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.
With thanks to the BBC, I have permission to post a copy of my interview about universal benefits, broadcast on 29th September. It is obtainable as an MP3 file here.
Robert Black, who recently retired as Auditor General in Scotland, argues in today’s Scotsman in favour of reviewing the cost of universal services – particularly free personal care and free transport. He acknowledges that the cost of free prescriptions and eye tests is less and that they have a preventive function. His position has been consistent; it was formerly argued in an Audit Scotland report, Scotland’s public finances.
Part of Bob’s case is unarguable – that public expenditure has an opportunity cost, and we should always be prepared to consider what the implications are of one decision relative to another. Some of the figures he uses, however, are contentious. The increase in prescription costs to £1 billion is a general cost of the NHS, not a specific cost of ‘free prescriptions’. They cost nearer to £80m, though I’ve been struggling to find an accurate figure – the rest of the £150m cited in costs is down to eye tests, which have been separately justified in terms of savings elsewhere. We’re told that the cost of the National Concessionary Travel Scheme (bus and travel passes) ‘could rise’ to £500m. Well, it could do anything in theory; much depends on inflation, much on future policy; but the budget for 2012-13, 2013-14 and 2014-15 has been set at a constant £194m. There are certainly pressures on the public finances, but it’s not clear that it’s the universal benefits currently in dispute that are driving them.
In reports from today’s Liberal Democratic conference, both Nick Clegg and Don Johnson have queried why the Winter Fuel Payment should be available to rich pensioners. The same argument is frequently heard about other benefits, including Child Benefit, and it could be extended to any non-means-tested benefit – health care, pensions, social care and so forth.
There are several arguments for universality – social inclusion, avoiding deterrents and so forth – but the simplest one is this. At present, everyone is already subject to one test of income: the tax system. The easiest way to manage any benefit is to pay a fixed sum and then to claw it back from tax. If there was to be a separate test for benefits like Winter Fuel Payment, everyone who might qualify would then be subject to a further test of income. Testing people’s income repeatedly is a recipe for unnecessary administration and intrusion. Why would anyone want there to be more tests than we need?
It appears that proposals for a Citizen’s Pension have been kicked into touch; I saw this first in an article by Simon Reade (“How politics put paid to the Coalition’s pensions reform”, i, 22nd September) but the main source of the reports has been the Financial Times, which I can’t link to here because it’s confined to subscribers. This decision goes beyond the question of postponing decisions till after the next election. When the government suggested a flat-rate pension in 2010, the proposal was for a universal payment for all pensioners. In later discussions it seems this has been changed to become a flat rate pension for anyone who has contributed for 30 years – which is line with the Beveridge scheme rather than the original idea of a Citizen’s Pension. The key difference is that those who have not been able to contribute or whose working life has been interrupted, especially women and people with disabilities, will be left out. That means that there will be no minimum income guarantee and that Pension Credit will have to be maintained.
The other long-standing weakness of the Beveridge scheme, of course, is that flat-rate benefits were never enough to meet basic needs. The reason why governments moved to earnings-relation was the evidence that continental schemes had proved far more effective in providing incomes in old age.
I did threaten, when I set up this blog, that I would use it to float half-baked ideas. This is a first stab – I’m likely to make changes and extend the argument as time goes by.
The Scottish Government has been keen to consider how to expand its role in taxation and economic management, but social security has hardly been mentioned. One of the main uses of tax is for “transfer payments” – moving money from one set of people to another. Pensions, tax credits and benefits have to be paid for. An independent Scotland, or a much more devolved administration – “devo-max” – would need to have its own benefit system. This has not largely featured in any of the discussions. That might be because it is a hot brick, and no-one wants to handle it; but it might also reflect a sense of despair, a feeling that not much can be done about it.
There is a general problem in all administrative reform called “path dependency”: changing things that work can be difficult to justify. Are we going to say, for example, that benefits should not be acting as a form of social insurance (the rationale for Widowed Parent’s Allowance)? That people should not be compensated for disability if they do not have financial needs (Industrial Injury Benefits)? That people should not have their rent paid (Housing Benefit)? It’s doubtful, if we were designing the system from the outset, that we would do things the same way; but once they have started, it’s hard to stop.
A benefits system cannot be designed from scratch. There are people now who are elderly, disabled, unemployed or otherwise in need of support, and they have benefits delivered on the same terms as the rest of Britain. The first thing that they will learn about a new system is whether they are better or worse off than they were before. If a Scottish system cost the same as benefits do now, it would either have to pay the same benefits, or it would have to justify paying less to some people so that others could get more. And people would always compare what was happening to what happens over the border. When the Republic of Ireland became independent from the UK, it mirrored the benefit system blow by blow for most of the next sixty years. Even today, it still has a clutch of benefits that look like benefits in the UK – Jobseekers Allowance (yes, the name is the same), State Pension and Child Benefit – and others that look a lot like the way that the UK system used to look (Invalidity Pension, Maternity Benefit, Supplementary Welfare Allowance). Scotland would most likely end up doing the same sort of thing.
The only practical way to make more fundamental reforms is to pay substantially more in benefits, so that people do not lose out. The strongest contender for a reformed system would be something like a Citizen’s Income – extending the universal principle of Child Benefit to a range of adults. The coalition government is talking about something similar in relation to pensions – a Citizen’s Pension, instead of the combination of insurance and means-testing we have now. The same principle could help people at the margins of the job market without work – the labour market in Scotland has a sector of people who are “sub employed”, shifting between benefits and causal, peripheral and temporary work, and a more secure income would make a big difference. To make it even possible, however, the Scottish Government needs to start thinking about the issues now.
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.
At the same time as the government is planning to focus working-age benefits on means-tested benefits – a “Universal Credit” – it is also making proposals to remove means-testing for pensioners. The principle of a universal pension was pioneered in the Citizen’s Pension of New Zeland, and that, more or less, is likely to be the model for future development. There are strong arguments for such a scheme: it will be simpler to manage, take-up will be better, and it avoids the perverse incentives associated with means-testing. It should go a long way towards avoiding poverty in old age, without penalising people for saving or having made alternative arrangements.
However, the government is suggesting that the new pension will not affect the position of existing pensioners; it will only apply to new claimants. The State Pensions scheme is not based on a fund: current contributions go to pay current benefits. The claim of those who are working to have decent pensions in the future depends on what they do for pensioners now. The arrangement the government is proposing suggests that pensions will be better when their generation retires, at the expense of those who are then working, but that they are not ready to protect the position of current pensioners. This is indefensible.
The government could just abolish National Insurance pensions instead. However, removing entitlements that people have paid for will raise a storm of protest from those who feel their contributions have gone for nought. (The same problem blights the transitional arrangements: when the scheme is introduced, the new claimants will also have paid contributions.) There is a way round the problem: start introducing the scheme, not for younger pensioners, but for older ones. If the scheme opens with a universal pension for everyone over 90, the problems with equity largely vanish. During the transition, younger pensioners can be told their benefits are time-limited, which is consistent with the principle of insurance. And the qualifying age can gradually be reduced to the level the government wants to support, avoiding the vexed problems of raising pension age.
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.