Child Benefit is a universal benefit, which means it is awarded on the basis of having a certain contingency (a child!) and not on the basis of a contributions record or an income test. It is for this latter reason that the equity and efficiency of child benefit has come into question.
Is it really equitable or a good use of money for a family earning £200,000 per year to receive child benefit of £20.30 per week for the first child and £13.40 each week for every subsequent child? Do these families really need the money, or would it be better spent on education, healthcare etc? This question became even more pertinent with the growing budget deficit facing the UK and the Coalition’s policy of cutting the deficit and hence cutting government expenditure.
Child benefit was one of the benefits targeted by the Coalition. It would be removed from higher rate tax payers. Those earning more than £44,000 would no longer be eligible to receive it. For some this seems like a good policy – the benefit is being targeted at those who need it most – it is becoming more vertically efficient. However, for others this presents a problem, not least because it looks at individual income and not family income. If there is a 2 parent household, with each parent earning, say, £40,000 then total household income is £80,000. Yet, this family is still eligible to receive child benefit, as neither of their incomes exceed £44,000. However, a 2 parent household, where one person works and earns £45,000 and the other only works part time and earns £5,000 would not receive child benefit, despite their total household income being only £50,000. This policy, unsurprisingly, faced criticisms of inequity and that middle income households would be the ones who saw their income squeezed and were made significantly worse off.
Amid these criticisms, David Cameron has admitted that there is an issue with the threshold and those facing the cliff edge of becoming a higher rate tax payer and losing the benefit. The Chancellor is unlikely to be in favour of any significant changes that will reduce the projected £2.5bn savings the policy will make. Although the policy still looks set to go ahead, following the Coalition’s defeat in the House of Lords concerning cuts to welfare and Cameron’s desire to retain the loyalty of Conservative supporters, we may still see some revisions to the initial proposal. The following articles consider this highly charged issue.
Child benefit cut will go ahead, says Osborne BBC News (13/1/12)
George Osborne: child benefit plans will go ahead The Telegraph, Robert Winnett (9/5/11)
Child benefit cut to hit 1.5 million families, says IFS BBC News (13/1/12)
Osborne sticks to child benefit cut The Press Association (13/1/12)
Middle-class parents could keep their child benefit after all Independent, Andrew Grice (13/1/12)
Welfare payment cap poses ‘real risks to children’s rights’ Guardian, Randeep Ramesh (11/1/12)
Universal child benefit has had its day Mail Online, Janice Atkinson-Small (13/1/12)
- What is the difference between a benefit such as income support and child benefit?
- Define the terms horizontal and vertical efficiency and horizontal and vertical equity.
- To what extent does child benefit (as a universal benefit) conform with your definitions above? Would the new means tested child benefit meet the objectives of horizontal and vertical efficiency and horizontal and vertical equity any better?
- Why are middle-income families and women likely to be the most affected by the proposed changes to child benefit?
- Why is there a growing pressure on the Coalition government to rethink the proposal?
- If child benefit is removed from higher rate tax payers, should other benefits be changed to compensate some families for their losses?
On November 11, the government published a White Paper on welfare reform. Central to the proposals is the replacing of the range of out-of-work benefits, housing benefit and tax credits with a single universal benefit. The system will be introduced for new claimants in 2013 and for those currently on benefits sometime after 2015.
When the unemployed find work, the benefit will be withdrawn at a rate of 65p of each £1 earned. At present, because of the complexity of the system, some claimants on multiple benefits can find that the withdrawal rate is almost 100%. When income tax is added in, the tax-plus-lost-benefit rate does sometimes exceed 100%. Thus some people find themselves in a poverty trap, whereby it’s not worth getting a job. It’s financially benefical to stay on benefits.
The other crucial element of the proposal is to deny people benefits who turn down a legitimate job.
a. Failure to meet a requirement to prepare for work (applicable to jobseekers and those in the Employment and Support Allowance Work-Related Activity Group) will lead to 100 per cent of payments ceasing until the recipient re-complies with requirements and for a fixed period after re-compliance (fixed period sanctions start at one week, rising to two, then four weeks with each subsequent failure to comply).
b. Failure to actively seek employment or be available for work will lead to payment ceasing for four weeks for a first failure and up to three months for a second.
c. The most serious failures that apply only to jobseekers will lead to Jobseeker’s Allowance payment ceasing for a fixed period of at least three months (longer for repeat offences). Actions that could trigger this level of penalty include failure to accept a reasonable job offer, failure to apply for a job or failure to attend Mandatory Work Activity.
The following podcasts and articles look at the details of the proposals and discuss their merits and drawbacks,
Podcasts and webcasts
Not going to work if you can is ‘not an option’ ITV, part of speech by Iain Duncan Smith (11/11/10)
IDS: Staying on benefits ‘irrational choice’ BBC Today Programme, Chris Buckler, Iain Duncan Smith Smith (11/11/10)
Iain Duncan Smith unveils new benefits system BBC News (11/11/10)
Welfare reform success ‘far from certain’ BBC Today Programme, Norman Smith (11/11/10)
Benefits system overhaul ‘to make work pay’ BBC News (11/11/10)
At-a-glance: Benefits overhaul BBC News (11/11/10)
Benefits explained: A basic guide to entitlements BBC News (11/11/10)
Is welfare reform doomed to fail? BBC News, Norman Smith (11/11/10)
A bold and principled approach to benefits Telegraph (11/11/10)
Reshaping the benefits system The Economist, Blighty blog (11/11/10)
Unemployment benefits shake-up ‘a fair deal’ Independent (11/11/10)
Tougher welfare sanctions spark ‘destitution’ warnings Independent (11/11/10)
Iain Duncan Smith: it’s a sin that people fail to take up work Guardian, Patrick Wintour, Randeep Ramesh and Hélène Mulholland (11/11/10)
Preacher Duncan Smith aims for holy grail of welfare policy Guardian, Randeep Ramesh (11/11/10)
Documents, official information and data
Universal Credit: welfare that works Department for Work and Pensions, Links to White Paper (11/11/10)
Benefits and financial support Directgov
Economic and Labour Market Review (see tables in Chapters 2 and 6), National Statistics
- Explain what is meant by the ‘poverty trap’ (or ‘welfare trap’).
- Summarise the reforms to benefits proposed in the White Paper.
- Examine whether the Coalition government’s proposal for a universal benefit will lead to greater fairness.
- Will a withdrawal rate of 65% provide a strong incentive for people out of work to take a job?
- Why may some be paying a combined tax-plus-lost-benefit rate of 76%?
- Why is there an inherent trade-off between making work pay (and thus eliminating the poverty trap) and keeping the cost of welfare benefits down? Would reducing the level of benefit be an appropriate answer to this trade-off?
- One aim of the benefits reform is to reduce unemployment. What type of unemployment is likely to be affected?
- Find out the current level of unemployment and the level of job vacancies and, in the light of this, comment on the likely effectiveness of the policy in reducing unemployment (a) shortly after the new system is introduced; (b) over the longer term.