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1 Aug 2016

Poverty costs UK £78 billion per year, research reveals

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A new report – co-authored by Loughborough University – reveals that dealing with the effects of poverty costs the UK £78 billion a year, £1,200 for every person. 

The research entitled Counting the cost of UK poverty was produced by Loughborough University’s Centre for Research in Social Policy (CRSP) and Heriot-Watt University on behalf of the Joseph Rowntree Foundation (JRF). 

It is the first research to illustrate the cost poverty among all age groups has on the public purse[1]. It found that £69 billion of all spending on public services – £1 in every £5 – goes on services which are needed to pick up the pieces from the damage and cost poverty has on the lives of the 13 million people living in it in the UK today. 

The total £78 billion also includes £9 billion lost tax revenue and additional benefits spending resulting from the experience of poverty. It is equivalent to 4% of the UK’s GDP. 

The report shows how poverty cuts across all government departments and areas of public spending[2], including: 

  • Health care accounts for the largest chunk of the spending, with £29 billion every year spent treating health conditions associated with poverty. This is enough to pay the salaries of 126,000 nurses, and is almost equal to the £30 billion shortfall which the NHS has said will appear by 2020. The £29 billion makes up 25% of all health spending
  • Schools spend an extra £10 billion every year coping with the impact of poverty through initiatives such as free school meals and the Pupil Premium. This is nearly 20% of the total schools budget
  • Police and criminal justiceaccount for £9 billion of the total annual poverty cost, due to the higher incidence of crime in more deprived areas. This represents 35% of all spending on police and criminal justice
  • Children’s services, including children’s social services and early years provision such as free childcare include £7.5 billion additional spending because of poverty. The amount spent on poverty represents 40% of the early years budget and 60% of the children’s social care budget
  • Adult social care is associated with £4.6 billion of the cost of poverty, 26% of spending
  • Housingadds £4 billion to the annual public service cost of poverty, 37% of spending on housing and communities.

As well as looking at public services spending, the report considers the knock on effect that experiencing poverty has on future costs to the public purse. It estimates that experiencing poverty in childhood results in more adults being out of work, requiring £2 billion to be spent on their benefits, and those in work earning £13 billion less, which causes £4 billion of lost tax revenue each year. The £78 billion also includes the cost of additional spending on some benefits, such as Pension Credits and Employment and Support Allowance, in more deprived constituencies. 

The total does not include the full cost of benefits aimed at preventing poverty or helping people to find a way out, such as Income Support, Working Tax Credits or Job Seeker’s Allowance. It also does not include the amount that experiencing poverty in adulthood costs the public purse through reduced tax revenue. 

One of the report’s authors, Director of CRSP and Professor of Social Policy Donald Hirsch, said: “It is hard even to estimate the full cost of poverty, not least its full scarring effect on those who experience it. 

“What our figures show is that there are very large, tangible effects on the public purse. The experience of poverty, for example, makes it more likely that you’ll suffer ill health or that you’ll grow up with poor employment prospects and rely more on the state for your income. 

“The very large amounts we spend on the NHS and on benefits means that making a section of the population more likely to need them is extremely costly to the Treasury.” 

Julia Unwin, Chief Executive of the JRF, said: “The UK’s shamefully high levels of poverty are a waste of people’s potential, a waste of economic opportunity and a waste of public money. This report lays bare the huge harm that poverty causes for people who are struggling to make ends meet and, shows the impact that dealing with poverty has on the public finances. 

“UK poverty is a problem that can be solved. Taking real action to cut poverty would bring down the huge £78 billion yearly cost of dealing with its effects, and mean more money to create better public services and support the economy. It won’t happen overnight, but a more prosperous society is possible if Government, businesses and individuals work together to solve poverty in the UK once and for all. That way, we will all be better off.” 

Glen Bramley, Professor of Urban Studies at Heriot-Watt University and one of the report’s authors, said: “The £69bn extra cost of public services is our best estimate based on reviewing evidence on the patterns of service utilisation and spending across individuals, neighbourhoods and localities with different levels of poverty. We have taken account of the actual resource allocation mechanisms in use and applied statistical analysis techniques to allow for other factors which affect the amount of services used. These costs include the effects of both current poverty and past experiences of poverty, including other social problems which are closely inter-related with poverty.”

 

Notes for editors

Article reference number: PR 16/110

  1. A previous report, Estimating the costs of child poverty by Donald Hirsch, looked at the impact of child poverty on the public finances.
  2. The full breakdown of the £69 billion extra public expenditure on services associated with poverty are: 
Expenditure headingEngland (£bn)Rest of UK (£bn)UK total (£bn)UK to England expenditure ratio
 
Acute hospital 17.8 4.0 21.8 1.23
         
Primary health care 5.9 1.2 7.1 1.20
 
Public health 1.2 0.4 1.6 1.33
 
Children and families personal social services 4.9 1.0 5.9 1.20
Children and families nursery/early years 1.3 0.3 1.6 1.20
 
Adult social care – younger 2.0 0.4 2.4 1.20
Adult social care – older 1.7 0.7 2.2 1.29
 
Schools 9.1 1.0 10.1 1.11
16-19 education 0.9 0.2 1.1 1.21
Higher education 0.3 0.1 0.4 1.21
 
Housing investment 2.1 0.7 2.7 1.34
Housing current 1.0 0.4 1.4 1.39
 
Police 4.2 0.8 5.0 1.19
Criminal justice 3.2 0.7 3.9 1.22
Fire and rescue 0.62 0.18 0.80 1.29
 
Transport – concessions and bus subsidies 0.33 0.12 0.45 1.43
Local environmental services 0.7 0.2 0.9 1.28
 
Totals 57.2 12.2 69.2 1.21

3. Public costs are incurred in measures to reduce or alleviate poverty, and as a consequence of poverty’s existence. The present report focuses on the latter and estimates there is £69 billion current spending on services associated with the existence of poverty. It also finds £9 billion longer-term consequences of poverty to the Treasury, in terms of reduced revenues and increased benefit payments to people whose earnings potential will be damaged in the future by the experience of poverty today. It does not count the cost of paying benefits to people on low incomes as a ‘cost of poverty’ (other than where the above knock-on effect can be identified). The state spends about £70 billion on means-tested benefits and tax credits to those whose incomes excluding such payments would be below the poverty line. 

4. In total, knock-on effects of £9 billion per year have been measured by this study, although the difficulty in identifying long-term effects suggest that the true cost is much higher:

  • £4 billion in lost tax revenues, associated with £13 billion in lost earnings of individuals who have grown up in poverty. This is based on updated figures using the previous (2008) study’s analysis of the earnings of adults according to whether their families had experienced hardship when they were teenagers, controlling for other factors. The £9 billion of these earnings that would have been retained by individuals are not counted as part of the cost in this report, as it focuses on public revenues, but this could also be regarded as a social cost in terms of reduced economic activity 
  • £2.4 billion in additional benefits paid to the additional number of adults not working as a result of people having grown up in poverty, also based on the modelling in the original 2008 study 
  • £1.4 billion in Employment and Support Allowance attributable to higher claim rates in poorer parliamentary constituencies. This is associated with evidence that the experience of poverty has serious long-term consequences for physical and mental health, and therefore helps explain why in deprived areas more people receive benefits related to health and disability 
  • £1.3 billion in Pension Credit attributable to higher claim rates in poorer areas. People receiving the means-tested Pension Credit have been unable to build up sufficient retirement income of their own, and this is linked to poverty and low income throughout working life. 

5. Most of the evidence on services involves comparing spending levels across small areas with different poverty rates; some of it also draws on differences in use of services by individuals according to their poverty status. Such differences must be regarded as indicative of poverty costs, rather than as direct measures. Several factors must be taken into account when interpreting them: 

  • While some effort has been made to control for factors that can influence both poverty and spending on public services, these associations between higher spending and the extent of poverty do not necessarily demonstrate causation
  • This association, however, has been shown to be more than merely incidental. There has been ample evidence elsewhere to show how poverty can increase people’s chances of requiring various forms of public assistance or treatment (for example via its effects on health), and some services are particularly designed to target people in poverty or material need (such as additional educational help for children in low income families), or to target deprived areas (such as area regeneration programmes)
  • The precise extent of additional spending measured in this way is affected not just by the additional needs that poverty creates but by the degree of responsiveness in services in meeting them, which is not a constant. For example, where spending on a service becomes more focused on disadvantaged groups (such as when the Pupil Premium was introduced in schools), it may appear that the cost of poverty is rising, whereas if services in general are cut, or individuals required to pay privately for something that previously had been public, it may appear that the cost is falling. In other words, our estimate is a snapshot of the expenditure which appears to be associated with poverty at a point in time, given the policies and budgets applying at that time. 

The nature and strength of the evidence examined here is varied. In turning it into estimates of the cost of poverty, the analysis below tries to steer a reasonable path between high and low estimates, where possible taking a middle position, but the patchy nature of some of the data is another reason for treating the figures as indicative. 

For the above reasons, the following estimates must be seen as illustrating how a very large amount of public service spending is addressing poverty and its consequences, but should not be treated as a means of monitoring accurately what poverty actually costs in every service from year to year. A concerted effort to eradicate poverty may well involve spending more initially on services that help break the long-term cycle of family poverty and its consequences, but bring longer-term social and economic benefits. Moreover, given that poverty so often goes hand in hand with other social disadvantages, the costs measured here would not be avoided merely by bringing people’s incomes above the poverty line without tackling other associated forms of disadvantage. 

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