Child Benefit cuts will hit the poor hardest in the long run


The UK has provided universal benefits for children for just over 64 years. But today George Osborne has announced the end of universal Child Benefit, an essential source of financial support which provides families with a secure and constant source of income as they bring up their children. Today’s announcement is at odds with the then shadow Chancellor’s speech to the Tory party conference a year ago, in which he said: “We will preserve Child Benefit.”

Child-BenefitIt also breaks campaign promises made by both the Conservatives and the Liberal Democrats, resulting in a large tax rise for any family where one household member is a higher rate taxpayer. Child Benefit is not taxed, so for affected families with one child this is a loss of £1,055.60 a year, and for larger families there will be an additional £696.80 penalty per child annually.

These cuts will be felt by families up and down the country – the loss of income is significant. But of even greater concern is the step that this cut marks towards the residualisation of the welfare state. Universal benefits are essential to the welfare state’s existence. As post-war UK welfare developed, Richard Titmuss argued in favour of universalism, maintaining that ‘services for the poor will always be poor services’.

This still holds true – as the Fabians have comprehensively shown:

“… both the coverage of welfare policy and the distributive principle underpinning it are crucial in shaping attitudes to welfare… policies with narrow coverage divide the population into groups, who may then think about their interests and identities in terms of ‘them’ and ‘us’, whereas policies with wide coverage align interests and identities so that we are ‘in this together’.”

Their research has found that welfare institutions that are focused only on the poorest do less well at reducing poverty than “broadly based systems which aim to reflect a shared sense of citizenship across society”.

This makes intuitive sense. Once middle and higher earners are completely excluded from state welfare the generosity of the system begins to deteriorate as political pressure for its maintenance reduces. This is not an argument against welfare spending on the poorest – those in the lowest income deciles already receive significantly more in welfare than those with higher incomes (and arguably should receive far higher payments) – but a strong case against the complete withdrawal of state support from those higher up the income scale.

Universal systems are also (as pensions minister Steve Webb understands) the best and most efficient means to promote benefit take amongst all households – including those in greatest need. Professor John Hills makes the case well:

“A consequence of means-testing can be that stigamized services or benefits fail to reach all of their targets because of lack of take-up by those entitled. Targeting by means-testing can be efficient in one sense – achieving the result that only those who are the prime focus of the policy benefit – but inefficient in another, if those who are the intended beneficiaries miss out.”

Means testing increases complexity, stigma and confusion. While take up rates for Child Benefit are currently close to 100 per cent, rates for means tested benefits are therefore far lower. In future years, as a result of the Chancellor’s announcement, we can expect these take up rates to fall, with poverty rates consequently increasing. Last year the Government’s Child Poverty Unit concluded:

“There are 400,000 children living in poverty as a result of families not claiming all the benefits and tax credits to which they are entitled.”

There are also many unanswered questions about how the new arrangements will actually work. While today’s announcement has been billed as a measure that avoids means testing, the reality is that this system will inevitably be more complex – any restriction in entitlement is by definition a means test.

At present Child Benefit is paid directly into the bank account of the nominated carer, and employment and other details about other family members are not required. As a minimum a longer form, requiring recipients to provide details of all earners in their households, will now be involved. Fraud levels can also be expected to rise, as can administration costs, payment delays and levels of public misunderstanding.

It is also far from clear how parents will be expected to react if their incomes change – a particular benefit of Child Benefit is that it provides security when incomes fluctuate. Income changes in particular raise the possibility of overpayments and underpayments – of the sort that the Conservatives and Liberal Democrats, while in opposition, were always keen to criticise when they occurred in the tax credit system.

If lower income parents receive a pay rise will they now be expected to report to the Revenue so that their Child Benefit can be cut? And if someone’s household income falls how quickly will the Revenue be able to make their child benefit available? What will this mean for separated couples, where one parent retains primary caring responsibility but receives maintenance payments from a higher rate taxpayer?

There are also important unanswered questions about women’s pension rights, as Child Benefit claims entitle women caring for children, while their partners work, to have National Insurance contributions and credits paid into their state pension account.

As well as complicating a universal system, this means test will have differential impacts among households depending on how many people work and their particular individual earning levels. A household with one earner paying higher rate tax, and another who is not in work, will lose their Child Benefit. In contrast, a household with two earners on £43,000 will still receive it.

Households with incomes above £80,000 will receive the benefit, while those with incomes just over £44,000 will have their benefit cut. And for all of the recent talk of work incentives, the taper rate for Child Benefit will be 100 per cent – it may well make more economic sense for some households, particularly larger families, to reduce their hours rather than move just over the income tax band and experience a tax rise of several thousand pounds a year.

We also know that far greater cuts for middle income families are on the way – despite all of the positive spin around Universal Credit, reports suggest that the rate at which the benefit will be withdrawn once a member of the household enters employment (the ‘taper’) will be around 65p in the pound.

This is more generous than the rate at which some benefits are withdrawn – for example once a household has an earned income Housing Benefit is withdrawn at a rate of 85p in the pound – but far less generous than others, specifically Tax Credits which are currently withdrawn at a rate of 39p in the pound. This will inevitably mean  that many families who currently receive Tax Credits are going to see further significant income cuts.

Today’s announcement is extremely bad news for working families – both those who will no longer receive Child Benefit and those who will now inevitably see the value of their benefits and Tax Credits fall in the future as the principle of universal welfare in the UK is further eroded.

UPDATE 17.30:

The Institute for Fiscal Studies, Channel 4’s Cuts Check and the ippr think tank all add their pennies worth on the cuts with some worrying reading for the Government.

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  • http://danieljfrost.blogspot.com Daniel

    Excellent post :) Inspired me to right my own criticism of this disastrous policy xD

    http://danieljfrost.blogspot.com/2010/10/child-benefit-fiasco.html

  • http://www.wildlifeextra.com Powell Ettinger

    I really don’t understand the fuss over child benefit. I have been saying to my friends for years that it is entirely illogical for well off families (and i include my family in that) to receive child benefit to help subsidize nice holidays and meals out. The money should be much better used elsewhere. And if it means someone else earning £45,000 reduces their hours (how?) then someone else will get them surely? Why does it make sense for someone who sends their kids to Eton or any other fee paying school to have that subsidised by the rest of us?

  • anominous

    labour goverment has created a very good income for single mothers that just keep having kids every 4 years to doge work so they can max out on bennefits live rent free and moan about how hard done to they are with there heating alowence there full sky packages and there flat screen tv,s etc.people that have never had a job and paid any thing into the state system but take everything out.so its quite simple stop giving them that wont work help only give bennefits to two siblins not 10 plus, if there shown never to have worked reduce there money and make them get back to the real world were a fair days work means a fair days pay then the money saved should be shared out amongst the genuine familys that have been made redundent in this resecion and are struggling to make ends meat through no fault of there own.

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  • Ash

    Anon E Mouse –

    “do you think it’s right to use the shelf stacker’s taxes to give benefits to Eric Clapton?”

    Let me turn this round on you.

    Do you think it’s right to use the shelf stacker’s wages to pay for NHS treatment for Eric Clapton? Or a state pension for Eric Clapton? Or a state education for his daughter? He doesn’t need any of those things any more than he needs Child Benefit: he can afford excellent private healthcare, private education and private pension provision.

    But that’s the Tory dream, isn’t it? The better-off enjoy excellent private services, and the universal welfare state is redefined as being about targeted, safety-net benefits and services for the poor. And over time, those benefits and services deteriorate because the better-off don’t care about them and aren’t prepared to pay for them.

  • Pat

    Anonimus,

    Your comment is probably the most illiterate and ill thought out I have ever come across on the internet (and that really is saying something)!
    Why start as you do by blaming the labour government?
    True, they instituted the welfare state, have you not benefited?
    but every other gowernment since has accepted that Universal Child benefits, a Health service and Education are desirable –

    Perhaps your deplorable written offering is an example of the last round of cuts – are you one of Thatchers illiterate children?
    are

  • Tiz

    “labour goverment has created a very good income for single mothers that just keep having kids every 4 years to doge work so they can max out on bennefits live rent free and moan about how hard done to they are with there heating alowence there full sky packages and there flat screen tv,s etc.people that have never had a job and paid any thing into the state system but take everything out.so its quite simple stop giving them that wont work help only give bennefits to two siblins not 10 plus, if there shown never to have worked reduce there money and make them get back to the real world were a fair days work means a fair days pay then the money saved should be shared out amongst the genuine familys that have been made redundent in this resecion and are struggling to make ends meat through no fault of there own”.

    *groan* anominous – If ‘having kids every 4 years to dodge work and max out on benefits’ is so profitable, why aren’t more people doing it? Spending on welfare as a % of GDP was actually reduced under the previous government. You clearly have a very low level of education, not to mention a low level of cognitive reasoning, so why aren’t you following that particular ‘life style’ choice?

    Sorry, other readers, I know I shouldn’t be reacting but I’m so fed up of hearing it…………

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  • Mike Thomas

    If you earn more than £44,000/yr you are in the top 10% of earners.

    So Labour are in favour of benefits for the top 10% of incomes and yet also in favour of mixing deficit repayment as 50% tax and 50% cuts.

    So in favour of keeping their benefits and hiking their taxes too.

    What a muddle and zero credibility.

  • Ash

    Mike –

    “So in favour of keeping their benefits and hiking their taxes too.

    What a muddle and zero credibility.”

    Where’s the muddle? The size of the net contribution you make to the public purse is supposed to reflect what you can reasonably afford to pay. And what you can reasonably afford to pay depends not just on your income, but also on the number of dependent children you have. (Clearly a single person on 45k is in a position to make a bigger net contribution than someone supporting a family of five on the same income.) So it makes perfect sense that people with dependent children should get some sort of tax rebate, additional tax-free allowance, or cash benefit in recognition of that fact.

  • Ash

    Oh, and on this point Mike:

    “If you earn more than £44,000/yr you are in the top 10% of earners.”

    True – but when calculating where a *household* sits in the income distribution, the shape of that household has to be taken into account. A single person on 45k would be in the top decile, yes; but a family of five on 45k would actually be right in the middle. Hence why our tax & benefits system should clearly distinguish between the two in terms of the net amount they are asked to contribute to the public finances.

  • Mike Thomas

    A household income of £44,000 just about puts that household in top quintile. These people are also well outside the fatuous definition of Labour’s own ‘squeezed middle’.

    http://www.statistics.gov.uk/cci/nugget.asp?id=334

    If a family decides to have five kids, that is their decision. It is not the position of the State to influence that decision one way or the other. There is a very old fashioned piece of common sense here, you have kids when you can afford them.

    What government should do is get out of this, it has no business here, why pay for the administration of benefits, the cost of benefits when the State could simply take less in taxation.

    Lastly, you omit Labour’s opposition to this benefit cut and yet Labour wants to hike the taxation element of deficit to over double the current level planned.

  • Ash

    Mike –

    If you don’t believe the Government should take someone’s dependent children into account when deciding what net contribution they should be asked to make to public finances, then I suppose that way of looking at the income distribution is correct – i.e. it treats everyone earning £X as being equally well off, and puts all people on £45,000 in the top quintile. I don’t take that view, so I prefer to look at a household’s position in the income distribution in a way that takes the shape of that household into account – i.e. it treats someone earning £X who has dependent children as being less well off than someone earning £X who doesn’t. I’m thinking specifically of the way the IFS calculates where a household sits in the income distribution; if you crunch the numbers through the calculator on their website, £45k households with 2 or 3 kids are in the middle.

    “Lastly, you omit Labour’s opposition to this benefit cut and yet Labour wants to hike the taxation element of deficit to over double the current level planned.”

    Sorry, I thought I’d been clear on this: I think that if we want higher-rate taxpayers to make a contribution to deficit reduction, we should simply raise their taxes. Child Benefit should stay as the simplest way of ensuring that those who have more dependent children make a slightly smaller net contribution than those who have fewer dependent children, which seems fair to me (though not to you). It seems perverse to me to take this £1 billion out of the pockets of those with children while those without children contribute precisely nothing.

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  • Ben

    Hello,

    Surely if you earn £44K + then you can afford to lose this small income provided through child benefits? You cannot be considered to be poor whilst earning this amount. Instead of concentrating on middle income families losing this negligable amount, shouldnt we be concentrating efforts in preventing benefit allowances to people like the disabled and pensioners? Particularly the disabled as they would only dream of earning £44K+ and worrying about this loss most people are speaking of currently. I wish I was able to earn £44000. One word: perspective.

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  • http://None Richard Nalty

    The ongoing debate on child benefit is entirely misplaced. This is easily explained. Child benefit should not exist for a simple reason: raising a child is not the responsibility of someone else. I am not responsible for your children, nor are you for mine. Child benefit promotes poverty by undermining the role of the father. The father’s role should be that of the sole, or main breadwinner. Anything that supplements the mother’s income serves to undermine fatherhood. It encourages a dowry of infamy among the lower classes. Benefits of any kind, make little difference to the behaviour of the rich. To be rich is to be protected. To be poor is to be prey to the counterintuitive workings of the welfare state. Social policies designed to alleviate poverty and distress always encourage the very conditions they are supposed to remove. An early warning of this is found in Tocqueville’s Memoirs on Pauperism, written in 1833. That slim volume contains all you need to know on the moral hazards of public charity. Child benefit is but one benefit of many that comes with a built-in moral hazard. Children would not go hungry were child benefit removed. Do they in countries where there is no child benefit or perhaps no welfare apparatus at all? No they do not. In part this is explained by the greater importance attached to self-reliance, the traditional family, and in many cases, an agreeable religious system (Buddhism being one). Needless to say, the traditional family outperforms any other arrangement handsomely, caeteris paribus. Therefore any sentimental appeal to open up the Government’s coffers needs to be examined with extreme caution, for it is almost certain to fail the Tocqueville test. Frederic Bastiat, another great Frenchman would also pour scorn on the very idea of a child benefit system. The larger concern of course is this: if projects rooted in the leftist world-view are doomed to fail, as they ignore moral hazards long-since identified, then why does this worldview persist? The answer is that sentimentality and a related cousin – resentment – can sustain a lie for a very long time.

  • Robert

    The father should be the sole bread winner, god where do these morons come from……

  • Lucia Fry

    I’m interested that there is such scant mention of the gender dimension here. We should remember that child benefit gives women (and a few men – of course) on lower incomes than their partners some control over household spending, it recognises the value of this work to society, and goes some small way to compensating for the sacrifice of status and independence involved in choosing part-time work or taking a break altogether.

  • http://www.touchstoneblog.org.uk Nicola Smith

    Lucia, that’s a very fair point – I should have put a paragraph on the important role that CB plays in providing women with an independent income into the original article. Nicola

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