Ten policy headaches for the government on child benefit

Sunder Katwala, general secretary of the Fabian Society, outlines ten policy headaches for David Cameron and George Osborne over the changes to Child Benefit.

Reaction to the government’s proposals on child benefit has been all over today’s papers, with Conservative MPs and commentators among those vocally complaining about the scale of political gamble involved, including comparisons to Gordon Brown’s 10p tax change which proved a major policy and political own-goal.

This has the feeling of a depth charge that could come back to haunt the Chancellor in the way the 10p tax rate damaged Gordon Brown.

One objection to this analogy would be that the political risk involved in the child benefit change is much clearer on day one, even if the government today seems disconcerted by the scale and range of objections.

But the comparison is perhaps most apt in that the change appears to have a wide range of unintended consequences, and that it is not clear that the government has worked through the policy and political implications of trying to deal with this.

Here are 10 challenges to the politics and policy of cutting the universality of child benefit.

1. Breaking clear election pledges not to do this

Then Shadow Chief Secretary to the Treasury Philip Hammond told Andrew Neil before the election that the Tories had made a clear pledge, but this did not apply to a coalition election government. The Lib Dems will not appreciate the implication they are to blame – especially when Nick Clegg gave a similar commitment to Jeremy Paxman. The debate about who did and did not support the proposal may cause friction in the coalition.

Possible solution: The solution to the ‘broken pledge’ problem would be for the government to pre-announce the measure for 2015/16. They won’t do this. Having vehemently accused opponents of lying and scaremongering – on predictions from VAT to universal benefits, which turned out to be true, the Conservatives will be very vulnerable to charges that they have a “hidden agenda” at the next election.

2. Unfairness of who loses child benefit and who doesn’t

Even supporters of the proposal believe it is indefensible that a couple with one earner on £45,000 would lose all of their child benefit, while a couple both earning £40,000 would keep all of their child benefit. The newspapers seem united in saying this aspect of the proposal must be amended. But the crudity of the cut is a central feature of what the Conservatives claim is a “non-means testing” approach to stopping child benefit being universal, and the entire rationale for the policy may then unravel.

Possible solution: Tax credits avoid this problem by being assessed on a household basis. As the government already means-tests the family element of Child Tax Credit on joint incomes up to £50,000, child benefit could be means-tested with no net increase in complexity. This would still be unpopular, but the reason for the unpopularity is that the government is clearly introducing means-testing itself anyway in cutting out families with one high-earner.

If the government insists that means-testing by household would be too complex, it is difficult to see how to get out of this, other than announcing further reform proposals, which will have a complexity cost which will be likely to damage take-up and reduce savings.

3. Hitting stay-at-home mothers… who the marriage tax break won’t help

This issue has the Daily Mail and Daily Telegraph up in arms. David Cameron today claimed that his marriage tax system would help here. That will indeed be biased in favour of stay-at-home mothers. (It is a marriage tax break that will exclude all married two-earner couples.) But the Tory manifesto proposal does nothing at all for anybody who has lost Child Benefit, since it also excludes higher rate taxpayers.

If that is not amended, introducing it would increase their sense of grievance further, and exacerbate several problems from the policy, such as the extraordinarily high new marginal tax rates between income tax bands.

Possible solution: Difficult. If the marriage tax allowance were now amended to include higher rate taxpayers, the maximum gain from the marriage tax break is £150, when anybody losing child benefit is losing at least £1,000 (or more for those with two or more children). This remains a policy in search of a rationale. The main gainers are childless married pensioner couples, though only those.

4. Extraordinarily high marginal rates: tax distortion and disincentives to work

The Institute For Fiscal Studies has criticised the proposal as a move away from the goal of tax simplification, pointing out how the proposal will introduce marginal tax rates of over 500 per cent for those who get a pay rise or increased hours to take them across the higher rate threshold. Some people will be much better off if they can negotiate a pay cut of several hundred pounds, but the Conservatives will be seen by key groups of voters as having placed a ‘ceiling on aspiration’.

Possible solution: Tapering would increase cost and complexity, leading to issues of over and underpayment as circumstances change, and will start to eat up the potential savings from the change.

5. Disincentives to marry

The Conservatives have made a great deal of “couple penalties” – and have promised to end them. Their proposal introduces a much larger couple’s penalty for some couples.

Possible solution: Difficult. The Conservatives will have to adopt the argument of their opponents, that financial incentives are not likely to drive behaviour change. This would seem to undermine their broader advocacy on the transferable allowance. (However, these financial effects are much larger).

6. Unfair to single mothers

The charity Gingerbread has pointed out that the single/double-earner anomaly will particularly affect middle-class working single mothers and fathers (who might include those who have been widowed and divorced as well as those who did not marry). These relatively high earning single parents may often have high childcare costs.

This has sympathy on the Conservative backbenches, if for slightly selective reasons.

“Single mothers don’t all live on council estates. There are those whose husbands ran off with the au pair.”

7. Risk to the pensions’ entitlement of women who take a career-break

Women with children under 12 taking a career break have been able to receive National Insurance contribution credits on the basis of receiving child benefit, so maintaining their entitlement to the basic state pension, which requires a certain number of ‘contribution years’. Higher rate taxpayers will no longer be eligible for this as they will no longer be eligible for child benefit.

Possible solution: The government could offer women who do not qualify for child benefit the chance to register for an NI credit on the basis of having a child under 12. It would be very unfair not to do this. But this will require a new administrative system to register non-Child Benefit recipients as meriting NI credits because they were previously eligible for child benefit.

8. Targeting women and families disproportionately in deficit plans

The reform in effect removes a £1 billion tax allowance from higher-rate taxpayers. However, the government’s decision to use child benefit means that it has only affected families with children, and not other higher-rate taxpayers. It has also gone for the only benefit paid to mothers.

This is embarrassing for a government which is already facing legal challenge from the Fawcett Society over whether it carried out a gender impact assessment of its emergency budget. Initial House of Commons analysis suggests women were disproportionately hit. The Child Benefit changes exacerbate this.

Possible solution: Government sources now privately acknowledge that they did not have sufficient processes in place to meet their legal obligations for the emergency budget. They are confident that the CSR process is considerably better.

However, there is little doubt that the impacts will be worse on the poor and on women, simply because most public spending is progressive, and because women are comparatively more likely to work in the public sector. The government’s job will be to challenge perceptions that so many of their measures seem to affect women and families the most.

9. Higher administration costs than the Conservatives think

The Conservatives believe that the crude form of the policy minimises the costs so that some worthwhile savings are made. But £1 billion seems a considerable over-estimate of the net gain, given how many questions remain about how the process of aligning the Child Benefit system and the tax system will work, in particular how this will deal effectively with changes of circumstances. (New children; changes in tax bands as incomes rise and fall; separation and divorce, etc.)

There will need to be increased administration to check up on claimants and to minimise deliberate fraud, convenient forgetfulness and confusion about how the system works.

Possible solution: The Conservatives believe the new universal credit will simplify the entire benefits system, and will provide the long-term answer. But it won’t be in place until after 2013 and there is little detail – and contradictory arguments from the top of government – about what will be included and when.

Hence Iain Duncan Smith talking enthusiastically yesterday about wishing to wrap child benefit up into this. But that raises the spectre of further means-testing. There is now confusion about this. David Cameron said there were no plans for child benefit to become part of the universal credit – but the direction of Tory policy thinking suggests this could well change in the future.

10. A blow to the principle of universalism

This is the central objection from the Fabian left: that the ‘common sense’ case for targeting resources on the poor fails, because in a democracy, the evidence strongly shows that it is much harder to.

Hence Richard Titmuss’ argument that “services for the poor will always be poor services” – as the post-war experience of the universal NHS versus social housing shows – and the Fabian Solidarity Society finding in the comparative international and historic evidence of the “poverty paradox” – that welfare states primarily concerned to address poverty (such as the US and Britain) had a much poorer poverty performance than broader and more inclusive welfare regimes (such as those in Scandinavia).

But this ranks lowest as a Conservative problem – because the measure is in part a deliberate rejection of and political challenge to this political philosophy. However, there is a link here to a centre-right argument, voiced by Paul Goodman of ConservativeHome, that those who contribute most to the common weal through taxation do need to feel that they get something from it.

The outcry about Child Benefit could be seen to exemplify the Fabian argument. It is also the case that any future increase in Child Benefit in better fiscal times – which would once have met general approbation – will now exacerbate a sense of grievance.

Possible solution: Goodman is calling for the Conservatives to say that the suspension of higher-rate child benefit is a temporary measure, which will be reversed in an economic upturn. This would make the many headaches that Cameron and Osborne face to make sense of their new policy at least only temporary headaches.

It may prove a politically attractive option unless the government sees this major fight as a good chance to make a “there is no alternative” case for a tough budget deficit approach.

53 Responses to “Ten policy headaches for the government on child benefit”

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  4. Shamik Das

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  5. Will Straw

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