Tagged: Child Benefit

Cutting Child Benefit

According to Danny Alexander, the outgoing Chief Secretary of the Treasury, the Conservative plan to save £12bn on benefits might consist substantially of cuts to Child Benefit.  He lists four:

  • limiting Child Benefit to two children.  I’ve reviewed this proposal before, actually more than once.  It wouldn’t save very much and it would be unexpectedly complex – because it would lead to families have to revise claims for eligibile children as their families got older.
  • removing it for 16-19 year olds.  This could have worked in the past.  Older families tend to be better off, and it would have been the least regressive of the proposals.  Unfortunately, times have changed, and the school leaving age in England is going up to 18/19.  So it won’t work any more.
  • stopping the higher rate for the first child.  The higher rate was introduced because families with one child, and families with young children, tend to be poorer.  Changing this would be a further penalty for the poor.
  • means-testing the benefit  We already have one means-test; it’s done by the tax system.  The call for means testing is a call for another awkward, clunky, intrusive process to get in the way.

Child Benefit, for those who’ve forgotten, was created by combining the  Child Tax Allowance with the Family Allowance.  Cutting Child Benefit is directly equivalent to increasing tax.

The Conservatives have denied that any of this is current policy.  They’ve explained where about £2bn of cuts will be made, they still have to explain where about £10bn of their £12bn is going to come from, and every time a politican speaks to the media, they go back to the same first £2bn.   The question remains – if it’s not about Child Benefit, what is it about?

Old arguments about Child Benefit are revived

It seems at times that no proposal ever dies, no matter how foolish.  Earlier this year, we saw the revival of the  proposal to adopt EBT cards, which don’t work.  Now it’s the turn of the argument to cut Child Benefit for families with more than two children.  I dealt with the arguments about this more than two years ago. Last July the Policy Exchange suggested a restriction to four children, which would have done very little to save money – – it would affect about 3% of families, and then not for all the benefit – but would have introduced a string of complications into the administration of a relatively simple benefit.    Now Iain Duncan Smith (of course) has come back to the idea of limiting it to two children, which would affect about a fifth of all families.  It was a bad idea two years ago.  At a time when families don’t have enough money for food, it’s an even worse idea now.

The proposal to limit Child Benefit to two children

This morning’s Daily Telegraph reports that the Treasury is considering limiting Child Benefit to two children. The Telegraph has been the conduit for a series of kites flown by government recently. The main purpose of speculating about policy changes – Norman Fowler, a former Conservative Secretary of State, used to do it with the Times – is to test the water, to see what people will put up with. This is the first attempt to put flesh on the bones of Iain Duncan Smith’s suggestion that large families should lose support, but it comes from outside his domain – Child Benefit is the responsibility of HMRC and the Treasury, not the DWP.

As ever, there are issues of principle and practice to consider. In principle, Child Benefit does four things:

  • It supports children in general;
  • it gives an income to women responsible for child care;
  • it supplements wages and other benefits, so that household income is adjusted for family size; and
  • it stands in place of a Child Tax Allowance, which it replaced.

The main effect of cutting benefits for larger families would have in three of these cases would be to limit the benefit, rather than to destroy it. There will still be a benefit, but it will be worth less. The aim that it negates is the principle of adjusting family income to the family’s size. Larger families are not going to say that the income they receive is intended for child number 2, and not for child number 3; what will happen is that all the family, and all the children, will have less, and that will happen regardless of whether people are in benefits or in work. In a nutshell, it will increase child poverty.

The issues of practice are more complex. Child Benefit works mainly because it is very simple. This reform looks simple on paper, but it adds a significant complication. People claim Child Benefit first for the oldest child. That claim runs till the child is too old, and it continues automatically until the youngest child is too old. If the benefit is paid only for the first two children, the claim will only be for the first two, and there will be no link to records for the younger children. Families will need to register a fresh claim for younger children – the ones HMRC will not know about – at the point where the oldest child reaches school leaving age. Fresh claims mean, inevitably, delay and non-takeup. It’s possible that this is an effect the government wants to produce – HMRC has been encouraging better-off families not to claim at all. If people don’t claim, they don’t cost.

Savings, however, will be limited. Only about a fifth of families have more than two children, and all of those will still be entitled to benefits for the first two. The cuts would, of course, affect the welfare of all the children in these families, but the actual savings would be about a sixth of the Child Benefit bill – far less than the government is aiming to cut from benefit. I am not sure exactly how much this would be, because from the previous £12-13 billion that Child Benefit costs, the government claims already to have taken steps to save £2.5 billion a year from the cut to higher earners. On paper, though, it seems unlikely to save more than about £1.5 billion. To put this in perspective, it’s worth about £2.50 a week on the pension. The effects of this saving would be disproportionate, however, because they will affect every person in a family with three or more children.

Confusion about Child Benefit

The news that HMRC is sending letters to parents about Child Benefit has prompted a series of articles about the muddle and confusion that goes along with the process. On one hand, there seems to be popular support from opinion polls to the effect that richer people should not receive Child Benefit. (See e.g. the Daily Telegraph, 29th October.) On the other, there is confusion about inequity, how the rules will work, whether people are being asked not to claim, and so forth. The Institutes of Chartered Accountants think the whole thing is far too complicated. There is no contradiction here. The first statement is a question of principle; the second part concerns questions of practice. It is possible to make sure that richer people don’t benefit disproportionately by using the tax system, ‘clawing back’ the benefits. There is no possible arrangement for means-testing Child Benefit, or introducing special tax rules for one benefit on its own, that isn’t going to be complicated. “What I find so frightening”, Richard Titmuss once wrote, “is the extraordinary administrative naivety of those who argue in such terms for ‘selectivity’.” That same naivety is at root of the Treasury’s current problems.

Cutting Child Benefit

The government intends to cut Child Benefit by suspending payments to families where one person falls into the higher tax bracket. There are two main objections to that proposal. One is that it is inequitable: it allows households on higher incomes to retain the benefit while cutting it to some people on lower incomes. The second is that it is impractical; there is no easy way of identifying who should be affected.

The main argument for cutting Child Benefit seems to be that it will help to cut the deficit. If the government wanted to increase the burden on richer families, it has the option of clawing back the benefit through the tax system. It would make more sense to tax all higher rate payers, rather than only those with children. If the government was serious about cutting the deficit, they would be raising tax. The fact they are not talking about raising tax is a strong indication that this is not really about balancing the books. They are focusing on public spending, which is quite a different issue.

The curious case of Child Benefit

6th October 2010

When the Chancellor announced, shortly before the Conservative party conference, that Child Benefit would be withdrawn to families with high earners, it was clear that no-one expected the storm of protest. Iain Duncan Smith had called the idea of paying benefits to richer people “bonkers”, and up to that point the newspapers had seemed to agree.

The government’s reasoning made some sense. Child Benefit is effective because it is simple, takeup is virtually universal and it has no discincentive implications. Means-testing Child Benefit would be self-defeating, and pointless – there is already a means-tested benefit for families with children, in the shape of Child Tax Credit. The government was looking, then, for a simple administrative trigger that could make a practical distinction, and they thought they had found it. The central argument for keeping Child Benefit, however, its its universality – a point the press have not, to this point, seemed to understand. We don’t means-test people using schools, hospitals or roads for many reasons, but the most obvious one is that it would be nightmarishly complicated if we tried to do it. Child Benefit is built on the same logic. Every alternative is more difficult, more complicated, and more burdensome.

Many of the complaints have focused on the unfairness of the proposal – the implication that two earners might retain the benefit when a single high earner cannot. There are two problems. One is that Child Benefit is still mainly received by women, and stopping benefits to women because of men’s earnings is not popular. The other is that every attempt to respond to changes in people’s circumstances comes with complications. People with fluctuating earnings will not know whether or not they are entitled; people who become unemployed will be entitled at some points and not at others. Some people will only know that they are in the higher tax bracket and the end of the tax year, and adjustments will have to be made. These issues have blighted the Tax Credits scheme and inevitably they will blight this change.