By Graham Whitham, CEO at Resolve Poverty
Last week the Government set out how they intend to develop a UK child poverty strategy. This builds on the creation of a Child Poverty Unit within government and a Child Poverty Taskforce, bringing together government ministers, civil servants and external stakeholders, shortly after the July General Election. These developments represent the first time in over a decade that the UK government has set out considered and meaningful plans to address poverty.
The Budget this week presents the first real opportunity for the government to take the steps required to make their anti-poverty ambitions a reality. Rightly, anti-poverty charities, think tanks and campaigners are calling for the need to scrap the two-child limit on children’s benefits.
Most recently, the New Economics Foundation made the fiscal case for scrapping the two-child limit. In essence, the cost of scrapping the two-child limit and the cap on benefits (the total value a household can receive in income through social security payments) would be around £2.5bn in 2025/26. This would be significantly offset by short, medium and longer-term economic gains, specifically reducing the total cost to Government of child poverty by £3bn a year in 2025/26.
Let’s be clear that these benefits would not simply be a “one hit wonder”. By 2029/30, the annual £3.5bn cost would be outweighed by a £4bn reduction in the cost of poverty. These substantial savings would provide government significant scope to invest further in reducing and preventing poverty.
The IFS indicate that scrapping the two-child limit on benefits would lift 550,000 children out of absolute poverty. Scrapping the cap on benefits and removing the two-child limit would bring 620,000 children out of poverty. The overall impact of removing both limits would be to lift 880,000 people of absolute poverty.
Government investment in poverty reduction circumvents the classical equity-efficiency trade-off encountered in public policy: it can create a fairer economy and improve government efficiency. It is a win-win for government and society alike.
It makes sense economically as well as morally to end the two-child limit on benefits. This argument holds true more broadly in respect of addressing poverty. High levels of poverty cost the UK tens of billions of pounds per year. In 2023, Child Poverty Action Group estimated the total cost of child poverty to Government to be £39bn a year. If the government wants a successful society and a successful economy, they must address poverty head on.
A challenge for the Government is initiating growth in an economy that has flatlined for years. Limited investment in the UK economy has been a problem for decades.
Business investment in the UK has been an average of 36% lower than other members of the G7 since 1990 according to the IMF.
It is hard to see how the Government’s growth agenda is compatible with a society riven by poverty. Successive governments have focussed on tax incentives and targeted financial support for major projects as a means of generating growth. These approaches haven’t worked.
The modus operandi of the regional Combined Authorities is to boost economic growth in our regions, but realising this ambition requires substantive action to address poverty. Poverty rates in regions with regional authorities, including the North West, North East, West Midlands and London, are among the highest of the UK regions.
Poverty stifles our regions’ potential to grow. Action to address it will yield economic benefits. Most immediately, boosting the incomes of those in poverty boosts economic growth through higher consumption. Textbook economics tells us that those on the lowest incomes spend more of their additional income on goods and services than those on higher incomes. Their relatively high marginal propensity to consume generates a multiplier effect that further shores up local economies and contributes to growth.
More broadly, investment to reduce child poverty is investment in our future. It can not only significantly improve the life chances of the next generation, but also generate higher, sustainable growth through long-run improvement in skills. Investment in poverty reduction is hence a positive-sum game which benefits us all.
Long story short, lifting people out of poverty by boosting their incomes makes economic and moral sense. Business welcomes stability and that includes social stability as well as political and economic. Government should see driving down poverty as a key tenet of its growth agenda.
