Child poverty modelling: update

2. Introduction

In March 2022, the Scottish Government published a Cumulative Impact Assessment (CIA) to accompany the second Tackling Child Poverty Delivery Plan, Best Start, Bright Futures.^[1] The CIA set out projections for relative and absolute child poverty, in addition to the estimated impact of Scottish Government policies, using the latest information available at the time. The modelling was subsequently updated in June 2023 alongside the annual Progress Report.^[2] A further update was published in February 2024, extending the analysis to include deep poverty and including additional estimates on a selection of hypothetical UK Government welfare reforms.^[3]

The update set out in this report incorporates the economic forecasts published by the Office for Budget Responsibility (OBR) in October 2024; UK and Scottish Government policy announcements, including from the 2024 Spring and Autumn UK Budgets as well as the Scottish Budget as published on 4 December; and updated household survey information, including an additional year of data (2022-23) from the Family Resources Survey (FRS). We also extend to the modelling horizon to 2029-30; expand the CIA to include distributional impacts; and present new analysis on UK Government welfare reforms. Note that this update does not incorporate the March 2025 Spring Statement or the associated OBR forecasts, nor does it include the FRS data for 2023-24.

The most significant UK policy changes that have been incorporated in our model since the last update relate to taxes on earnings, which tend to affect middle- and higher-income households more than those at the bottom of the income distribution. After the previous UK Government introduced a further cut to employee National Insurance Contributions (NICs) in 2024-25, the new Government chose to increase NICs for employers beginning in 2025-26, though the latter does not directly affect household incomes. In terms of benefit policy, the Government has lowered the maximum rate at which UC awards can be reduced in order to repay debts to 15%, although this rule already applied to households with no earnings. Reforms to disability and incapacity benefits have also been announced, coupled with increases to the standard allowance of Universal Credit, but at the time of writing insufficient detail was available to incorporate these changes in our model.^[4]

On the other hand, the Scottish Budget in December included a commitment to mitigate the two-child limit, which restricts support through UC to the first two children and is widely considered to be a key driver of child poverty in large families. The Budget also increased the starter- and basic-rate income tax thresholds by 3.5%, whereas UK income tax and NI thresholds are set to remain frozen until 2027-28.

The macroeconomic outlook has fluctuated since our last update, but remains challenging. Inflation forecasts were downgraded in the 2024 Spring Budget, but were then upgraded again in the autumn. The effects of the cost-of-living crisis persist: consumer price levels are set to be around 25% higher by the beginning of 2025-26 than they were before inflation began to accelerate in 2021-22, and at the time of writing inflation rates were expected to remain above the Bank of England's target of 2% until 2029-30. Forecasts for nominal earnings growth were also revised upwards in the October forecasts, having shown little change in the previous March, though the implications for child poverty will ultimately depend on how this growth is distributed as well as the effects of tax policy.

Overall, real disposable household income has grown more quickly than previously expected over the last two years, but is now expected to stagnate over the medium term such that the outlook remained virtually unchanged by the end of the forecast horizon at the time of writing. This measure of living standards is set to be only two percent higher in 2025-26 at the UK level than it was before the Covid-19 pandemic, with little growth forecast over the next half-decade.

In terms of the input data, we are now able to incorporate FRS data for 2022-23 along with 2021-22, which allows us to drop 2019-20 from the sample. The modelling should therefore be more representative of the post-Covid world, although it continues to be affected by the higher levels of uncertainty and volatility that come with using a pool of two years data rather than three. We plan to revert to a three-year pool once input data for 2023-24 is available for use in the model.

In this instance, updating the input data has led to a considerable deterioration in our projections, reflecting the increase in single-year poverty rates observed in 2022-23. As noted in previous updates, this effect is sensitive to the method chosen for calibrating the outputs of the model to the official child poverty statistics, and fluctuations can occur in both directions as the input data is updated over time. The final section of the report sets out the results from using an alternative calibration method.

The outlook for child poverty could change with future events. Besides the aforementioned reforms to disability and incapacity benefits, the UK Spring Statement is due to be issued shortly before this update, followed by the UK Government’s Child Poverty Taskforce strategy later in 2025. In March 2026, the Scottish Government will then publish its final Tackling Child Poverty Delivery Plan, which will set out a path to meeting the final child poverty targets in 2030-31. The UK Government has also committed to reviewing Universal Credit (UC).^[5] In addition, the data and forecasts underpinning the model will continue to be updated over time, which will have a bearing on our estimates.