In the long run, the cuts to Child Benefit announced today will hit the poorest hardest, as the principle of universal benefits is eroded, argues Nicola Smith.
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.”
It 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.
126 Responses to “Child Benefit cuts will hit the poor hardest in the long run”
Ash
The case for universalism is counterintuitive but persuasive – I hope people will take the time to look into the Fabian research on this before settling for a kneejerk ‘cuts for the rich, what’s the problem?’ response.
And this business about the poor paying for the riches’ benefits is just rubbish – the rich easily cover the costs of their own child benefit and more besides. For a well-off individual, child benefit is essentially a small tax rebate in recognition of the fact that they have children to care for. Nothing wrong with that, especially if it helps foster people’s sense that the cornerstones of the welfare state (Child Benefit, the NHS, the state pension) are there for everyone and not just a ‘safety net’ for the poor.
What I find most striking about this is the way it reveals the depths of the Tories’ ideological commitment to cuts. If you want higher rate taxpayers to make a £1 billion contribution to reducing the deficit, the simple, fair and sane solution is to put a penny on the 40p and 50p tax rates – that way every higher-rate taxpayer makes a modest contribution. Why on earth would you instead ask the least well off higher rate taxpayers (NB: a single-income two-parent family with 3 kids on £44000 would be in the bottom half of the income distribution) to bear the whole burden, with a bill of £2,000 or so per typical family?
Answer: just so you can say you cut spending, or hit your target of an X% reduction in the welfare budget, rather than (horrors!) raising taxes.
And for that they’re prepared to wind up everyone from the Fabian Society to the Daily Mail. Bizarre.
Mr Jabberwock
Nicola
Thanks for engaging in the comments – that is appreciated.
Your argument is that if the benefit is £100 and universal it makes it harder to cut as all voters feel the pain than if it is £100 and paid only to 90% and progressively so as the % falls. I am afraid the argument is massively outweighed by the cost in these times. This is a relatively lower pain cuts than many that will have to be made, even on the Darling plan. So maybe we just disagree about the relative importance of other cuts.
On the second point it isn’t an argument against the cut to say it could be implemented badly! As I understand it, and I may be wrong, you will be able to claim the benefit as I describe. If that is the case Osbourne can encourage people all he likes they will keep claiming it if there is even the slightest chance that they may face an income of below the threshold.
Hazel Chowcat
RT @leftfootfwd: Child Benefit cuts will hit the poor hardest in the long run http://bit.ly/9iZjlb
Ash
Mr Jabberwock –
“This is a relatively lower pain cuts than many that will have to be made”
– fair point, but why not just raise £1 billion in taxes from higher rate taxpayers? Same financial impact (albeit more fairly shared out), and you preserve universal CB.
Grant Streader
RT @leftfootfwd: Child Benefit cuts will hit the poor hardest in the long run: http://bit.ly/bqGbBb