Westminster Blog

The government is struggling with two problems arising from its decision to cut child benefit for higher earners. They are:

1) The fairness issue. Under the current plans, a family where one person earns £43,000 and the other person receives nothing would lose the benefit, but one where both people earn £42,500 still received it.

2) The cliff edge. If you earn just below the higher-rate threshold, you actually lose money by getting a small pay-rise, because you will suddenly lose all your child benefit.

Various solutions have been floated to these two problems.

The first is that you could lift the threshold for losing child benefit to £50,000, essentially making sure it hits a smaller, wealthier section of the population. But apart from the money it costs, this actually solves neither of the above problems. Ministers might see it as a good and simple way to generate some more positive feeling around this policy, but it doesn’t fix the major issues at all.

The second is to turn the child benefit into the equivalent of a tax credit, which is administered by the Treasury, and lowers tax rates for those claiming it. The tax credit can then be tapered according to circumstance (which in this case would mean number of children and income), and thereby effectively deal with the “cliff edge” issue.

The problems with this are that it would be administratively difficult, unpopular among Tories (who don’t like tax credits) and wouldn’t solve the fairness issue. Even worse, says Mike Brewer of the Institute for Fiscal Studies, families would no longer see money being paid into their accounts, but instead see their tax bills going down – which doesn’t have quite the same psychological effect.

The third, and best option, is to roll the child benefit into the new single universal credit (something recommended by the Social Market Foundation). Again, this would be like turning the benefit into a tax credit. The good thing about the UC system is that it measures households’ incomes (as does the current benefits system), not just those of individuals. The government could then set tapers that allow for household income, and effectively solve both issues.

There are two problems with this: first that the design of the UC is already well under way and officials don’t need an extra headache before implementation; and second that the UC doesn’t come in until April 2014, whereas the child benefit change is due to come in a year earlier – what would you do to mitigate the problem in that extra year?

You could of course argue (as Labour will do today) that the whole plan should be dropped – but ministers are unlikely to do that, not least because of the £2.5bn the policy is due to save. Which leaves option three – but only if it is possible to administer.