- In this briefing we set out four ideas that would help to ensure the Autumn Statement delivers for the 13.5 million people living in poverty in Britain today.
- First, if the prices of essential goods and services begin to rise the Government should return to the earlier system of uprating working age benefits annually.
- Second, the importance of low-wage sectors should not be overlooked within the refreshed industrial strategy. Government should work with businesses and industry bodies in low-pay sectors to develop sector strategies to increase productivity.
- Third, increased funding and greater flexibility within the Shared Ownership and Affordable Homes Programme are needed so housing associations can leverage their own resources to deliver the right types of affordable homes for different markets, including homes with rents set so they are affordable to tenants on low wages, Rent to Buy homes and other intermediate products.
- Fourth, leaving the EU creates an opportunity to design a regional policy that responds to local priorities and opportunities, and bolsters the devolution agenda. JRF recommends the Government earmarks at least an equivalent level of funding to that committed to ESIF (European Structural and Investment Funds) to create a Rebalancing Fund.
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Earlier this month the Chancellor made the following pledge:
“At the Autumn Statement in November I will set out our plan to deliver long-term fiscal sustainability…while responding to the consequences of short-term uncertainty…and recognising the need for investment to build an economy that works for everyone.”
In this briefing we set out four ideas that would help to ensure the Autumn Statement delivers on those sentiments for the 13.5 million people living in poverty in Britain today. Doing so is both a political and economic necessity. Poverty divides communities and generations. It harms people’s potential and strains families whilst also draining the public purse and holding back our economy.
Estimates of the costs of poverty to the UK run to £78 billion a year, £1,200 for every person and equivalent to 4 per cent of GDP. A total of £69 billion of this figure is spent on public services needed to pick up the pieces dealing with poverty – £1 in every £5 spent on public services. A further £9 billion is lost tax revenue and additional benefits spending due to the knock-on effects of poverty later in life. It is also clear that there are a large number of voters who feel they had been pushed to the margins of society and are being unfairly denied the opportunities that abound in modern Britain.
Analysis of voter intentions recorded in the British Election Study indicate groups in Britain who have been ‘left behind’ by rapid economic change and feel cut adrift from the mainstream consensus were the most likely to support Brexit. These voters face a ‘double whammy’. While their lack of qualifications put them at a significant disadvantage in the modern economy, they are also being further marginalised in society by the lack of opportunities in their low-skilled communities.
The suggestions that follow in this briefing aim to address both sides of the poverty equation: incomes and costs. In the short term the most pressing task is to insure people living on low household incomes (who may not have much in the way of savings) against the negative effects of market volatility following the vote to leave the European Union.
The second priority is to raise the skills of working age adults stuck in poorly paid, insecure jobs whilst also boosting the demand for higher level skills within the economy. The third priority involves developing a housing strategy capable of delivering homes of different tenure types to suit the full spectrum of needs within our society rather than just ones to own.
Finally we call on the Government to seize the opportunity provided by Brexit to refresh regional policy. The emerging governance structure of city regions, local enterprise partnerships and devolution deals which spread in varying degrees responsibility for skills, employment support, transport, housing and some public services provide a potentially powerful vehicle to tackle deep rooted social and economic problems. However many of these networks and institutions depend at least in part on EU funding. This money will need to be replaced, but in doing so a new chance is introduced to consider whether there might be ways to target it more directly on the Government’s stated policy objectives and the priorities of local areas.
Protecting the poorest households from market volatility
To live in poverty means having resources that fall well below those required to meet minimum needs. The prices of essential goods and services therefore can matter a great deal to whether a family is able to make ends meet (as in the case of the Prime Minister’s ‘just about managing’ group) or starts to fall into poverty. Given that, sterling’s loss of value against other major currencies since the referendum vote is potentially quite significant. In the past major currency moves have led to prolonged bouts of inflation above the Bank of England’s 2 per cent target, such as between 2008 and 2014 when the prices of essentials rose three times faster than average wages after the pound fell by 25 per cent in 2007- 8. Higher import costs arising from having a weaker currency would hit low income families especially hard given that the cost of essential goods and services – some of which are imported - makes up a larger proportion of their budgets. Food for instance, represents 16 per cent of household budgets among the bottom 20 per cent of the income distribution versus 12 per cent for the middle 20 per cent (see Table 1).
|Budget share in 2014|
|Bottom 20% of income distribution||Middle 20% of income distribution|
|Food and non-alcoholic drink||16%||12%|
|Recreation and culture||10%||13%|
|Electricity, Gas and other fuels||9%||5%|
|Miscellaneous goods and services||7%||8%|
|Household goods and services||6%||7%|
|Mortgage interest payments, council tax etc.||5%||8%|
|Cigarettes and alcohol||3%||2%|
Any such increases would bring to an end the brief respite of the past two years when prices remained stable. The only way families living on low pay or surviving on out of work benefits will avoid falling living standards is by securing extra income. This in turn will depend on the strength of economy; the value of many in work and out of work benefits (which have been declining in real term value due to uprating policies); and for those working at the bottom end of the labour market, the extent to which the National Living Wage does rise as planned against a potentially challenging economic backdrop.
With so much uncertainty surrounding many of these factors the Government’s policy of freezing the value of many working age benefits (see Box 1) to 2019/20 looks increasingly out of date. If the prices of essential goods and services begin to rise the Government should return to the earlier system of uprating working age benefits annually in line with the cost of essentials.
Box 1: Benefits which have been frozen within the current system and in Universal Credit
- Jobseekers’ Allowance
- Employment and Support Allowance (but not the support group component)
- Income Support
- Child Benefit
- Applicable amounts for Housing Benefit
- Local Housing Allowance rates, with provision for high rent areas
- Child tax credit and working tax credit (excluding disability elements)
Low pay is the strongest factor in working poverty in the UK, especially where the main earner in the household is low-paid. In an era of weaker collective bargaining, minimum wages help prevent higher poverty. The introduction of the UK National Minimum Wage (NMW) was estimated to reduce the relative income poverty rate by 1.2 percentage points; a significant contribution. The creation of the National Living Wage (NLW) for workers aged 25 and over is likely to make another significant contribution.
But there are some downsides too. The Office for Budget Responsibility has estimated that the NLW could result in the loss of 60,000 jobs. Also, as the pay floor has risen, pay differentials have become more challenging to maintain. Low Pay Commission projections suggest that by 2020 the NLW will be in line with the expected average wage in retail, hospitality and cleaning, and very close to it for hairdressing, childcare and food processing. Compressed pay differentials risk lessening the incentive for promotion and progression. For these reasons increasing pay must go hand in hand with increasing productivity.
Currently UK productivity lags behind that of other developed economies, and productivity in low-pay sectors (defined as those with median hourly wages less than 80 per cent of the UK’s median hourly wage, such as retail and hospitality) is part of the problem. While they constitute about 23% of the UK economy, they account for around a third of the productivity gap with leading Western European economies. UK low paying sectors have a smaller proportion of innovative firms, poorer management quality and a short term focus compared to counterpart countries.
Sector-based strategies look to increase productivity and growth by tackling common challenges such as filling skills gaps and developing new technologies. Typically these focus on high-value-added sectors, such as advanced manufacturing, and high-skilled engineering. But the importance of low-wage sectors should not be overlooked. We recommend that government work with businesses and industry bodies in low-pay sectors to develop sector strategies to increase productivity. Promising approaches in low-pay sectors include: taking a broader view of innovation, to include processes, design and marketing; improving management skills through training and business support services; and encouraging business models that ensure firms invest in employees’ skills.
Supporting the creation of genuinely affordable homes
Bringing down the cost of essential goods and services is as important to poverty reduction as increasing individual and household incomes. This is especially true in the case of housing, where high costs led to 3.4 million additional people falling into relative income poverty last year. Britain has led the world in beginning to break the link between low incomes and poor housing conditions, but policy changes are now putting this proud legacy under threat.
Although housing benefit helps people to meet high housing costs the bill has ballooned as a result of more people living in the private rented sector, the charging of higher rents and there being more people who are in work but earning low incomes. Even after the Government cut the generosity of Housing Benefit by about £2 billion a year over the 2010-15 parliament, increasing need meant real spending still increased by £1 billion by 2015/16. In the long term this is unsustainable. Homes let on assured shorthold tenancies also cannot provide the security which families with children need.
England alone needs to build 243,000 houses per year, with at least 78,000 to cater to people for whom traditional home ownership is not currently a realistic or desirable option. Yet rates of house-building in England remain stuck at around half the level needed to meet existing and anticipated demand. Since private developers have no interest in flooding the market with new properties, increasing the capacity of housing associations and local authorities to contribute to the Government’s target of building a million homes by 2020 is critical.
Traditionally housing associations have delivered a tenure mix of around 75% sub-market rent and 25% shared ownership. The new forecasted tenure mix of 88% shared ownership and just 12% specialist rent products is a marked but inevitable change following the overwhelming focus on ownership within the 2016-2021 Shared Ownership and Affordable Homes Programme (SOAHP).
Recently ministers have acknowledged the importance of a housing strategy that delivers homes of every type of tenure, including homes at rents that are affordable to people on the lowest incomes. We welcome this shift in tone but a huge amount still needs to be done. An effective strategy requires planning and land assembly policies that pay closer regard to what’s genuinely affordable in relation to local and individual need. JRF has set out with the NHF and Savills a Living Rent development framework that would make it economic to offer new homes at rents which are linked to the bottom third of local earnings, ensuring affordability. But for the model to work increased funding and greater flexibility within the SOAHP are needed so housing associations can leverage their own resources to deliver the right types of affordable homes for different markets, including homes that are let to tenants on low wages, Rent to Buy homes and other intermediate products. Additional investment would be paid back over time in the form of lower Housing Benefit costs.
Finally, the existing stock of social housing reaches higher internal standards than its privately rented equivalent. Even so, some estates are in need of physical regeneration. Where this takes place, policy should ensure that this does not reduce the supply of low-cost rented housing, and that regeneration involves residents and includes activity focused on changing their lives, not just the places they live. The £140m allocated by government for Estate Regeneration should be focused on a small number of high-impact schemes, and may require a grant element to ensure it works in parts of the country with low land values.
Developing a new approach to regional policy
The strength of UK’s labour markets and the productivity of local economies vary considerably. As the UK negotiates its exit from the EU, we face uncertainty and a potential economic slowdown. It is vital that stimulus measures taken by the government are focused on minimising the impact on those people and areas with the least capacity to cope with a downturn.
Rebalancing the economy will require investment in infrastructure, research and development, support for innovation and skills, as well as careful planning. The devolution agenda developed between 2010 and 2016 has left a strong foundation upon which to build. The local labour market level – or city region – is a practical level at which to broker the relationships between employers, employment support providers, training and skills providers and business support agencies necessary to connect more people in poverty to the opportunities arising from economic development.
The adult skills system, for instance, needs a substantial re-design if it is to help more unemployed and low paid people aged over 25 to acquire the skills and qualifications necessary to making greater progress in the work place. With some areas in England taking full responsibility for the adult skills budget from 2018/19 there are significant opportunities for these areas to align the provision of skills with the needs of employers and growth sectors, and make connections between employment support, job creation and support for businesses to grow and develop their workforce.
However for these types of innovation to take flight two conditions are necessary. First, we call on the government to work with local authorities as well as business and industry leaders to set a bolder vision for inclusive and sustainable growth. Traditionally, local economic policy has been made separately from social policy in local government. This needs to change and be brought more closely together.
Second, the right financing also needs to be in place. The pending reform of local government funding and finance is crucial here. While JRF welcomes greater fiscal responsibility for English local government, there is a risk of disadvantaged areas with the weakest tax bases being left behind if reform is not backed by a well-designed redistribution system. In addition, the incentives should be geared towards inclusive growth, which benefits all people and places.
In addition, the European Union currently provides considerable funding aimed at supporting growth and jobs in lagging areas of the UK economy, through the European Structural and Investment Funds (ESIF). Collectively, these funds have committed £8.9bn for local programmes between 2014 and 2020, and also leveraged co-funding from the UK public and private sectors. There is evidence that European structural funding has boosted economic growth and employment in lagging regions. Leaving the EU creates an opportunity to design a regional policy that responds to local priorities and opportunities, and bolsters the devolution agenda. JRF recommends the Government earmarks at least an equivalent level of funding to that committed to ESIF to create a Rebalancing Fund. This should be allocated to LEP (Local Enterprise Partnerships) areas to support inclusive growth and employment in lagging towns and cities. The size of an area’s allocation would depend on need.