Child Benefit: Justice or Empty Rhetoric?

Tom Smith

Introduction
One 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 the Comprehensive 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.

The Universal Welfare State

Both 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 the following 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 2010

We 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 prevent inequality 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.

The Best-Case Solution

The approach advocated by the Liberal Democrats in Autumn 2010 appears to be the 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.

Practical Recommendations
The 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 nonworking mothers. On the downside, this provides for a very unequal approach between households with 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 open with 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.

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 Universal Credit 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 becoming apparent. 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.

Conclusion
The Governments approach to child benefit has not been thought through. It has overlooked 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 for implementation 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 those in the highest earnings and wealth brackets. Study how, in the long term, child benefit can be retained as a universal benefit 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