Failure to build an economy geared towards fairer rewards and growth that meets social priorities will hamper the fight, argues Stewart Lansley.

After months of growing pressure, the government has finally given hints of a lift to the two-child benefit limit. In his speech to Party conference, Keir Starmer maintained that Labour are committed to cutting poverty. These are positive signs, but they leave open a vital question: by how much – if at all – will poverty be cut at the end of Labour’s term?

Official figures show 4.5 million children (almost a third of all children) lived in relative poverty in 2024. This was up by 100,000 over 2023. Yet desirable and effective as an end to the cap would be,  such a move would only cut child poverty by around half a million. Moreover, if the change involves a partial, rather than a complete lifting of the cap, limited, say, to three or four children as the Treasury seems to be insisting, the fall would be a lot less.  Even if it is scrapped in full, 28 per cent of children would stay poor. This is more than double the historic low point of the 1970s.

The government has taken other steps to help low income families, with the extension of free school meals predicted to lift up to 100,000 children out of poverty in the long term. A more substantial strike however depends on a much more fundamental overhaul of the British economy, of how rewards are shared and resources are allocated. 

Ultimately, the level of poverty depends on how the cake is shared. It is Britain’s yawning income and wealth gap – and the way the gains from economic activity have been captured by an ever-powerful financial and corporate elite – that explains Britain’s dismal record. Yet there has been little mention of inequality by Labour leaders, or a recognition of the umbilical link between trends in poverty and the income and wealth divide. Britain has been a high poverty, high inequality nation for most of its history, the one exception being the short-lived period of post-war egalitarianism initiated by the post-war Labour government. The achievements of the 1970s have been overturned by the ideological counter-revolution against the more managed model capitalism, with the state returning to its long term role as an agent of inequality.

The rise in poverty since the 1970s has been driven by a hike in top fortunes engineered at the expense of stagnant and falling living standards across much of society. This surge in personal wealth at the top is the product of a range of predatory business methods. Companies have been turned into cash cows for owners through the ‘skimming’ of the gains from economic activity at the cost of weakened social and economic resilience and declining life chances. 

Britain’s built-in bias to inequality and poverty is not just bad news for social progress. With the process of enrichment achieved by often unproductive activity that leads to hollowed out companies, it is also the principal explanation for the stifling of economic advance. 

In 1759, the patron saint of economics, Adam Smith,  warned of how the rich and powerful rig economies against the rest of society. “The test of our progress is not whether we add more to the abundance of those who have much,” declared the American President, Franklin D. Roosevelt in 1936, “It is whether we provide enough for those who have too little.” For the last 50 years, these warnings have been largely ignored. Instead, a toxic mix of extreme inequality and an over-reliance on private markets has delivered a hike in activity that serves little social purpose. 

The scale of the task involved is revealed by the ‘poverty gap`. This is the amount by which a  particular household falls below the poverty line. The current gap across all poor households is around 30%.  This is equivalent to an average shortfall of £6,200 a year for a couple with two children. It is a gap that stood at around 23% in the 1990s. It is a stark indicator of the inadequate share of national income and wealth enjoyed by those on the lowest incomes.  The poorest fifth of households currently hold 7% of the nation’s aggregate income (after taxes and benefits). In contrast, the top fifth hold 41%.

Rising and deepening poverty has nothing to do with a lack of resources, or Labour’s claim  that there’s ‘no money left’. Its roots lie in a mix of flat taxes, over-privatisation, excessive reliance on markets, and growing monopolisation, that has transferred power over how land, the workforce and financial resources are used to global asset managers, boardrooms, bankers and an increasingly wealthy billionaire class.

An effective war on poverty depends on a much more radical reshaping of a badly broken economy through a more progressive tax system, tougher anti-poverty policies, and a new regulatory war on corporate power and extraction. Failure to build an economy geared to fairer rewards and growth that meets social priorities will keep Britain at the top end of global poverty and inequality league tables while its economy will continue to fester.

Stewart Lansley is the author of The Richer, The Poorer: How Britain Enriched the Few and Failed the Poor, a 200-year History,  He is a visiting fellow at the University of Bristol and a Council member of the Progressive Economy Forum.

Image: c/o Labour Hub