Tackling child poverty - progress report 2022 to 2023: annex d - cost of living focus report

Interactions with the other drivers of child poverty

Key messages

• Some households have sought more paid work to mitigate the increasing costs of living. For example, some have increased their hours, while others have obtained an additional job.
• But increasing income through paid work is not a route available to all.
• Overall, wages have failed to keep up with inflation, meaning an overall fall in living standards. Low-paid work is not evenly distributed, but concentrated in particular sectors, such as retail and hospitality and manual labour – which were also hit hardest by pandemic lockdown restrictions.
• As a result of the benefits freeze from 2016 to 2020, the real value (nominal values adjusted by inflation) of UK government administered benefits has declined in recent years. This includes Universal Credit.
• While the benefit freeze was lifted in 2020 to boost support for families during the pandemic, the subsequent cost of living crisis has continued to erode the true value of benefits.
• A range of measures have been adopted in Scotland. Most notably, the increase to the Scottish Child Payment and increased funding for Discretionary Housing Payments. Early evidence suggests that the uplifts and additional support provided by Scottish Government is minimising the negative impacts of the cost of living crisis for families on low incomes.

The Scottish Government approach to tackling child poverty focuses its policies around three main drivers: income from employment, costs of living, and income from social security and benefits in-kind.

This evidence review focuses mainly on the cost of living driver. However, it is well documented that all three drivers are interconnected. For example, the cost of household essentials are only an issue if household incomes are not sufficient to afford them.

It is therefore, necessary to look at the two main ways that families can increase their income, be this through paid work or through increases to social security or benefits in-kind.

Income from Employment

To mitigate the increasing costs of living, some households have sought more paid work to boost their income. Some have increased their hours, others have obtained an additional job.^[65]

Increasing income through paid work is not a route available to all. There are a number of constraints on people's ability to increase earnings through paid work, whether they are already in some form of employment, or out of work but looking for a job.

The following sections consider the main constraints that families face when seeking to increase earnings from employment. That is: the amount they are paid, the number of hours they are able to work and the factors affecting one's ability to undertake paid work.

Pay

Overall, wages have failed to keep up with inflation, meaning an overall fall in living standards. The most recent rise to the rate of the National Living Wage (9.7%) remains marginally below the CPI inflation level (10.1%, March 2023) and represents a real terms decrease compared to April 2021. However, since its introduction in 2015 the National Living Wage has increased much faster than prices or average weekly wages up until 2021.^[102] The Real Living Wage^[v], meanwhile, increased by 10.1% to £10.90 in September 2022.^[103] In 2022, 91 per cent of employees in Scotland were paid at least the real living wage, having increased from 80.6 per cent in 2018.^[104] Scotland's 3,203 Living Wage employers account for over a quarter of the total 12,500 accredited employers around the UK.^[105]

Low-paid work is not evenly distributed, but concentrated in particular sectors, such as retail, hospitality and manual labour.^[106] Evidence suggests that the possibilities for progression in these lower-paid occupations are limited in comparison to better paid work.^[107] And so there may be fewer opportunities for employees to 'work their way up' to a higher wage. Indeed, research by JRF reports that, during the cost of living crisis, higher earners were much more likely to ask for a promotion or higher pay as ways to increase income. Instead, lower earners were more likely to seek additional hours or apply for new or additional employment.^[65]

Nevertheless, as seen in previous chapters, many on the lowest wages had little financial resilience (e.g. debts, fewer savings) going into the crisis. ^[1] Furthermore, people in lower-paid sectors are more likely to have experienced pandemic-related job losses and have had to quickly find alternatives to cover rising costs.

Insecure employment

Being in insecure work can lead to fluctuating household incomes which can make managing finances difficult. It can also make it harder to get a loan or mortgage which can lead to higher spending. This can result in in-work poverty, and lead to households falling deeper into poverty during the current financial crisis.

Insecure contracts are also generally associated with lower-paid work. Research by The Work Foundation has found that those on insecure employment^[vi] contracts are a group most at risk during the cost of living crisis.^[108] Indeed, the Resolution Foundation highlight the growing prevalence of insecure work.^[109] Being employed on an insecure contract is correlated with low-paid work, with 56% of insecure workers across the UK earning less than the Real living wage, and 20% of workers in Scotland experiencing work insecurity.^[2]

Insecure contracts can sometimes reduce options for increasing work hours. Furthermore, the estimated proportion of people in employment on a zero hours contract in Scotland increased over the year from 2.9% (79,000) in Jan-Mar 2022 to 3.9% (105,000) in Jan-Mar 2023. This compares with an increase from 3.1% to 3.4% across the UK over the same period. Scotland has the second highest proportion of people employed on a zero-hours contract across the countries and regions of the UK, behind Yorkshire and the Humber (4.5 per cent).^[110]

Unpredictable work hours can also incur additional costs of living, such as having to arrange transport and/or childcare at short notice and outside of traditional 'office hours'. ^[2] Being in insecure and unpredictable work as costs soar can also have detrimental effects on mental health, with people unable to effectively manage budgets and plan for the future. People are more likely to take on debt to cover short-falls caused by work volatility.^[111]

Factors affecting ability to work

There are a range of factors which affect an individual's ability to find employment or increase their hours. Some of the main factors include: childcare, transport and availability of and access to internet.^[112]

Childcare

For households with low incomes, the expense of childcare often undermines opting to work, as take-home pay would barely cover the costs.^[113] This is emphasized in lone parent households, or in a large families. Aside from costs, the availability and flexibility of childcare has been signalled as an issue during the cost of living crisis. A lack of flexible provision that accommodates different working patterns is also highlighted as a barrier with parents often concerned about their ability to maintain employment.^[65],[113] Further, the cost of living crisis has prompted some new parents to return to work earlier than they had planned,^[114] though this is only a viable option if that work can cover childcare costs while still adding to household income. Government funded childcare hours are not available until the age of 3 (or 2 for those on means-tested benefits)^[115] which limits the options for parents hoping to increase income from employment to mitigate the effects of cost of living the crisis.

Transport

While increases to the costs of transport have slowed more recently, they have been one of the biggest drivers in accounting for the increase in the cost of living. This has mainly been driven by fuel price increases. In June 2022, transport inflation peaked at 15.2%. Transport inflation currently sits at 1.6%. However, data from May 2023 reports that two in five adults (38%) identified increased fuel costs as a factor in increased costs of living.^[116]

Internet

While the majority of households have internet access, the rate of access decreases with income.^[117] Moreover, the ways in which people access and use digital technology may be limited by income. Research for Connecting Scotland (a Scottish Government digital inclusion programme) found that even where users had some form of internet access, they were limited by, for example, using out-dated or damaged devices because they could not afford suitable equipment.^[118] In rural areas of Scotland, digital connection can be slower and more unreliable^[93] – with families often more dependent on the internet due to a lack of face-to-face services.^[119] This makes some activities, such as editing CVs and submitting online application forms, considerably more difficult. Additionally, people on low incomes are more likely to cut back spending on digital access; surveys by both Ofcom and the Digital Poverty Alliance have found around a third of people struggling to afford, or cutting back on, their digital access.^[120],[121]

Income from Social Security (or benefits in-kind)

This section outlines the main challenges families face when aiming to boost their income through social security or benefits in-kind.

Real-terms benefit impacts

As a result of the benefits freeze from 2016 to 2020, the real value (nominal values adjusted by inflation) of UK government administered benefits (including Universal Credit) has declined in recent years.

While the benefit freeze was lifted in 2020 to boost support for families during the pandemic, the subsequent cost of living crisis has continued to erode the true value of benefits amid very high rates of inflation.

Over the last year UK reserved benefits have been uprated various times, though not always in line with inflation. For example, in April 2022, UK reserved benefits were uprated by 3.1%. In comparison, the annual rate of CPI at that point was 9%.^[122] In recognition of this shortfall, in April 2022, the Scottish Government, using latest available data at the time, applied a higher uprating of 6% to eight devolved benefits.^[123] More recently, the latest uprating in April 2023 of 10.1% by the UK^[124] and Scottish Governments^[125] mean benefit rates actually increased more than inflation (which was 8.7% that month), partly mitigating those previous losses of real terms value.

There are practical reasons for the Scottish and UK Governments to use the previous September CPI rate to uprate benefits each April, such as the time required to update benefits systems and the timing of budgets. However, stakeholders have argued that while this process broadly preserves the real terms value of benefits when inflation is stable and close to the Bank of England's 2% target, during periods of high inflation benefit clients can face volatile changes to their benefit income.^[126]

Cost of living payments, as well as other social security benefits, can provide an additional boost to household incomes. The Scottish Government has taken a range of measures, most notably, the increase to the Scottish Child Payment^[127] and increased funding for Discretionary Housing Payments.^[128]

Additionally, people living in Scotland facing financial emergencies can also apply for a grant from the Scottish Welfare Fund.^[vii] While these are welcomed at a time of financial strain, stakeholders argue for systematic entitlements rather than ad-hoc funding in order to improve family incomes.^[127] A recent review of the Fund highlighted the value of its discretionary nature to account for local need and the nature of the cash-limited scheme. The findings report that there was no definitive answer as to why some local authorities have lower application success rates than others, but did note that monitoring data evidenced variability in success based on location and the time of year applicants apply to the Fund. The conclusions support a programme of audit to provide further understanding of local variation.^[75]

Eligibility

The cost of living crisis has highlighted how those who are narrowly ineligible for benefits could actually end up worse-off financially than those in receipt.^[129] This is because eligibility for cost of living payments is determined by being on a qualifying benefit. This means that people in receipt of the lowest awards of universal credit still qualify to receive cost of living payments, while those just above the threshold miss out. This is more widely considered in the Scottish Government analytical report on the cost of living crisis.^[1] Though, since publication of that report, the situation for many families may have worsened.

Additionally, eligibility rules for some UK government benefits mean that certain households are entitled to less, proportionally, than others. The two-child limit on the child element of Universal Credit and child tax credit, for example, particularly affects families with three or more children born before April 2017 (and especially those headed by lone-parents).^[130] Further, people under 25 years of age are subject to a lower rate of Universal Credit than those over 25 years of age.^[131] This differential rate can impact on how young families experience the cost of living crisis and make it more difficult to stay out of poverty. While these are pre-existing issues,^[132] they are further exacerbated by the cost of living crisis and these challenges limit the financial support on offer to families.