Select Committee on Social Security Appendices to the Minutes of Evidence

Figure 2


  Source: Margaret Wynn, Family Policy, Penguin Books, 1972, p 165.


  3.1  Budget standards for children explained

  A budget standard calculates the average expenditures required by specified household types, each week or month, to purchase a predefined living standard. Although different households make different choices, experience in countries which have used budget standards for many years has shown that the total amounts of money spent (at a pre-defined standard) tend to be similar.

  The budget standard for a child comprises the direct costs of his/her food, clothing etc—either individual consumption (eg clothing) or shared consumption (eg food). The budgets for children aged 4 and 10 years, in Annex 3 to this report, are drawn from the FBU's budgets for working families with two children at January 1998 prices, which have been uprated to October 2000, using the Retail Prices Index. [16] The budget for the boy aged 16 years uses the same basic assumptions as the budgets for younger children. The budget standard costs (eg clothing, personal care and leisure) are adjusted for the older child. Pocket money, Christmas presents and birthday presents are not highlighted. Instead, they are included implicitly in the detailed lists of each child's food (eg sweets), toys and activities.

  3.2  FBU research method: January 1998 budgets, parents and children

  When calculating budgets for a complete household, the method is in the following ten stages:

  Stage (1): Select the household types for which budgets are to be drawn up.

  These are shown in Table 1. As with the DSS Tax Benefit Model Tables, [17] all the household types are hypothetical, not actual families. All are assumed to live in local authority housing in York. And all are in paid work (full-time or part-time).

Table 1


  FAMILY (a): One man, one woman, boy aged 10 years, girl aged 4 years

    —  Two earners, one works 38.5 hours, one works 17 hours a week

    —  One earner, 38.5 hours week

    —  One earner, 17 hours week

  FAMILY (b): One woman, boy aged 10 years, girl aged 4 years

    —  One earner, 38.5 hours week

    —  One earner, 17 hours week

  Stage (2): Select the locality where the households are assumed to live.

  As with previous FBU budgets, all the households live on the outskirts of York, which also serves as a secondary pricing centre, in addition to supermarkets with branches across the UK.

  Stage (3): Identify the goods and services to be included in the budgets.

  These comprise budget standard expenditures and variable expenditures (Table 2). The former are specified baskets of goods and services which, at a given living standard, are assumed to be the same for all households of the same composition. The latter comprise core variables (ie housing, fuel and transport) and lifestyle variables (ie tobacco, alcohol, pets and charitable giving). The costs of the core variables are a function of house size, heating system, travel-to-school costs and so forth. The lifestyle variable are illustrative. Although unnecessary for survival, they can reduce stress and promote social inclusion. In Table 2, the bold type indicates the costs which include purchases for the children. For example, leisure goods include toys, some of which may be purchased by the children with their pocket money.

Table 2

Budget standard Variable expenditures
expendituresCore variables Lifestyle variables
FoodHousing Pets
ClothingFuel Alcohol
Personal careTransport Charitable donations
Household goodsChildcare Tobacco
Household servicesNHS charges
Debts/ fines/ maintenance
Job-related costs (other than childcare)
Seeking work costs

  The FBU's food budget standards represent the level of expenditure required to attain a given standard of consumption and dietary adequacy. The LCA food baskets represent a pattern of consumption characteristic of households on low incomes in the UK, and are based on National Food Survey and Family Expenditure Survey data. They contain a balance of foods which will promote short- and long-term health in adults and children. They are based on Department of Health and Health Education Authority guidelines. And they refer to foods which are widely available, at low prices, using Sainsbury and KwikSave national price bases.

  Stage (4): Identify the required quality of the items to be included

  Taking into account life-times and prices, the cheapest items may not be the best value, in which case more hardwearing alternatives are selected, even though their prices are slightly higher.

  Stage (5): First consultations with discussion groups: Consumer preferences

  Stage (6): Price every item in the budgets

  All prices include VAT, where it is payable.

  Stage (7): Establish life-times for the durable items

  The weekly cost of each durable then becomes its price divided by its life-time in weeks.

  Stage (8): Second consultation with discussion groups: draft budgets discussed

  Stage (9): Expenditure totals calculated for each household type.

  Stage (10): Grossing up for tax. For the complete budgets (parents + children) each household's total expenditure is grossed up for income tax and NI contributions, less all social security benefits to which the family is entitled. The resulting figures show the gross earnings required to reach LCA level.

  3.3  FBU research method, October 2000: children only

  3.3.1  No discussion groups were held, nor were the budgets grossed up for income tax and NI contribution.

  3.3.2  First, the costs of each child were disaggregated from the January 1998 household budgets, then the budgets for children were uprated from January 1998 to October 2000, using the Retail Prices Index and the same components and subcomponents as the RPI. For example, because the different categories of food in the FBU food budgets are linked to separate categories of food in the RPI, price changes in bread, cereals, cheese, eggs etc are uprated separately.


  4.1  Summary of findings

  The disaggregated costs of each child are summarised in Table 3. The costs of childminding are based on weekly costs averaged over one year, assuming an hourly childminding charge of £2.20 (rounded figure). The costs of institutionalised childcare would be considerably higher.

Table 3

Living Costs+ Childminding costs*= Total costs
Child£ week Hours£ week £ week
Girl aged 4 years27.74 none0.00 27.74
Girl aged 4 years27.74 29.364.21 91.95
Girl aged 4 years27.74 13.429.30 57.04
Boy aged 10 years36.60 none0.00 36.60
Boy aged 10 years36.60 11.525.13 61.73
Boy aged 10 years26.60 3.27.09 43.69
Boy aged 16 years55.94 none0.00 55.94

  *Based on an average hourly childminding charge (rounded) of £2.20.

Source: Annex 3

  4.2  Four causes for concern.   The Family Budget Unit is not directly involved in public policy issues, its purpose being to inform the public in matters relating to living standards, living costs and the economic requirements of UK households. The following comments may nevertheless be of interest:

  4.2.1  Narrow margins.   The margins between the LCA budgets and the net incomes of low-income households with children are extremely tight, yet many households face higher costs than those assumed here. Also, most households, particularly two-earner households, aim above the LCA standard, in the direction the MBA standard. In Scandinavia and North America, MBA, or its equivalent, is often the only standard measured. The FBU embarked on the LCA standard because of the relatively low pay and living standards of UK households. Organisations like Age Concern and Child Poverty Action Group had difficulty relating to the MBA standard, because most of the households they represent live below it.

  4.2.2  High dependence on means-tested benefits. Arguably, minimum wage plus child benefit, plus income tax allowances / convertible tax credits, plus housing benefit and council tax benefit should be sufficient to bring all working families to LCA level or above, with minimal dependence on Working Families Tax Credit and little chance of being caught in the poverty trap. Instead households with children on average earnings or above (particularly women), face implied marginal tax rates of 70 per cent, compared with 40 per cent for the highest earners in the land.

  4.2.3  Working Families' Tax Credit /Children's Tax Credit /Employment Tax Credit.

  The June 2000 edition of Tax Benefit Model Tables shows a lone mother with two children, (rent £47.37 a week, council tax £11.10, childcare costs £150.00) facing an implied marginal tax rate of 70 per cent (or more) until her gross earnings reached £640 a week (£33,280 a year). [18] A couple with three children, rent £99.90, council tax £14.50, no childcare costs, faces an implied marginal tax rate of 70 per cent until their gross earnings reach £470 week (£24,440 year). [19]

  When examining the proposed changes, the Select Committee may wish to request similar Tables, detailing the effects on net incomes of WFTC, CTC, ETC (apart and together).

  Annex 8 illustrates the situation in April 2000. On gross weekly earnings between £138.60—£157.00 (Figure 1) the net weekly income of two-parent households increased by 11 pence for each extra £ of gross earnings. On gross weekly earnings between £158—£376 (£19,552 a year), net weekly income increased by 30-31 pence for each extra £ earned. The position of lone mothers with childcare costs to pay (Figure 2) is worse. Assuming childminding costs of £86.96 a week, lone mothers required gross weekly earnings of £538 (nearly £28,000 a year) before they gained more than 30 pence out of each extra £ earned.

  Is this acceptable? Will integrated child credit and employment tax credit increase or reduce the levels of earnings required to escape the poverty trap? And if so, by how much?

  4.2.4  Households below Average Earnings Statistics (HBAI). Some of the figure-work in the Treasury Paper Tackling Poverty and Making Work Pay, [20] for example Chart 2.1, appears to be based on studies which incorporated HBAI equivalence ratios in their estimates of relative living standards. In Annex 9[21], Heremione Parker has argued that the HBAI equivalence ratios under-estimate the costs of children, especially babies and toddlers. This is because the HBAI scales are derived from expenditure data, notwithstanding the truism that hard-pressed families cannot spend money they do not have.


  5.1  That budget standard estimates of the needs and costs of households, with and without children, be taken into account by Parliament whenever changes in legislation and/or regulations affecting household living standards are proposed.

  5.2  That the costs of each parent and each child be disaggregated, according to gender and age, with particular reference to the nutritional needs of women during pregnancy and lactation.

  5.3  That the redistributive and poverty trap effects of all proposed changes that impact on household living standards be made explicit.

  5.4  That equivalence ratios derived from Family Expenditure Surveys cease to be used to measure need —since households on low incomes cannot spend money they do not have.

16   Hermione Parker (ed), 1998, op cit. Back

17   Department of Social Security, Analytical Services Division, Tax Benefit Model Tables, June 2000. Back

18   DSS Tax Benefit Model Tables op cit, 1.3f and 1. Back

19   DSS Tax Benefit Model Tables op cit, 1.3f and 1. Back

20   HM Treasury, March 2000, op cit Back

21   Article by Hermione Parker MA in the Parliamentary Brief, Independent Commentary on British Political Affairs, Vol. 5, No. 10, May 1999, Item 43, Mr Brown has no children-not printed. Back

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