Running up the down escalator: as a description of the government's attempts to eradicate child poverty in the United Kingdom, it is a fair assessment of the rate of progress being made to reach the targets that define the Labour Party in office.

The mission to eradicate child poverty by 2020, first announced by Tony Blair in 1999 when there were 3.4 children living in deprived circumstances, has been at the core of what Labour wants to achieve in government. Over 10 years Gordon Brown as Chancellor assiduously and quietly built a complex system of tax credits and benefits to lever poor people up the income scale. He once said that he wanted Britain to be a land where child and pensioner poverty was a thing of the past. Yesterday's release of the annual figures on low-income households proved we are nowhere near his New Jerusalem.

The government's figures for low income in 2006-07 showed that 2.9 million children are officially living below the breadline in the UK - up 100,000 since 2005-06. This is the second successive year the government has failed to make progress on its target to reduce poverty. Child poverty levels in Scotland, with 210,000 children in low-income households, have remained the same for the past three years, which offers a picture of policy grinding to a halt.

The figures also show that in 2006-07 there were 2.5 million pensioners living in poverty before their housing costs were taken into account, a rise of 300,000. This is the first increase in pensioner poverty since 1998 and is, according to Age Concern, a figure that should shame the entire population. The adage is that the poor will always be with us. Well, we know they will be well beyond the 2010 target that Tony Blair set as the waypoint for halving the poverty figures.

Despite working up a down escalator, none of the Department of Work and Pensions team looked that out of breath when they unveiled the statistics yesterday morning. From their point of view the government is actually making progress.

Children's Minister Beverley Hughes said she was "disappointed but not necessarily surprised" by the figures and she acknowledged that meeting targets to halve and then eradicate child poverty would not be easy. "There are quite a few Budgets between now and 2010," said Ms Hughes. "We will redouble our efforts, we will not abandon any of our children to a future of poverty and disadvantage and we remain 100% committed to these goals."

Redoubling efforts is exactly what seems to be needed. David Phillips, research economist from the Institute of Fiscal Studies, said: "We estimate that the government would need to spend a further £2.8bn a year by 2010/11 to give itself a 50-50 chance of meeting its next child poverty target." That is almost the same amount of money that the Chancellor spent last month with the "one-off" income tax cut to solve the 10p tax rate debacle, although most of the benefit will go to middle-income families, rather than the poor.

Ms Hughes, while she could not downplay the direction of the graphs over the past year, emphasised that in the past decade 600,000 have been lifted out of poverty. Action is being taken to reverse the trend of increasing inequality by pumping £1bn into child benefit and tax credit arrangements. The changes - which ministers believe will lift a further 550,000 children out of poverty - will still leave the government needing to help a further 550,000 in order to hit its target of 1.7 million. Unfortunately for the families living in poverty, the changes in Budgets and pre-Budget reports over the past two years have come too late to affect this year's figures.

Why pensioner poverty is increasing is explained by Gordon Brown's own pre-election largesse. In 2005, there was an increased settlement on winter fuel payments and a one-off, pre-election, payment of £200 to help pensioners with council tax payments. The effect of losing that £4 extra a week is now visible in the statistics for the following year. During the course of the 2006/07 non-pensioner average incomes rose faster than inflation, so pensioners were left behind in relative terms too, explained Mike O'Brien, the Pension's Minister.

Of course it is all relative. The report calculated the benchmark for low income as less than £226 per week for a couple with no children based on an income of less than 60% of the median disposable household income before housing costs are taken into consideration. A new measure of "material deprivation" has also been included that involves measuring the simple services people can afford, such as swimming classes, school trips and birthday parties. "It's a useful tool to illustrate how poverty plays out for hundreds of thousands of children across the UK," said John Dickie, head of the Child Poverty Action Group in Scotland. " These children miss out on things that most of us take for granted." He added: "It is within the reach of a country as wealthy as the UK to eradicate poverty if the political and moral leadership is there."

Pension incomes have risen substantially since the millennium, up 29% while average earnings have increased 16%, but the number of older people claiming pension credits has now reached a plateau, leaving nearly £5bn of benefits unclaimed each year. The government is putting more effort into making people claim and working to reduce fuel poverty. Ministers have also pledged to restore the link between the state pension and average wage in 2012, but pension campaigners say that needs to happen now.

While it may run counter to the self-image, Scotland, where some 21% of children live below the poverty line, is not the worst off part of the UK. Inner-city London, the East Midlands of England, Northern Ireland and Wales all have more children living in poverty.

Critics argue that the government has tools other than tax credits at its disposal if it wants to reverse the direction of the social escalator. An increase in the minimum wage, which trade union argue would reduce poverty at a stroke, is not a policy lever the government wishes to pull.

There may be 2.5 million pensioners living in poverty but there are, according to the sheaves of statistics and graphs provided by the government yesterday, 2.7 million individuals in the UK with an income above £1000 per week. The government shows no enthusiasm for reducing the wage inequalities in the country.

While ministers were preparing their poverty figures, another Treasury Minister, Kitty Ussher, was successfully fighting EU efforts to exercise some restraint on executive pay and bonuses that help skew economic inequality in modern Britain.

"One of the drivers of child poverty is income inequality," said John Dickie of the Child Poverty Action Group in Scotland. "Those societies that have more equal income distribution are those with the lowest child poverty."