It seems the Prime Minister is finally waking up to the implications of his government’s ill-advised removal of child benefit from those paying the 40p tax rate. In several months time, any household which has a taxpayer living in it who dares to earn £42,745 will lose the right to claim child benefit. If they have two children that means a whopping loss of £1752.40 a year; that’s on top of the other tax rises the government has introduced.
As the Prime Minister belatedly points out in an interview with the House magazine, this creates a “cliff-edge” effect. You don’t say. Someone just below the cut-off point is eligible for child benefit, and someone earning only a few hundred pounds more is clobbered.
And consider a couple earning a combined £80,000 (£40K each). They get to keep their child benefit whilst their neighbours, where one partner earns £42,745 and the other decides to stay at home to look after the children, loses out.
It is anti-aspirational, too. Tory ministers should surely be able to grasp that it will not only have an impact on those earning £42,745 but also on those who aspire and hope to do so one day if they put in the work and enjoy some luck. Get there, and have children along the way, and this government tells them that it will hit them hard.
It would have been good if David Cameron had realised all this at the time and stopped George Osborne announcing the coalition’s ultimate too clever by half policy*.
Now the PM is trying to get the Treasury to work out a “taper”. Good luck with that. The Treasury says the policy will not change, although officials who were not involved in the original decision by Osborne’s team did say afterwards that it was all nightmarish.
On the day it was announced at Tory conference in Birmingham in 2010 some of us warned it was an iniquitous disaster in the making – a depth charge of a policy that would disappear until implementation, at which point it would explode. There are echoes of the way in which Gordon Brown’s abolition of the 10p tax band backfired so badly.
Having denounced the government’s approach on Newsnight that evening in Birmingham I retired to the Spectator’s drinks reception to be loftily told by one of the Chancellor’s friends that I didn’t understand the middle classes. A minister said that I shouldn’t be concerned as the removal of child benefit would only impact on “the rich”. As I told him, if the Tory leadership thinks voters earning £43,000, already over-taxed, with a hefty mortgage and probably paying through the nose to commute, count as rich then it has lost touch with reality. For a great many aspirational families taking away £1750 will count as removing the summer holiday or cancelling Christmas.
Here was a policy designed in Notting Hill, by privileged Tory modernisers or what I have termed OKA Conservatives. They may like to think of themselves as hard-pressed members of the middle class, but that is only in relation to their friends who went into banking.
To understand how this stinker of a policy was conceived, picture the scene around dinner tables packed with very prosperous double-income couples shortly after the election, when deficit reduction was all the rage:
Him (working at the top of financial PR), pouring another glass of white burgundy: “I mean, it’s outrageous. Do people like us really need child benefit?”
Her (working in media or as a headhunter), declining another portion of Hugh Fearnley-Whatshisname River Cottage pie: “I know. We spend it on skiing. It’s terrible. I feel rather guilty.”
Another him, this one working for a senior government minister as an advisor but married to a successful furniture designer: “We actually save it. We’ve opened an account in the kids names and they’ll get it when they need a deposit for a flat.”
Her: “I know, it is going to be so difficult for them to get on the housing ladder, particularly around here. But us getting child benefit is simply not fair.”
Him: “I say axe it. I’ve said so to George.”
*Note: Too clever by half, meaning sounds clever in a meeting but is actually a stupid idea. The child benefit policy was a piece of positioning, designed to emphasise that the Tories were prepared to punish voters more likely to vote Conservative as well as cutting money from those on welfare. It would supposedly prove their caring credentials: “We’re all in it together,” etc. It might have sounded clever on a surface level for five minutes but it is daft when one thinks properly about the practicalities and who it will hit.
If you are concerned about people on £42,745 not being able to claim public money for child benefit, would you oppose the planned changes to ESA and DLA?
I mean, surely people with disabilities, many of whom are too ill to work, are more deserving of money than people on over £42,745?
I was under the impression that all government policy was conceived in the manner outlined above…
I see. So now are they going to make it even more complicated? It was already complicated enough to decide higher-rate status (because for the self-employed or contractors that is determined in retrospect, and can change from year to year especially at the margin). Are we now going to have more little forms to fill in or boxes to tick?
“For a great many aspirational families taking away £1750 will count as removing the summer holiday or cancelling Christmas.”
The country is printing money to keep the show on the road, debt is climbing inexorably, we have hit Peak Wealth and are on the path to becoming an Undeveloping Nation. Sorting out the payment of a summer holiday, funded by the State, is absurd.
The main inconsistency with the planned change to CB is that, for a government nervously tip-toeing around the edge of limited transferrable tax allowances for married couples & civil partnerships, this is a huge step in the opposite direction. As Iain rightly states, a dual-income couple on £30k each suffer no loss of benefit; a single-income couple or single parent on £60k loses the lot.
The other issue is collecting the tax reliably. In most single-income couples it’s the non-working partner that collects CB – as nearly all other income tax & NI is collected on an individual basis, the Revenue don’t appear to spend a lot of time keeping records of who’s married to whom. So either higher rate taxpayers will fill out a declaration on their SA forms as to how much CB, if any, their partner has collected (assuming they know), or the partner will voluntarily stop collecting CB. Either way, tricky to police & which individual are they going to hold liable if benefit is overpaid or tax undercollected? I can ask my better half how much CB she’s been paid in the last 6 months & she can tell me to get stuffed. Similarly, if she asks how much I earn. And that’s assuming a functioning relationship.. where do they draw the line for estranged, seperated, living apart but amicable etc. etc. couples?
This policy, with or without taper, will never happen. It is practically impossible to implement.
As CHF points out, there will surely have to be an annual certification/assessment of income for this to happen. There is a problem of timing: a certification can only be assessed retrospectively but what if there has been a change of circumstance since, for example going part time?.
If it is to be an assessment what is the cost of conducting this annual exercise? Even if using PAYE data this is not a simple.
If it is to be a certification what is to stop a spouse simply refusing to declare their income?
Gordon Brown was amazingly successful in embedding a culture of benefit dependency – even the top 15% of earners feel they have a right to a state handout. Their addiction to suckle at the public teat is championed by journalists who, in other circumstances, push for a smaller state.
Gordon must be smiling with glee in his hideaway.
“Cameron’s looming child benefit disaster”
What are you on about? the policy stays.
Rubbish writing from you and I was looking forward to reading your blog again!
They already have a system that looks at a couples earnings, child tax credit. All they had to do was ditch CB and tinker with child tax credit thresholds and payments.
Idiots.
“a certification can only be assessed retrospectively”
Just to add detail to that: self-assessment is completed by 31 January of the calendar year following the end of the tax year. Only then is the data known to stop child benefit for the following year. But the following year, the situation might change, so I assume getting/losing the benefit will start with the following tax year (effectively a one-year lag). Thus, having been in the money, you lose it; then at the end of that year, you’ll find that you didn’t do so well, so you’ll get it back again, but then you do well, so you lose it the following year. It’s easy to create situations where you get the money only when you’re doing well. In fact, Schedule D tax has special handling of the Payments on Account, allowing them to be adjusted down if necessary, to avoid that effect for tax payments.
Oh. Someone mentioned child tax credit. The lag in that was one reason it got so screwed up.
The obvious thing to do, remove the earnings cap, make it payable for the first two children only.
There’s a more fundamental form of stupidity behind this. Child Benefit wasn’t a problem. One can argue about whether it is needed any longer (arguably the money was directed at the children through the mothers, so the tax status of the parents is largely irrelevant), but whatever its ideological faults, unlike some other social spending it was inherently limited, increasing in cost only when ministers raised the rate (which they could avoid) and as children were born, but also decreasing in cost as children moved out of childhood, a fairly steady pace. It was probably fairly balanced. It was certainly very old, and thus nothing to do with Brown’s spending spree.
Why target Child Benefit, then? The huge budget increases of the Labour government caused the problem. The first target should be continuing programmes introduced by that government that are the bigger spenders, the biggest producers of deficit and debt. (Of course, older programmes also need to be considered depending how much of the Labour debt was capital spending, which if one-off and long gone, has to be compensated for by cutting existing programmes, but even so, you’d start with the more recent recurrent costs.)
Unfortunately, and actually rather pointlessly, the Conservatives cleverly protected one of the biggest targets of Labour largesse: the Health Service, not only ring-fencing its budget but (I think) keeping it going in real terms (I might be wrong about that). That budget included the Connecting for Health programme, now cancelled, and the notorious contract negotiated with GPs (under Hewitt, the BMA at the time could not believe its luck!). Since one of the biggest spending areas was ring-fenced, the “savings” had to come from elsewhere.
So the government has ended up having to complicate a tax system (already over-complicated by Brown), and that in novel ways, to save a fairly small amount of money; then, whilst arguing that it’s absolutely essential to save that money, we see new millions handed out for this and that, and from one of the ring-fenced departments: http://www.nhs.uk/Change4Life and read of plans to distribute healthy living leaflets to 4m homes, and establish … a healthy recipe site.
It’s sometimes difficult to take this government seriously.
Brown, Brown and Brown again, I see the right wing excuses squad is out in full force.
I wish Cameron regretted the child benefit fiasco, earlier, especially with all the Conservatives MP’s waiving their order papers, as they sacked public sector workers.
Looks like Brown to me: http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data#zoomed-picture
And more largesse from the Department of Health: http://www.telegraph.co.uk/health/healthnews/9031792/Healthy-residents-bonus-for-town-halls.html
“authorities will be allocated more than £2 billion to take care of the nation’s health”
It’s a ring-fence within a ring-fence, apparently.
Whilst appreciating cuts have to me made, they still need to be fair and thought through. How is it fair that a wage earner of 47,000 will get there child benefit cut, but if a couple actually earn over that threshold but individually earn less theres will not be cut. Where is the fairness there I ask.
Why not leave it as universal (for reasons outlined above), but from now on limit is to a maximum of two children i.e as of nine months hence any third or more child will not be eligible? Oh and while we are at it, why not allow individuals to roll over up to, say, 5 years personal tax allowance so that in the first few years of work after unemployment you can have double the tax free amount on income? Just a (somple) thought. Occams razor and all that
The Government has created horrendous anti-aspirational walls in the tax system. If you earn £42,745 you lose child benefit regardless of your circumstance, if you get passed the effects of that, you then have the pleasure of contemplating a ludicrous 62% effective rate of tax if you achieve £100,000 (when personal allowances are tapered away). The 52% rate (tax & NI) for the very well paid seems quite a bargain.