Beyond the two-child benefit cap: a long-term strategy against poverty?

Benjamin Stokes - Former Civil Servant and Bank of England official

So how can it be addressed? A focus on high costs, not only low incomes, is essential because it opens the door to a set of strategic objectives that are measurable and point to a broader, more ambitious agenda – while also helping specify genuine constraints, international as well as domestic. I suggest three such objectives:

1)    Significantly reduce housing costs as a percentage of incomes.

Market imbalances between landlords and private renters are pushing up costs and require better regulation to fix, for example, on no-fault evictions, which the last government failed to end as it promised in 2019. But to significantly reduce monthly rents and mortgage payments, the supply of new homes must increase – and there are few excuses. This is not an area where international markets (beyond the daily basics of fiscal credibility) or high-end supply chains are notable constraints.

2)    Significantly reduce day-to-day energy costs as a percentage of incomes.

This agenda is much more complex and challenging, not least due to its international dimensions. Fossil fuel import dependencies can be reduced; but even then other international supply chains will be vital for renewables, and impose cost and availability constraints in new ways (e.g. critical minerals). This said, greater resilience against sharp price spikes can be delivered through a mix of domestically generated renewables and nuclear, with gas phased down to a backup. But that will also require using electricity for a far greater proportion of day-to-day energy use (electric cars, heat pumps) and building the infrastructure to make that possible (national power grid capacity). At present, households typically use over four times as much gas generated energy each year compared to electricity – so the transformation at hand is vast.

3)    Significantly reduce the cost of good quality food as a percentage of incomes.

Like energy, food prices in the UK have a significant international dimension, because of direct import dependencies (mainly from other areas of Europe) as well as global price dynamics for commodity products. This means no easy national-level fixes. Most policy to manage costs will be foundational; supporting agricultural stability globally and especially in Europe, and a macroeconomic framework that sustains the international value of the pounds we use to buy our imports. But these elements should be made part of an agricultural and food strategy (alongside industrial strategy) not an excuse for lacking one. With climate extremes and conflict increasingly disrupting food markets, this strategy must aim for greater resilience. It also needs actively to promote the availability and affordability of good, nutritious food that supports health – a problem that food banks simply cannot solve. And because getting ill makes us more likely to fall into poverty, and living in poverty makes us more likely to fall ill, there’s a strong case for anti-poverty and health equity aims to be held together within a single coherent frame.

The common thread is that, to fulfill these objectives, upfront cost will be unavoidable. The question is who bears it – as well as benefits from longer run returns on investment – rather than whether or not it’s needed. On housebuilding, planning reform can surely allow private enterprise to bear the upfront costs of a good deal more building. But given the depths of the housing crisis, with so few new homes since the 1980s, that may not be enough. If it’s not, government will have to step in. It’s the same story on energy, only on a vastly larger scale, and with no doubt about the government investing directly, alongside others.

What’s needed then is a credible framework for undertaking these costs. That means when we talk about investment, it’s no easy answer – there’s no tap to just turn on. But we mean enabling proportionate risk to returns over the relevant time horizon, and at scale. The danger is that aspects of the current approach, for example, to public debt sustainability suffer self-defeating dynamics. This is about much more than just ‘fiscal rules’. Our institutions have all the expertise and potential to deliver, but largely lack the connective tissue to work well together to a hard-headed policy for investment, accounting for the value of long-term assets. Given the parlous state of trust in politics, and the damage from austerity and other political failures of the 2010s, initial steps will have to take great care; proving themselves viable as they go. You cannot forget the imperative of credibility when a large current account deficit means relying on the ‘kindness of strangers’, in the form of financial decisions made overseas, to sustain economic value at home. Liz Truss proved that. But we must begin, or the hill just gets steeper.

There is much of equal importance to be said on the low income side: including removing the two-child limit, improving the minimum wage, and ending "one-sided flexibility" in the labour market. These points tend to get more attention in tackling poverty, rightly so perhaps given backward steps since 2010. However, a costs agenda is equally indispensable, and the two go hand in hand. For example, discussions on welfare reforms going further – to bring in minimum levels of social security based on fulfilling basic needs – are compelling but can only be made workable over time if the real price of essentials is kept within limits. In the twenty-first century of new geopolitical and climate risks that’s ahead of us, that means a serious strategy for lower costs in core areas like housing, energy and food; alongside good policy to lift up incomes.