Child benefit reform needs a rethink

 
Allister Heath
WHO said nothing ever happens at political party conferences? It felt almost like another Budget day yesterday in Birmingham, with George Osborne announcing a radical, once in a generation welfare revolution. The plan is breathtaking in its ambition. The entire welfare system, with its dozens of overly complex benefits, will eventually be replaced by a single benefit; the myriad of work destroying incentives will be swept away, with a dramatic commitment to ensure that it will always pay for recipients to work. In parallel to this, shorter term changes are being imposed to save money: those who pay tax at 40 or 50 per cent will lose all their child benefit; the total amount of benefits a workless family can receive will be capped at around £500 per week, close to what an average family would earn from working.

It makes no sense that better-off families pay lots of tax, and then get some of it back. It keeps taxes and spending high without helping anybody apart from those paid to administer this merry-go-round. So it is right, in principle, that child benefits be means-tested. The problem is that the actual reform outlined yesterday is unfair. Imagine your neighbour and his partner are making £43,000 each (a family total of £86,000) and have one child. They will keep their benefit, worth £1,000. Imagine that you are on £43,876, with a stay at home partner who doesn’t work and two children. You will lose your child benefits, worth £1,750. How is that just?

Families with a stay at home parent are already discriminated against because the tax free allowance isn’t transferrable. To go back to our example, a couple relying on one earner on £86,000 pays far more direct tax than a couple relying on two earners on £43,000 each, who benefit from two separate zero-rated allowances. The change to child benefits will make this worse. What is really needed is family-based, not individual based, accounting.

There is another major issue. Imagine this time that you are just below the 40 per cent tax rate. Your boss offers you a promotion and a pay rise of £1,000 – astonishingly, rather than celebrating, you will refuse. As the Institute of Fiscal Studies points out, a family with two children receives £1,750 a year in child benefit. A one-earner couple with two children with a gross income of £43,876-£46,850 would be worse off than if their income were £43,875. Crazy. A one-earner couple with an income of £43,875 would need a pay rise of £2,975 to ensure they were no worse off after paying direct tax and losing child benefit. This doesn’t make sense – especially given that Osborne wants to eradicate perverse anti-work incentives elsewhere in the system.

Yesterday’s blunder is a shame given that the overall welfare plan is extremely promising. One of the greatest tragedies in this country is that 5.9m adults are stuck on out of work benefits, in many cases with no incentive to work. The coalition’s commitment to creating a system to help move the most deprived people in our society into employment is admirable. But all of this could be ruined by the way the cuts to child benefits have been designed. For the sake of the wider reform, Osborne must think again: the better off should lose their benefits, but in a way which preserves fairness and incentives. Let’s hope it is not too late.

allister.heath@cityam.com