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.