^[4] .
• The limiting of premia for children in Housing Benefit, tax credits and Universal Credit to a maximum of two children only for new claimants – with support also not available for most third and subsequent children born after April 2017 for existing claimants.
• The abolition of the Work-Related Activity Premium for Employment and Support Allowance claimants from 2017 onwards.

1.5 Universal Credit

A further important driver is the gradual introduction of Universal Credit ( UC) ( DWP 2013), which is intended to replace the current system of tax credits and most means-tested benefits with a single unified system. In most cases UC is less generous than the benefits and tax credits it replaces (Browne, Hood and Joyce 2016). The introduction of UC has been extremely fraught (Timmins 2016) and national roll-out of the policy is well behind the UK Government’s original schedule, but has now been accelerated (Gauke, 2017).

1.6 Devolved Social Security Powers

Following the 2014 Independence Referendum, the Smith Commission:

Recommended that the Scottish Parliament be given autonomy to determine the structure and value of a range of powers over disability, as well as the power to make administrative changes to Universal Credit and to vary the housing cost element. It also recommended that the Scottish Parliament be given powers to create new benefits in areas of devolved responsibility, and top-up reserved ones.

(Scottish Government 2016)

In the wake of the Scotland Act 2016, which devolved further powers over part of the social security system to Scotland, the measures that the Scottish Government has introduced, or is planning to introduce, include:

• Introducing a new Social Security Agency (Scottish Government 2017a);
• Increasing the weekly payment of Carers’ Allowance to the level of Jobseekers’ Allowance for a single adult – an increase from £62.70 to £73.10 at current (2017/18) rates (Scottish Government 2017b);
• A new Best Start Grant which replaces the Sure Start Maternity Grant ( SSMG), which is a grant for new mothers in low income families. Since 2010 the SSMG has been paid only for the first child in a low-income family. The Best Start Grant pays qualifying families £600 on the birth of their first child (compared with £500 for the SSMG) and £300 on the birth of any subsequent children. Qualifying families also receive £250 when each child begins nursery, and a further £250 when they start school.

1.7 Devolved Income Tax Powers

The Scotland Act 2016 also enabled the Scottish Government to set its own income tax rates and bands on non-savings and non-dividend income. Table 1.1 shows the new rates which will apply for the 2018/19 tax year in Scotland and compares them with the rates which remain in place in the rest of the UK.

Table 1.1. Income tax marginal rates in Scotland and England/Wales: 2018-19

	Income tax marginal rate (%)
Gross income level	Scotland	England/Wales
£11,850-£13,850	19	20
£13,850-£24,000	20	20
£24,000-£43,430	21	20
£43,430-£46,350	41	20
£46,350-£150,000	41	40
Above £150,000	46	45

The new Scottish rates of income tax result in a tax cut for people in Scotland earning between £11,850 and £26,000 per year compared to the system in place in the rest of the UK; this tax cut is worth a maximum of £20 per taxpayer annually. Above £26,000 annual gross income, the increase in marginal rates (and setting the higher rate threshold at £43,430 in Scotland rather than £46,350 in the rest of the UK) results in higher income tax payments, the extra revenue from which is being reinvested into public services to offset the impact of the UK Government’s cuts to the Scottish Government’s budget settlement (Scottish Government, 2018). It should be noted that the impacts of the reinvestment of additional tax revenues into public spending are not captured in the modelling used in this report (except where the additional revenue is being used to increase social security payments, as in the reforms to Carers Allowance and the introduction of the Best Start Grant).

Important as the Scottish Government’s new tax and social security measures are, we show in Chapter 3 that their effects are relatively minor compared to the UK Government cuts that have already happened or are in the pipeline.

1.8 Trends in population and employment

Demographics

As well as changes to the tax and social security system, the extent of child poverty depends also on demographics and the state of the economy.

Appendix 1 below discuss how we use economic and demographic forecasts in our microsimulation work. Here we briefly note two things.

Firstly, political events, especially Brexit, mean that there is a higher than usual level of uncertainty about the path of the Scottish population and the Scottish economy. Figures 1.1 and 1.2 below illustrate this; they show the range of official population forecasts for Scotland, for all people (Figure 1.1) and children only (Figure 1.2) ^[5] . Differing assumptions about fertility, life expectancy and, in particular, inward migration mean that by the end of our forecast period there is a range of 700,000 between the highest and lowest official forecast for total population, and over a quarter of a million for children. The wide range of forecasts is reflected in the robustness analysis of the results in Section 3.5 of this report where using different sets of population forecasts produces a bigger variation in projected child poverty rates than for any of the other forecast parameters (for example earnings or employment).

Figure 1.1. Population projection variants

Figure 1.2 Forecast variants for number of children

Secondly, although we have put a lot of effort into capturing their effects accurately, in practice our results are not primarily driven by demographics or the projected state of the economy. Figures 1.3 and 1.4 below show projections for numbers of children (by age group and gender) and for employment and unemployment levels, for the baseline and one pessimistic projection (zero net migration from the EU post-Brexit).

Figure 1.3. Projected numbers of children, adults, and employment, baseline scenario

Figure 1.4. Projected numbers of children, adults and employment, pessimistic scenario

Although the Scottish population is clearly ageing (especially in the pessimistic scenario), the ratio of working-age adults to children is forecast to be reasonably stable even in the pessimistic case.

The Economy

The Scottish Fiscal Commission ( SFC) is now responsible for producing independent forecasts for Scotland. SFC produced their first forecast for the Scottish economy in December 2017 ( SFC 2017), and we take our projections for the paths of earnings and employment from there. Since (as discussed below), our poverty lines are calculated using data for the UK as a whole, we also use UK-wide data from the corresponding Office for Budget Responsibility ( OBR) forecast ( OBR 2017) to provide projections for the paths of earnings and employment for the rest of the UK.

As shown in Table 1.2 below, the SFC forecast paints a picture of relatively sluggish growth in both output per head and employment.

Table 1.2. SFC Scottish Growth Predictions: Headline Numbers

	2017	2018	2022
Growth (%)	0.4	0.7	1.1
Productivity Growth (%)	0.2	0.5	1.0
Wage Growth (Nominal) (%)	2.0	2.3	3.1
Employment Growth(%)	1.3	0.6	0.1

Source: SFC (2017), p7

This is true also of the OBR forecast for the whole UK, as shown in Table 1.3 below, which compares the SFC Scottish forecast with the OBR UK-wide one for the early years of our simulation period. Both Scotland and the UK are forecast to have historically slow growth, but the forecast UK growth is slightly higher ^[6] . However, the forecast divergence in growth between Scotland and the rest of the UK could be significant for our study because the poverty lines used in our poverty measures ^[7] increase with UK income ( DWP 2016b), and therefore slower growth in Scotland compared to the rest of the UK could cause measured relative poverty in Scotland to increase even if there was nothing else going on, due to slower real income growth causing more households to fall below a relative poverty line which is calculated based on UK-wide household incomes ^[8] . As discussed in Chapter 3, however, using OBR's and SFC's central projections, this effect appears to be small ^[9] .

Table 1.3. Comparison of SFC Scottish economy forecasts with OBR UK economy forecasts

		2016	2017	2018	2019	2020	2021	2022
GDP	OBR	1.8	1.5	1.4	1.3	1.3	1.5	1.6
	SFC	0.4	0.7	0.7	0.9	0.6	0.9	1.1
GDP per capita	OBR	1.0	0.9	0.8	0.7	0.7	0.9	1.0
	SFC	-0.1	0.3	0.3	0.6	0.3	0.6	0.9
Employment (millions)	OBR	31.7	32.1	32.3	32.4	32.5	32.6	32.7
	SFC	2.6	2.6	2.7	2.7	2.7	2.7	2.7
Real hourly wages	OBR	1.7	0.3	-0.1	0.7	0.6	1.0	1.0
	SFC	2.1	-0.3	0.1	0.5	0.6	0.8	1.1
Nominal annual earnings	OBR	2.8	2.3	2.3	2.3	2.6	3.0	3.1
	SFC	3.2	2.0	2.2	2.4	2.6	2.8	3.1

Source: SFC (2018) for Scottish economy forecasts, OBR (2017) for UK economy forecasts. ^[10]