This year is likely to be one of the hardest for the coalition, as spending cuts begin to hit harder than ever before. Tory MPs are warning that the measure that is most worrying their constituents is the removal of child benefit from higher earners, and analysis today from the Institute of Fiscal Studies gives us some inclination as to why.
The IFS has examined how much this will cost parents earning over £50,000 – the point at which the payments begin to be taken away. It has found that the measure will mean that for someone with one child who earns over £50,000, they will have a marginal tax rate of 52.6 per cent. In other words, for every extra pound earned over that level, 52.6p will be taken away. As they continue to go up the income scale, they will lose more and more cash until they hit £60,000 and all the child benefit payments are gone. This results in a marginal tax graph that looks like this:
This blog revealed back in March just before the Budget that George Osborne was considering capping child benefit at a certain number of children per family. At the moment, parents receive £20.30 a week for their first child and £13.40 for each additional child after that, but Treasury officials were looking at stopping those payments once a family had reached a certain number of children.
At the time, the measure was supposed to be an alternative to capping child benefit at a certain income level: the family-size measure would have been easier to implement and involve less of a cliff-edge for
people increasing their earnings. In the end, it was ruled out as too controversial, but judging by George Osborne’s speech at the Tory party conference today, the idea is back on the table. The chancellor said:
How can we justify a system where people in work have to consider the full financial costs of having another child, whilst those who are out of work don’t?
The Mail on Sunday reports this morning on a radical idea from David Cameron to cut housing benefit for under-25s altogether, something that would save £1.8bn a year, he says. It’s a proposal bound to garner a lot of interest, and designed to win back faltering support from Tory voters.
But another suggestion caught my eye lower down this piece. The paper reports:
Well-placed sources say Ministers are also taking a fresh look at plans to limit child benefit to a couple’s first three children, although Mr Cameron is not expected to address this issue directly tomorrow.
Long-time readers of FT Westminster will know all about this proposal: I first reported it on this site back in March. At the time I wrote:
After a couple of questions on Afghanistan, following the news that six British soldiers are presumed dead, Ed Miliband turned his attention to more domestic, and combative topics: specifically welfare.
What would the prime minister say, asked the Labour leader, to Tim Howells, a man from Dartford with a wife and three children, who faces losing his working tax credits when the minimum number of hours that must be worked to claim them rises from 16 hours to 24?
David Cameron had a reply: the 24-hour threshold was for couples, meaning each one only has to work 12 hours.
The problem is, replied Miliband, that his wife spends her time looking after the couple’s three children. And Howells simply can’t find the extra hours the government is asking him to do.
Cameron effectively acknowledged the unfairness, but was able to turn it to his own advantage:
I wrote earlier this week about the options open to ministers for solving the child benefit conundrum.
To recap, the government’s current proposals to axe child benefit for higher earners lead to two problems:
- Families with one person earning above the threshold (around £42,000) will lose their benefit, but those with two earning just below it will keep it.
- The lack of any tapering means it will become a disincentive to earn a promotion that takes you just above the £42,000 mark.
The most likely answer appears to be that George Osborne will find some extra money to move the threshold to £50,000 instead. But that solves neither issue, only moves the problem higher up the income scale.
But another proposal is floating round the Treasury: to reverse the plan altogether and instead cap child benefit at a certain number of children (most likely to be three).
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.
George Osborne’s cut to child benefit has triggered a bit of a debate over welfare handouts and procreation.
This is usually a bit of a no-go-area for politicians. But Jeremy Hunt has been brave enough to suggest that long-term benefit claimants should “take responsibility” for the number of children they have. Fraser Nelson, meanwhile, has dug up some numbers on the 2,500 incapacity benefit claimants with 6 or more kids.
This all reminded me of one of my favourite Gordon Brown stories. There were about 45,000 extra children born as a result of Brown’s largesse with benefits, according to economic research. It is a whole generation of “Brown babies” identified by the Institute of Fiscal Studies.
People appear to have taken his fiscal stimulus literally. Big increases in tax credits and income support payments pushed the birth rate to its highest level since 1974. The “price” of an extra child fell for many low income families along with the financial penalty of staying at home as a mother. Working class had more confidence to have children — or at least have them earlier.
Back in 1997 Tony Blair famously told Frank Field to “think the unthinkable” in the effort to reduce poverty, rationalise welfare benefits and improve work incentives. When Field returned to Downing Street some time later clutching a plan to overhaul the system, he found his ideas rebuffed. The Treasury had deemed them to be, well, unthinkable. Gordon Brown had his own ideas.
So old Whitehall hands could be forgiven a sense of deja vu when Iain Duncan Smith unveiled the latest project to reform a system that grew still more expensive and complex during 13 years of Labour rule. No one could quarrel with Duncan Smith’s analysis – the present system is riddled with disincentives, unfairnesses and complexities, and the costs are still spiralling. A much simpler system, with fewer benefits and much lower withdrawal rates, would ultimately help more people back into work and reduce the overall bill.
Politics for the next five years will be dominated by painful public spending cuts. But in this election every time a politician speaks, it seem to be in order to protect one more benefit perk. So far, in terms of new spending guarantees vs new cuts, the campaign score is at least £25bn to 0.
Take the appearance of Liam Byrne and Philip Hammond on Newsnight last night, which turned into the most expensive interview of their political careers. Without blinking, the two would-be guardians of the public purse ruled out means testing child benefit.
Price tag? Around £5bn to ensure millionaires (in fact anyone family earning more than £25,000) can still pick up their benefit perk. That’s roughly the size of the defence equipment budget.
Any cuts to match that? Of course not. If you try our Deficit Buster online tool, you’ll see that means testing child benefit is one of the easiest of a horrible set of choices. The public surely deserve to know where the Tories and Labour will find that £5bn.