Child Benefit: Justice or Empty Rhetoric?

8/2/2019 Child Benefit: Justice or Empty Rhetoric?

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Child Benefit:Justice or Empty Rhetoric?

Tom Smith


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IntroductionOne of the more surprisingly controversial of the Governments measures to cut

public spending has been the proposal to withdraw child benefit from households

containing a higher rate taxpayer (currently 42,475 per year). According to theComprehensive Spending Review of 2010, the measure will save the Treasury

approximately 2.5billion per year after taking into account expected avoidance and

evasion; not an insignificant amount in light of the overall budget deficit.

In an effort to derive a simple policy the Government has encountered a range of

complexities and encountered a range of practical and principled objections, many

of them well founded.

Liberal responses to the move have been conflicted. On the one hand this can be

seen as a progressive reduction of welfare spending for households in the top 10%of incomes. On the other hand the policy represents an erosion of universal child

benefit, one of the underpinning features of the modern liberal welfare state.

From a purely liberal perspective, the particular approach taken by the Government

is intellectually unsound and prone to instrumental unfairness and administrative

ineffectiveness. As such, we suggest two solutions; a normative liberal approach

advocating universal benefits that are simultaneously progressive and practical

measures to ameliorate the damage of this particular policy if the Government

presses ahead.


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The Universal Welfare StateBoth Coalition parties affirmed their commitment to universal child benefit before

the 2010 General Election and the commitment was reaffirmed by the Liberal

Democrats in their Autumn Conference of that year, passing a motion with thefollowing clause:

8. Safeguard universal child benefit in conjunction with progressive taxation in order

to provide a reliable source of income protection throughout childhood.

Ensuring Fairness in a Time of Austerity carried on 21 September 2010We will return to the point regarding taxation. But what are the arguments

underpinning this commitment to universalism, and does the Coalition risk

undermining the wider principles of the welfare state through this policy?

The bulk of the welfare state focuses on post-factum redistribution; those who lack

the means to support themselves receive a top-up, sometimes in kind but often

financially. This approach has all but eradicated absolute material poverty, but

tackles the symptoms and not the causes of inequality.

Child benefit is one of the few ex-ante features of the British welfare state and

ensures that no matter what family circumstances they are born into, children are

ostensibly guaranteed a basic subsistence. Even though its effects are masked by

many other features of social policy, this form of redistribution works to preventinequality before it can spawn negative symptoms from poor educational attainment

to teenage pregnancy.

Retaining child benefit as a universal benefit and shifting the overall focus of the

welfare state from post-factum to ex-ante redistribution would have a range of

advantages. It would help to create a stakeholder society, enabling the principle

that members of society should enjoy a balance of rights and responsibilities to

become a reality in policy terms. This would go some way to preventing the range

of social problems the UK experiences, significantly reducing the need to expend

resources on ameliorating them.

A universal, or citizens, income is a profoundly liberal approach to welfare and the

scope for introducing it in the UK should be explored in more detail. Seeking to

means test child benefit withdraws the states approach to welfare further from this

liberal ideal and more towards the progressive, outcome based, approach of

socialist and social democratic thinking.


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The Best-Case Solution

The approach advocated by the Liberal Democrats in Autumn 2010 appears to bethe most sensible response in the short term. Removing universal child benefit is not

desirable, but ensuring that in the round, the tax system does not enforce this

universalism by penalising the less well off is essential.

Retaining child benefit for higher rate

taxpayers, at a cost of 2.5 billion per

year could be offset by implementing

other proposals to reform the tax

system.

The abolition of higher rate pension

relief, which could benefit the Treasury

by approximately 7 billion per year

should be a priority, with part of the

proceeds earmarked for maintaining

child benefit.

Further steps should be taken to bring capital gains tax into line with income tax

rates and reduce tax avoidance opportunities available to those on higher incomes.


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Practical RecommendationsThe Coalition Government appears committed to its approach to remove child

benefit from households with higher rate taxpayers. This presents a range of

problems, some of which can be tackled by amending the policy slightly.

If one agrees with the proposition that families should receive less state support as

their income increases, the implications of the manner in which this principle is

implemented will test support of it to its limit. The Government proposes to

continue paying families child benefit and then clawing it back if at least one parent

is a higher rate taxpayer. The only apparent benefit of this particular method is that

it answers concerns that child benefit is often the only personal income of non-

working mothers.

On the downside, this provides for a very unequal approach between householdswith one and two working parents. Households would be disincentivised from

earning slightly more than the higher rate threshold while at the extreme, a

household with an income of 42,476 could be deprived of child benefit while one

with an income of 84,949 could retain it, as the Institute for Fiscal Studies has

concluded. This inevitably has negative social and economic consequences.

There then emerge a range of administrative complexities, not least in identifying

which households no longer quality for child benefit and how to approach changes

in circumstances. The Governments approach requires couples not only to be openwith each other about their tax affairs, but also with Her Majestys Revenue and

Customs.

One serious impediment to the successful implementation of this policy is the

inconsistent approach on tax and benefits on whether to consider welfare as an

individual or a family/household concern. Income tax assessment has traditionally

focused on the individual while means tested child related benefits have taken

account of household resources. The Governments reforms attempt to

incongruously bridge this divide.

Another potential unfairness stems from the decision to base the threshold solely on

income tax, ignoring consideration of savings, assets and other sources of income

for the household.


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Ministers have sensibly ruled out establishing a new separate means testing regime

for a tapered child benefit. In 2009-10 a child benefit claim cost 11 to process, the

means tested tax credit award cost 78. The number of child benefit claims would

ensure means testing would cost more to administer than any potential savings.

This argument disappears if child benefit were combined with another benefit, such

as child tax credit, the upper household income threshold for which is 41,300 in

2011-12. The Government has not stated a household total threshold for its child

benefit proposals but it can safely be assumed to be at the lower end of the range

between 42,475 and 84,950. Such an upper threshold for a combined child tax

credit and child benefit award would attract a considerably lower number of claims

requiring additional means testing.

Indeed, there is a strong argument for a complete overhaul of the means testing

regime used by the Government and public sector bodies. The move to UniversalCredit presents an opportunity for this. The National Audit Office has also hinted at

the need for reform and has identified at least 11 instances of means testing for

benefits, totalling over 42 million claims. Their report noted a distinct lack of

coordination between different departments, creating immense bureaucratic

inefficiencies let alone a considerable negative impact upon users of Government

services. Solving this overall problem would reduce up front administrative costs,

reduce error and fraud, eliminate many perverse economic incentives on claimants

and remove the need to reduce benefit levels in the first place.

If the Government wishes to retain its policy on child benefit in the short term,

remedial action must be taken to improve the administrative effectiveness of the

clawback and to reduce the unfairness of the cliff edge.

An incorporation of child benefit into child tax credit (soon itself to be incorporated

into universal credit) would pose initial costs in transferring administrative

responsibility but could save 85 million by streamlining the two benefits.

Depending on the new upper income threshold for such a joint benefit, additional

claims for means testing will be minimal but the changes to tax credit thresholds to

2014-15 and the introduction of universal credit prevent exact costs becomingapparent.

Combining child benefit with child tax credit will also allow great scope for tapering,

avoiding the cliff edge of current proposals and allowing for the overall fund for child

related benefits to be more progressively focussed on families with lower incomes.


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ConclusionThe Governments approach to child benefit has not been thought through. It hasoverlooked some key problems with implementation and fairness while failing to

look at opportunities to co-ordinate its approach with wider welfare reform policy.

The policy will be divisive and unpopular for those it unduly affects and may not

bring the savings to the Treasury that Ministers hope for.

Liberal Insight recommends that Government Ministers:

Look urgently at merging the child tax credit and child benefit systems forimplementation in April 2013.

Set a household upper earnings limit and taper for this combined child credit.

Continue to investigate measures to ensure a fair burden of taxation on thosein the highest earnings and wealth brackets.

Study how, in the long term, child benefit can be retained as a universalbenefit as part of a universal citizens income.

Sources:

http://www.ifs.org.uk/budgets/gb2012/12chap11.pdf http://www.official-documents.gov.uk/document/hc1012/hc14/1464/1464.pdf
http://www.ifs.org.uk/budgets/gb2012/12chap11.pdfhttp://www.ifs.org.uk/budgets/gb2012/12chap11.pdfhttp://www.official-documents.gov.uk/document/hc1012/hc14/1464/1464.pdfhttp://www.official-documents.gov.uk/document/hc1012/hc14/1464/1464.pdfhttp://www.official-documents.gov.uk/document/hc1012/hc14/1464/1464.pdfhttp://www.ifs.org.uk/budgets/gb2012/12chap11.pdf

Child Benefit: Justice or Empty Rhetoric?

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