What can the Chancellor learn from this week’s IFS poverty forecasts?

What’s likely to happen to UK poverty rates in the next few years? Helen Barnard draws out three lessons for the Chancellor from the latest projections.

The latest projections from the Institute for Fiscal Studies (IFS), which we published this week, set out what is likely to happen to poverty rates over the next few years. The findings highlight three key points for the Chancellor as he prepares for his Budget later this month.

The UK’s record of poverty reduction is unravelling

There is a strong risk that the UK’s proud record of reducing poverty will unravel over the next few years. The IFS’s projections show that relative child poverty is set to increase from 30% to 37% by 2021. That means an additional 1.2 million children in poverty, rising from 4 million in 2015/16 to 5.2 million in 2021/22.

The biggest reasons for increases in child poverty are changes to benefits and tax credits, especially the freeze on most working-age benefits. This is expected to save the Government over £3 billion a year but leave families struggling to cover the rising cost of essentials. Benefits to top up low pay and for people out of work stay the same while prices rise.

Different places will experience increasingly different fortunes

The fortunes of different parts of the country are set to diverge even further. Relative poverty is expected to rise in all parts of the UK, but the largest rises are likely to be in the North East, Wales and Northern Ireland. Much smaller increases are expected in London and the South East.

It is vital that the Chancellor uses the new Industrial Strategy to:

  • give local areas the tools to drive inclusive growth in their area
  • rebalance spending on science, technology and transport to drive growth across the country.

Universal Credit needs urgent attention

Universal Credit is worth saving – but needs urgent attention in both its design and implementation. There is intense debate over the rollout of Universal Credit, particularly focused on the time claimants have to wait for payments. This is important, but there also bigger issues at stake that are likely to determine the long-term success of the policy and which are not yet being properly addressed. The potential positive impact of introducing Universal Credit is greatly undermined by cuts in how much support many families are entitled to. However, increases in take-up of those benefits could result in a net gain for those on low incomes.

The first is cuts in entitlements: the amount of money that many types of families receive will fall under the new system. Cuts that were planned to tax credits but abandoned after an outcry are going ahead under Universal Credit. The IFS estimates that these cuts will see entitlements fall by around £5.5 billion in 2021 as a result of moving claimants onto Universal Credit. Our recent briefings detail the effects these cuts will have on families’ budgets and sets out the steps the Chancellor can take to prevent this hit to their living standards – unfreezing benefits and allowing families to keep more of what they earn.

The IFS’s projections also hold out hope for the positive effects of Universal Credit. One of the main goals of Universal Credit is to simplify the benefit system – instead of applying for multiple benefits, and often not applying for everything that they are entitled to, claimants can apply for one benefit and automatically receive everything they are entitled to. In theory, this should improve take-up. The IFS estimates that moving to Universal Credit could help to reduce poverty if people who currently claim some but not all of the benefits they could get do apply for Universal Credit and receive what they should. This is a prize worth having; under-claiming is a perennial problem in the benefit system. However, it reinforces the importance of getting the delivery of Universal Credit right, and ensuring that those who could claim it are confident enough in the system to do so.

This month’s Budget is a test for the Government – a chance to prove that they are truly on the side of those who are struggling. The Chancellor needs to take action to prevent these poverty projections becoming a reality.