Shock for Blair over `two-nation Britain'

A DAMNING report on poverty will be published by the Government later this month, providing fresh evidence that Britain is becoming "two nations" because of the divide between rich and poor.

Ministers will respond to the report by unveiling a new anti-poverty strategy, including the publication of 40 ambitious targets to improve the lives of the poor.

The new measures will build on the pounds 5bn-a-year working families tax credit, Labour's flagship welfare reform, which was launched by Tony Blair and Gordon Brown yesterday. The scheme, which takes effect on 5 October, aims to ensure that people are better off in work than on benefits. It will guarantee that full-time workers take home at least pounds 200 a week, and that families earning less than pounds 235 pay no income tax.

The survey of poverty and social exclusion has been compiled by the Department of Social Security. The findings are said to have shocked ministers, who say it proves the need for a new battery of "success measures" to show whether the Government is making real inroads into Britain's underclass.

The report will highlight the growing divide between the "work rich" and "work poor", with one in five families having no one in employment even though 500,000 jobs have been created since the 1997 general election. It will also reinforce fears about the "cycle of deprivation" being passed down the generations. Children from poor families are much less likely than others to attend school regularly and reach their full potential. As adults, they are more likely to be unemployed and live in poverty.

Labour will blame many of the problems on its inheritance from the Tories. But publication of the survey, just ahead of Labour's annual conference in Bournemouth, is bound to fuel demands from some MPs for more radical action.

Ministers claim their decision to set new performance targets is a high- risk strategy. Alistair Darling, the Secretary of State for Social Security, will argue that the new "success measures" prove the Government's determination to "tackle the root causes of poverty rather than the symptoms". Although he will insist that success can be judged only in the long term, he is expected to publish an annual progress report to keep up the pressure on the Government.

The goals will include reducing the proportion of children living in low-income families; reducing drug use; raising the life expectancy of the over-65s and increasing the number of elderly people who can live in their own homes.

Labour has already pledged to eradicate child poverty in 20 years. Yesterday Mr Brown said that the new tax credit would lift 1.25 million people out of poverty, including 800,000 children. He said 1.5 million families were eligible - almost double the 800,000 receiving the existing family credit benefit it replaces.

The Chancellor, who launched a pounds 12m advertising campaign to promote the new scheme, said the families would be better off by an average of pounds 24 a week. "The Government is not only integrating tax and benefits for the first time to tackle the causes of poverty but fulfilling an essential element of welfare reform - to make work pay," he said.

Mr Brown raised the prospect of further "targeted tax cuts" to boost the incomes of the low paid - a hint that he might broaden the slice of earnings covered by the 10p rate of tax introduced this year.

The Tories warned that employers would face a pounds 100m bill to administer the scheme, which tops up people's pay packets, and might be reluctant to take on workers who would benefit. They said homeowners might not be better off in work than on benefits, and that the new benefit, which offers help with childcare costs, would penalise mothers who stayed at home to look after their children.