A third source to boost living standards: the family

Policymakers should seek to mitigate the barriers to the giving and receiving of financial and practical support between family members.

By Ryan Shorthouse

Alongside tackling the deficit, the government‘s priority is now tackling another major economic problem: the rising cost of living, caused by a mix of stagnant wages, a real terms reduction in benefits, and inflation. But with public spending constrained and economic growth still fragile, policymakers need to think creatively about solutions beyond the traditional reliance on the state or the market to help struggling families.

A recent report by the Child Poverty Action Group and Joseph Rowntree Foundation demonstrates the scale of the problem for families on modest incomes: over the past year the average cost of raising children has risen by 4% for those also paying for childcare.

To boost family incomes, policymakers tend to fixate on two levers: the state or the market. Either government, through increased cash transfers or reduced taxation, or businesses, through increased wages, are called upon to do more. Under the last Labour government, cash transfers from the state to low-income families increased substantially with some notable successes, such as the reduction in the number of children living in poverty. The coalition government has prioritised reducing income tax. Recent emphasis has shifted to the role employers can play in boosting income: there is campaigning from across the main political parties to increase the minimum wage and spread the voluntary living wage to more employers.

The state and market should do more to help alleviate poverty. But the current economic conditions limit their reach. So it is also worth exploring how a third major resource can help improve family incomes: a person’s wider family.

Already, a significant minority of households receive regular financial support from their wider family, predominantly their parents. It is estimated that about 1 in 6 households regularly receive financial help from their parents with the average received in one year about £1,400. The national annual flow of such transfers is estimated to be about £1.2bn. But this undervalues the scale of transfers taking place: it misses out those who receive money through inheritance, which is estimated to be about £30bn a year.

Forthcoming research from the Social Market Foundation found that many on the lowest incomes, especially those experiencing circumstantial poverty due to unemployment or divorce, receive significant financial support from their parents, often worth thousands of pounds. And in-kind support such as the provision of childcare and shopping is also common and saves households significant amounts of money.

The family, then, is often a major but hidden form of welfare. Its impact can be quite remarkable. There can be a considerable improvement in living standards of low income families who receive support from parents: they are better able to work or train, and afford a wider range of goods from children’s clothes to holidays.

Policymakers should seek how to mitigate some of the barriers to the giving and receiving of financial and practical support between family members. Obviously, the lack of familial exchange may be explained by geographical or emotional distance between relatives. But there are other barriers such as money and time: for example, especially with cultural and governmental expectations to work for longer in older age, grandparents will have less time in the week to provide support.

Employment for older people could be more flexible. Since the late 1980s, DIY retailer B&Q has encouraged older workers, with a quarter of its workforce now over the age of 50, by ensuring flexible working – including for caring responsibilities – is part of the company culture. Maybe this could be nudged along by making parental leave, especially parents’ unpaid entitlement, transferable to grandparents if unused?

To tackle the financial constraints some families face, maybe tax efficient, high-interest multigenerational family trusts could be established to encourage low-income families to build up a pot of money to help different generations in testing times?

This year’s Budget – with announcements to help families with childcare, petrol and housing costs – showed that the government is focussing on measures to boost living standards for those on modest incomes. But policymakers will need to think creatively and draw on multiple sources: the state and the market, yes, but also the family.