Publication will no doubt be overshadowed by the ongoing Brexit debate. But it s important not to lose sight of the domestic policy agenda.

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1 Tomorrow, new statistics on poverty and income inequality will be published. All indications are that levels of poverty and inequality are on the rise in the UK over the longer term, and Scotland is no different. These statistics matter for a variety of reasons, not least because back in 2017, Holyrood voted to put into law a target to reduce relative child poverty in Scotland. Publication will no doubt be overshadowed by the ongoing Brexit debate. But it s important not to lose sight of the domestic policy agenda. Too often the debate over poverty collapses down to a simple discussion about the level of re-distribution in the tax and benefit system. But in reality, if Scotland is to meet its poverty targets then it ll require a much more fundamental look at the Scottish economy and how it functions. For instance, we have record people in employment in Scotland, but rising poverty. Ultimately, tackling poverty isn t just a moral or societal problem, but also an economic problem that requires a system-wide look at how jobs are created, levels of investment in the economy, productivity growth and wage growth. Poverty and Inequality in Scotland Poverty rates in Scotland had been falling, but recent data suggests that it has been rising once again. Relative poverty is a measure of whether the income of the poorest households are keeping pace with middle income households across the UK. It is estimated that 16% of Scotland s population, or 860,000 people, were in relative poverty before housing costs over (figures are always displayed as three year averages), with those figures rising to 19% and around 1 million people, once housing costs are included. After housing costs, the number of people in relative poverty is at its highest since Chart 1: Relative poverty in Scotland since devolution

2 In terms of absolute poverty i.e. whether the incomes of the poorest households are keeping pace with inflation relative to the poverty threshold in 2010/11 rates have stagnated in recent years, with around 17% of Scotland s population, or 910,000 people in absolute poverty (after housing costs). That being said, the fall since the mid-1990s has been significant, where rates of absolute poverty were as high as nearly 40%. One of the features of rates of poverty in Scotland (and the UK) is the increasing levels of inwork poverty. For all the claims about record numbers of people in work, it is clear that for many people this doesn t mean improved living standards. Chart 2: In-work poverty in Scotland

3 Nearly 60% of working-age adults in relative poverty are in a household where at least one person is working an all-time high since reporting began. In total, around 550,000 people in Scotland who are in relative poverty are in households with someone working. Most modelling including our own predicts that over the next few years, rates of relative poverty will continue to rise slightly. [For an excellent discussion of trends at a UK level see the Resolution Foundation s 2019 Living Standards Outlook]. A combination of recent high rates of inflation, the ongoing freeze of many in-work benefits plus wider reforms to many family-related benefits, and weak earnings growth, all point to a challenging time for households living in poverty. Income inequality Similar to poverty indicators, there seems to be little long-term movement in levels of income inequality in Scotland.

4 The so-called Palma ratio or 90/40 ratio, aims to measure the extent of inequality between those in the richest 10% of the income distribution with those in the lowest 40% of the income distribution. It divides the total income of the top 10% of earners by the total income of the bottom 40%. Chart 3: Income inequality in Scotland As the chart highlights, despite fluctuating year-on-year, rates of income inequality have been fairly static. The top ten percent of the population have 24% more income than the bottom forty percent combined marginally above the long-term average since devolution. At the same time, the Gini Co-efficient, another recognised measure of inequality, remains stuck at its post-devolution average.

5 Child poverty Two years ago, the Scottish Parliament signed up to challenging targets to reduce child poverty in Scotland. These targets included an objective of reducing child poverty to 10% by , with an interim target to reduce it to 18% by % of Scottish children, or 180,000, live in relative poverty (before housing costs) after housing costs this rises to 24% of children (i.e. nearly 1 in 4 children in Scotland), or 230,000. Child poverty rates had been falling for many years, but have started to rise again in recent years. Chart 4: Child poverty in Scotland

6 The rise in in-work poverty is undoubtedly a contributing factor to the rise in child poverty, as around two-thirds of children in poverty live in households where at least one adult is working. So how might the Scottish Parliament turn this around? It s important to note that rising poverty and income inequality are not just limited to Scotland. Indeed, rates of poverty, including child poverty, in Scotland are lower than in the UK as a whole (particularly when housing costs are included). Ultimately, many of the policy levers to tackle poverty are UK wide. The rise in poverty can be traced back, in part, to some of the changes to the welfare system introduced over the past decade including Universal Credit and the freeze in many working age benefits. But, perhaps laudably, it is the Scottish Government that has set explicit targets to reduce poverty. And has a number of policy levers which it can pull. So where might the policy debate focus? Firstly, the Scottish Government and Scottish Parliament should be commended for setting ambitious targets. But given the stubbornly high rates of poverty, meeting these targets is likely to require a scale of investment and policy ambition way beyond anything we have seen so far. On the face of it, policymakers face an uphill battle with pressures on public spending and a weak outlook for revenues. The proposed new income supplement offers one such opportunity, but it s questionable whether or not it can set at a level that will make a significant difference but remain affordable. Secondly, the parliament will need to adopt a rigorous and transparent approach to tracking performance. In this regard, the Scottish Government has a mixed track record on delivering against targets. On the one hand, in areas like climate change and renewable energy the government has consistently over achieved. But on the other hand, particularly in relation to Scotland s economy, many of its targets have been missed by a significant margin with little analysis or explanation from government on why this has happened.

7 If parliament is to meet its targets, it ll require a rigorous tracking of progress, underpinned by a robust analysis of what is and crucially isn t working. Finally, and most importantly, if Scotland is to tackle poverty rates it cannot hope to rely on the tax and benefit system on its own. Poverty is now increasingly a story of in-work poverty with a lack of growth in productivity, earnings and tax revenues feeding through to a cycle of weak household incomes, austerity and lack of economic opportunity. Ultimately, investing in people will be key reducing poverty but also building a stronger economy. Government will clearly have an important role across its labour market, economic housing, health, education and welfare agenda. But so will business, through recruitment practices, investment activity and wider efforts to boost productivity. The challenge with setting ambitious targets is that parliament can be judged, not just on whether or not it is meeting these targets, but on the effectiveness of the reforms they are implementing. The data out this week is likely to show that more of the same is simply not going to cut it.