Welfare cuts: pick your battles

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Today’s loss of child benefit for higher earners is less important than the cuts in income for poor families that will be heralded by tomorrow’s benefits uprating bill 

As of midnight, 820,000 families have lost their child benefit entirely, with another 320,000 seeing a reduction in their entitlement. On average, each family will lose £1300. This has dominated the media for a couple of days, with almost universal condemnation of the policy as unfair and unworkable. So let me play devil’s advocate.

First of all, one cannot defend the administration of the cut – it has been chaotic, with hundreds of thousands of people having to fill out tax returns and many families not even being told in advance of the change. It was rushed and poorly planned. Second, it would undoubtedly be more efficient to raise taxes on those on higher incomes, and it would be easier to target the highest earners, thereby making it more progressive.

But this option is not on the table. As David Cameron stated today in what could be described as a veiled threat: ‘if we didn’t take the £2bn [derived from child benefit cuts] from the better off 15% of the country, we would have to find someone else to take it from.’ I doubt anyone thinks for a moment he was talking about those even further up the income scale.

So, faced with the prospect of cutting benefits from higher earners, or having those cuts passed to lower earners, one has to opt for the former. Much has been made from the unfairness of the anomalies of the proposed measure – a two-working-parent household earning £49,000 each will keep child benefit, where a one-earner household on £60,000 will lose it. This quirk of our tax system is not new and creates similar oddities in tax credits and income tax payments: we get taxed individually, not as a household.

To remedy this, the government would need to ask individuals about their relationship status and change tax codes accordingly. It would mean whenever two people separated they would need to tell HMRC. Would cohabiting have the same tax code as marriage? What if the couple didn’t share their finances? In short, it would be complicated, intrusive, and expensive.

The big question is whether people feel this anomaly is enough to scrap the idea entirely. I’m not convinced. A household in the worst possible situation (a couple with a single earner on £61k) is the equivalent of two people on £30.5k per year – which is still above the average wage in this country. The phenomenally popular £26k cap on benefits income is based on the public reasoning that this is enough for anyone to live on. Are we now saying that isn’t the case, and that £30.5k isn’t enough? Are we suggesting a family with an income of £61k cannot cope if they lose on average £1.3k in child benefit – which constitutes less than half a percent of that income?

All this should, of course, be seen within the context of tomorrow’s  Welfare Benefits Uprating Bill. 7.9 million people in work will see a real terms cut in their working tax credit – and every one of these 7.9 million are earning less than £26k. If this is seen as justifiable, how can it be right to argue that child benefit, and the higher rate tax payers who claim it, are given special dispensation from the cuts which are weighing on everyone else so heavily?

Up until today, the take up rate for child benefit was 96% (today’s move will lower take up to 85%). This means some of the very wealthiest people in the country were claiming it. At a time when the government is seeking to wipe £18bn from the welfare bill, and to do so will involve cutting the incomes of 3.7 million people out of work and 7.9 million low earners, this level of coverage is simply indefensible – tax anomalies or no.

In an ideal world, Child Benefit would remain universal. But we are not in an ideal world. The government has pledged to cut the welfare bill, whether we like it or not. The option of not cutting benefits, but perhaps increasing the tax burden on the wealthy instead, is not on the table.  So whilst it’s tempting to oppose every cut to welfare and to pick apart every reform due to its anomalies, cliff edges and implementation issues, the lesson learnt from the Lords’ thwarted opposition to the Welfare Reform Bill in 2011 is that we cannot turn the juggernaut of the government’s programme of cuts in public spending – the best we can hope to do is to soften its blows.

So it is a case of picking one’s battles. And we have to ask a difficult question – do we focus our efforts on shielding higher rate taxpayers losing 1 or 2% of their incomes at most, or the hundreds of thousands of families in poverty and facing utter destitution as a result of other (including tomorrow’s) benefit cuts?

 

About Claudia Wood

Claudia is Deputy Director at Demos. Previously, she was head of policy and research at the Resolution Foundation and spent 5 years at the Social Market Foundation as a senior researcher and fellow working on early years policy, social mobility and education reform. She spent a period seconded to the prime minister's strategy unit in 2005 to work on the Education and Inspection Bill.

2 comments on Welfare cuts: pick your battles

  1. Martin O'Donnell says:

    The option of not cutting benefits, but perhaps increasing the tax burden on the wealthy instead, is not on the table.

    The real question Claudia is why the option of taxing those on £100k+ per annum is not “on the table”. The higher 50% tax rate is being removed: paid for (in part) by these child benefit cuts and lower uprating of other benefits which are paid to many working families.

    This child benefit change will be a nightmare to administer as families break up, employees change their hours, etc. It looks like a minor CSA (with its horrific administration costs) has been unleashed.

    It also creates incentives for some employees to reduce their hours or increase pension contributions to get round the change.

  2. PeterH says:

    Yes, child benefit limits are more defensible, but you are wrong to be dismissive of taxing household not individual income. It is not complex nor expensive, and it is commonly done in many other developed world economies, so surely our tax authorities are not less expert than those in other countries.

    The point on benefit updating is surely this: During the economic cycle, private sector wages grow faster in boom and slower/negatively during slump. When private sector wages were growing faster than inflation, I don’t recall hearing any conservatives claiming it was unfair that benefits were rising less than private sector wages, so it is spurious to claim fairness as an argument for cutting benefits in real terms.

    The more honest conversation is that we need to reduce the bill either by reducing the numbers who need benefits or by reducing the rate at which they are paid. More appropriate areas to focus on would be
    – tackling ‘underemployment’ as a real issue
    – gradually moving the minimum wage to a living wage to phase out the need for benefits to low-paid workers – these are really the state subsidising employers low wage rates.
    – sorting out supply in the housing market – again, housing benefit is really the state subsidising landlord incomes because it hasn’t tackled under supply in housing which drives up rents.

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