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Child Benefit – misery ahead?

October 29, 2012

Mark appeared on BBC 2’s Daily Politics on Friday to discuss changes to families’ eligibility for child benefit. To view his interview, click here. He also appeared on Newsnight click here to watch.

Although first mooted by the Treasury over two years ago, it is only this week that changes in child benefit will become fully apparent, as letters drop through the letterboxes of over a million households where one earner is bringing home at least £50 000 per annum.

Only last month at Conservative Party Conference, David Cameron made a powerful case for supporting the ‘strivers’ and the aspirational in our society. Yet it is precisely this group that stands to be most adversely affected by the child benefit changes.

Conservatives like me regard deficit reduction as a moral, as well as an economic, matter. Surely we owe it to our children and grandchildren alike not to pass on huge debts in the decades ahead for our consumption today.

As a result I shall always support measures by the coalition to reduce public spending.

But on the implementation of these child benefit reforms let’s for once be wise before the event.

Tax collection should invariably be efficient and certain. Yet I fear that much of the £2.5bn per annum that these changes are expected to raise will either need to be written off as too difficult to claim or be swallowed up in huge administrative costs. This is my core concern.

Ideologically my fear is that the scheme acts as a penalty on aspiration. Certainly in my own central London constituency, earning £50 000 p.a. does not place you within the ranks of the super wealthy. It is also the case that many people who earn just below the threshold will regard it as being a promotion away so these changes will therefore act as a significant disincentive to earn more, not least as the tapering arrangements for those earning between £50 000 and £60 000 results in marginal tax rates of 65% for families with three or more children. This just seems perverse. After all the (correct) justification at March’s Budget for reducing the top rate of tax for those earning more than £150 000 p.a. was that a 50% tax rate was acting as a strong disincentive to further effort.

The other glaring problem with this scheme as currently constructed is that a couple where both parties are earning £45 000 (an aggregate household income of £90 000) will lose not a single penny of their child benefit, whilst a family with a single earner of £60 000 will lose it in full. Surely the tax system and society as a whole should respect and support households choosing to have a ‘stay at home’ parent?

There are also some stark practicalities about the way in which many modern Britons live nowadays. Many people work on a consultancy basis – indeed this has been one of the big success stories for the coalition as this level of flexibility has helped add over one million people to private sector employment since 2010. However, working on this basis means that many will not know at the beginning, or even quite near to the end, of any tax year whether they will be earning as much as the £50 000 threshold. We run the risk of some perverse incentives to delay invoicing and many will likely seek the services of an accountant in order to find ways around the changes such as making additional pension contributions or adopting other means of tax avoidance. Separated and divorcing couples may also find themselves lumbered with big repayment bills after the event. The lesson of the community charge two decades ago is that many such liabilities will end up being written off by the government as uncollectable.

I have long been a critic of universal benefits, especially in this era of economic austerity. However, the full panoply of non-means-tested old-age benefits (many of which were only introduced during the last Labour administration) seem to be regarded as sacrosanct. Given the well-mobilised efforts of pensioner lobby groups to commit Party leaders in the teeth of a General Election to protecting ‘their’ benefits, I reckon it is unlikely there will be any action to pare back this type of universal benefit.

Yet it is worth remembering that the child benefit came into being in the mid 1970s to ensure that ‘stay at home’ mothers had some disposable income for children they were bringing up. Until then there was a system of tax allowances for parents to reflect – properly in my view – the notion that the time, effort and financial outlay involved in bringing up children was a ‘social good’ that should be reflected in the tax system.

All Conservatives rightly accept, to coin a phrase, that we are all in this together and must recognise the need to live within our collective means. However my fear is that this child benefit policy as currently constituted will bring a lot of pain for relatively little gain.