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Child Benefit and the Deficit

January 8, 2013

Child Benefit is being withdrawn from middle income households. There are three issues I want to address from this decision. The first is the argument in regards to fairness per the one/two income households. The second relates to the principle of universality and the third issue relates to the sort of language being used by all parties about what has happened.

The changes in child benefit are as follows:

One income of less than £50,000: This family keeps the full child benefit, which for two children is £1,752 a year.

One income of more than £50,000: Can keep some benefit but must repay 1 per cent per £100 earned over £50,000. For someone earning £54,000, for example, the charge is £700.

Two incomes, both less than £50,000 each: Although the couple’s joint income is over £50,000 they keep all their child benefit as neither one earns over the threshold.

Two incomes, one more than £60,000: Because one partner earns over £60,000 they must either stop claiming or repay the full £1,752 through a tax charge.

Clearly, one income households are going to lose more money than dual income households providing the dual income household doesn’t contain an income earner over £60,000.

What hasn’t been discussed, is a much bigger issue that affects the same people. Dual income households are going to take advantage of the way personal tax allowances and tax rates are structured. 

For example, if a household has a single income earner of £60,000, around £20,000 of that income will be taxed at 40% (taking into account the higher rate tax threshold). Their overall rate of tax on the full £60,000 will be around 24%. In comparison, for a household with two income earners of £30,000, given the basic rate allowance, their combined rate of tax on the full £60,000 will be around 14.5%.

The difference between the two households is around £6,000 p.a. – a matter that should put into perspective the c£1,700 loss from child benefit that might also affect single income households. 

Ultimately, the extent to which this is fair is a matter of political taste, but it is surprising how this more important difference in the way the tax system is working hasn’t been brought out by politicians or the media. It seems unreasonable for women who chose to stay at home and look after their children are to be penalised to this extent – the government appears to be signalling that this choice is going to become more expensive. There is also a disincentive effect for those people who are currently earning c£50k to go the extra mile and increase productivity.

The second issue I want to discuss is the matter of universal benefits. Whilst it seems reasonable in the context of a modern welfare economy to treat patients equally in respect to the NHS, or treat pupils equally in a State education system, it does seems a little odd that we pay significant sums of money in tax to be given some of it back by the State. The cost of collecting and then redistributing to millions of people who are above a certain income/ wealth threshold has to be a waste of money. The better proposal would be for the State simply to reduce the higher rate tax rate and not provide benefits to those over a certain level of savings and/or income. The notion of universality in respect to transfer payments such as child benefit, pensions, winter fuel allowance etc is an expensive way of giving people their own money back minus the exorbitant administration charges. I am not aware of the data on this, and it is probably unavailable but I imagine for every £1 a higher rate tax payer has to give to HMRC to pay for their share of universal transfer payments (i.e. the old child benefit, pensions etc), they probably receive back less than 5p in transfer payments value back. In other words, it would be better not to take the £1 in the first place. This argument relates only to the amount of tax taken for the purposes of funding transfer payments to those over a certain level of income/ wealth.  

In short, the idea of having the State take money it doesn’t need to give it back to the people who don’t require transfer payments only benefits those administering the system. It can make no real economic sense and should be eliminated. Those arguing in favour of universal benefits either have not thought it through or are concerned that the money saved from not distributing universally will be squandered elsewhere (a view I have considerable sympathy for). This leads me to the third point.

On the 7th January, David Cameron commented on the withdrawal of the child benefit:

“This will raise £2bn a year. If we don’t raise that £2bn from that group of people, the better off 15% in the country, we would have to find someone else to take it from.”

Whilst it is true that the withdrawal will save around £2 billion per year, the second part of the comment isn’t necessarily true. It doesn’t need to be taken from others if it isn’t spent in the first place. For those on “the Left” who think that it really does need to be taken for “schools and hospitals, for doctors and teachers and nurses etc”, they would struggle to provide an answer for public spending for Simon Burns:

http://www.telegraph.co.uk/news/uknews/road-and-rail-transport/9784037/Rail-minister-under-fire-for-use-of-official-cars.html

Simon thought it was a good idea for him to spend £80,000 p.a. of tax payers money for him to get to work in the morning and for someone to take him home. A great, well timed story to come out on the same day as the reduction in child benefit.

I don’t doubt that Simon has to get in. Everyone of the 20 million + UK workforce has to get in and no doubt many of those people have confidential information they work on (or could work on) whilst they commute. 

The point being made here is that whilst I may agree with the withdrawal of universal benefits such as child benefit – the squandering of billions of pounds in profligacy can’t be justified. For those that think Simon is unusual, think again – he is but the tip of the iceberg.

The deficit in the UK could be dealt with by addressing massive government overspending on vanity projects, vanity transportation, factious and questionable “initiatives” and a general focus on the important things. One only has to look at QUANGOs such as the Specialist Schools and Academies Trust (SSAT) to see that the additional billions of expenditure allegedly in education has had no impact on the success of schools, but funds a huge number of people in non-jobs pretending to add value and filling in self-evaluation forms to evidence their contribution. The sort of “projects” these people involve themselves in would be enough to make Simon look like a model of fiscal responsibility. The SSAT are known for their enjoyment of hiring out central London venues such as Chelsea Football Club for their outings.

Government spending needs a root and branch reform to spend tax payers money where it counts and only where it counts. We don’t need to spend £80,000 p.a. to drive Simon to work each day and we don’t need billions in the education system in any place other than schools and teachers. A back to (spending) basics policy would eliminate the deficit within a year.

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