Child Benefit: do George Osborne and Iain Duncan Smith talk to each other?

Yesterday, the coalition announced that Child Benefit (CB) will be scrapped for families where one member belongs to the higher-rate tax bracket. A sensible reform idea, even when the details are chaotic and inconsistent, is vastly preferable to a perfectly implemented bad idea. From this perspective, the announcement is laudable. It is not just a waste of fiscal resources to hand out billions to people who do not need handouts by any stretch of imagination. More importantly, the existence of “universal” and weakly targeted benefits is one of the major reasons why the transfer state could grow so excessively in the first place.

When the “Iron Chancellor” Otto von Bismarck introduced the first modern social insurance system, he explained to his advisors:

“My idea was to win over the working classes, or shall I say to bribe them, to regard the state as a social institution that exists for their sake and that wants to cater for their welfare.”

Middle-class and upper-class benefits achieve the same for the middle and upper classes. Most people pay for their own benefits many times over through taxes. The middle-class welfare state is a Santa Claus who sends an oversized bill after Boxing Day. But middle-class voters love their middle-class benefits nonetheless. As a rule of thumb, the wider the coverage of a benefit, the greater its popularity. The benefit is highly visible to its recipients, while most of the cost is hidden in devices like indirect taxes, “employer contributions”, debt or inflation. For example, an average household in Britain pays almost £500 a year in “sin taxes”, and over £800 in “green taxes”.

If the coalition is serious about reining in runaway government spending and debt, then it will have to break out of this public choice trap, and axing CB above a certain income level is at least an important symbolic step.

Nevertheless, the chaotic way in which this is being done will provide unnecessary frustration and uncertainty. Once the reform is in place, a single-breadwinner household with two children and a household income of £44,000 will no longer receive any CB. Never mind. But a double-earner household with two children, where each partner earns slightly less than that, will continue to receive £1,750 per year. Unless one of them gets a small pay rise, because then, their entitlement to CB ends. Does this make sense?

Osborne argues that it is the least bureaucratic way: if a means-test were to be introduced, the additional administrative cost would eat the £1bn in fiscal savings.

Osborne’s line of argument is slightly bizarre given that just a few days before his announcement, his colleague Ian Duncan Smith at the DWP announced the merger of several benefits into one single Universal Credit (UC). What would have been more obvious than for Osborne and IDS to coordinate their efforts, and to merge CB into the new UC as well? Apart from greater clarity and simplicity, this would automatically have made CB means-tested, without requiring any additional administrative infrastructure. And since it will contain several child-contingent payments, UC is also the place where CB logically belongs. Why have several tools that serve very similar purposes?

The taper rate could then have been adjusted to realise further savings. CB payments to people in the upper half of the income distribution amount to almost £5bn per year, so the potential for further economies is substantial.

10 thoughts on “Child Benefit: do George Osborne and Iain Duncan Smith talk to each other?”

  1. Posted 05/10/2010 at 10:15 | Permalink

    If I had never received a Winter Fuel Allowance, I would never have noticed. Nor would I have expected it. But now that I’ve been receiving it, I shall certainly notice if it is withdrawn (as it should be), and I shall probably feel a bit annoyed. Ditto my ‘free’ Bus Pass.

    Lesson: it’s easier for the state (or its agents) to interfere than to ‘un-interfere’. That’s one reason why the state has become far too big.

  2. Posted 05/10/2010 at 10:39 | Permalink

    Perhaps the reason for the inconsistency is because this is the first of several and this is part of a softening up process for a larger removal of universal benefits. Much better to breach the principle by annoying reasonably affluent households than the elderly.

    More cynically, the move also might be a trap to get the Labour party to defend higher rate tax payers.

  3. Posted 05/10/2010 at 12:20 | Permalink

    The problem with removing child benefit from higher earners is that it will move household incomes towards a more socialist-style distribution. Families on incomes below the median wage already receive roughly the same whether or not their members work, as a result of child tax credits, housing benefit, social housing and so on. Cuts to ‘middle-class’ benefits will extend this pattern further up the income scale. The Universal Credit may well have a similar effect, depending on the thresholds and withdrawal rates.

    Unfortunately, the coalition seems to be infected with an egalitarianism that favours a redistributive approach rather than cutting benefit rates to tackle welfare dependency.

  4. Posted 05/10/2010 at 14:35 | Permalink

    In some ways the fall out from this announcement shows how successful the left has been culturally over the last couple of decade: we have people earning almost twice average earnings complaining that they are being taken off welfare, and supposedly right of centre commentators in the press supporting them. Its going to be a long war.

  5. Posted 05/10/2010 at 16:52 | Permalink

    Definitely. To an outsider, it would appear contradictory that a leftist group like the Child Poverty Action Group defends upper-class benefits. Shouldn’t they be the ones who want to focus all the spending on the poor?
    Not at all, of course. They know exactly that upper-class benefits will make the upper classes more amenable to welfare, and even recruit them in the fight for ever-increasing state transfers. It’s a clever strategy: Make articulate, vociferous people push for higher benefits. If they succeed, benefits will automatically increase for the poor as well.

  6. Posted 06/10/2010 at 09:43 | Permalink

    Peter – there is more to it than what you suggest. We have a tax and benefit system that discourages family formation and work in a big way. IDS wishes to do something about it but his success will probably be quite limited. Osborne now takes a decision that will take those problems entrenched at the bottom of the income scale and entrenches them in the middle (in a magnified form). This is completely bonkers particularly as he is reforming the welfare system wholesale in any case. He could have brought child benefit into that reform and turned it into some kind of benefit that meant that higher earners were worse off in the way he intended but without the other effects.

  7. Posted 06/10/2010 at 09:46 | Permalink

    And it is also naked vote grabbing. Winter fuel allowances, free bus passes and/or free TV licences (you have not got there yet, David) and the ridiculous married couples allowance for pensioners could have been taken away with no problematic economic effects. Why has he not gone for this target? It is because the age of the active median voter is about 53. The “triple lock” on pensions is completely unnecessary (higher of wages and prices would have done – or just wages: though I would prefer just prices). There are lots of candidates for £1bn cuts but he has gone for something symbolic but deeply damaging.

  8. Posted 06/10/2010 at 10:18 | Permalink

    Philip, I quite agree with you. The problem is that I’m sure George Osborne knows all these arguments as well. But he felt unable to act as you suggest. This may be due to bad thinking or cynicism, but it shows that the politics will always win out over the economics and we shouldn’t really be surprised by this. You might remember that Nigel Lawson was asked why he didn’t introduce monetarism in the UK. His answer apparently was: ‘We can’t use water cannon!’

  9. Posted 06/10/2010 at 17:39 | Permalink

    Of course, it is asking for trouble to announce the withdrawal of just a single benefit, saving ‘only’ £1 billion (admittedly with an obvious anomaly that the media pounced on). But politicians must surely have recognised that.

    So I assume that the government was deliberately making a symbolic point, that the better-off were suffering, in preparation for the much larger cuts to be announced all together later this month.

    Someone said today, that an average departmental cut of 25% over four years amounts to a cut of 7% a year. That doesn’t seem impossible, given the scale of the government’s debt and ongoing deficit — especially since Plan B may be just to spread out the cuts over longer.

  10. Posted 13/10/2010 at 09:59 | Permalink

    Child benefit was introduced as a universal benefit to women and children. By removing child benefit from families over a certain threshold changes the nature of the benefit. This brash and naïve approach could end up costing us more as there will be hidden costs of implementation and administration and as well as families probably requesting other benefits to make up for the loss. I am a woman without children and I think it fair that I contribute to other women bringing up children in our society.

    In light of our government’s recent failure to collect the correct amount of tax from last year does not encourage me to think that they will have a cost effective approach to implementing which families will be entitled to the benefit.

    If this is the start of a total reform in our tax and benefit system, does it have to be austerity measures? Wouldn’t it be better received if people felt empowered by the decisions our governments are making.

    Instead of using a removal approach to benefits and taxes for the family home, try and incorporate a system whereby the infamous council tax, and other benefits work in unison and a reward system are put in place, starting at zero and offset our carbon footprint in the home. The state can then offer guidance on how to get the best out of reform and it would be more long lasting for our whole environments and societies.

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