Can you solve the Child Benefit conundrum?

As the Government grapples with the political and financial complexities of its pledge to remove child benefit from higher earners, Ian Mulheirn weighs up the options available and invites your views on how to solve the child benefit conundrum.

Last week the politically fraught issue of Child Benefit cuts for higher rate taxpayers reared its ugly head. The government is in a bind because of the perceived unfairness of taking the benefit away from families with a higher rate taxpayer. As a result, dual earner families with annual incomes up to £85,000 could continue to receive the benefit after April next year, while those with a single earner on £43,000 would have it withdrawn. The Treasury has pencilled in £2.4bn of savings from the change, so it’s a big deal.

In an interview last week, the Prime Minister hinted that something might be done to address the ‘unfairness’ of the measure and/or – it wasn’t entirely clear – to smooth the ‘cliff-edge’ by which all the benefit money is taken as soon as a person crosses the higher rate threshold. That’s intriguing, but when you think about the available options, it’s hard to see a solution that’s both politically and financially viable.

Is Universal Credit the answer?

At one extreme, the Government could roll the benefit into the Universal Credit, a ready-made system for allocating benefits fairly, according to total family income. It could also save something like another £3bn per year. But of course it would mean cutting the benefit for millions more families on even lower incomes than the current plan, so that won’t fly (even though it probably should, as we’ve argued before).

The nuclear option

At the other extreme the Chancellor could scrap the whole plan. But, apart from the embarrassment, dropping the idea would leave a gaping hole in his spending plans, so that’s a no-no.

The trouble with means testing

For anything in-between, the trouble is that it’s not possible to withdraw Child Benefit gradually. The creaking old system pays fixed amounts, based on simple rules, for 19 years after a child is born. So the only way to means test it is to recover the cash by raising income tax on the recipient family above a certain income. So far, so sensible. But since the late 1980s, the tax system has been based on individuals’ earnings, so establishing total family income for higher income families is all but impossible without some expensive, intrusive and politically suicidal new IT system (another non-starter).

Variations on a theme

That leaves variations on the idea of raising tax on one member of the family to recover the Child Benefit payment. Some have suggested that the Chancellor could decide to claw back the benefit from individuals earning above, say, £50,000 instead. Trouble is, it would cost hundreds of millions and wouldn’t address either of the two problems identified by the PM. Households with two earners could get more than a single earner family on a much lower income; and the problem of losing hundreds of pound of benefits for a small rise in earnings would remain.

An alternative would be to try to taper the benefit away more gradually. That would tackle the cliff-edge at a cost, but not the unfairness point – and it would introduce a whole bunch of other problems. Who should pay if both parents are higher rate payers? How much paperwork will be involved? And can the state require a parent to tell her/his higher rate paying partner that she/he gets Child Benefit?

All this is mind-numbingly complicated. And all the more baffling for the fact that elsewhere in the benefits system a massive upheaval to the tax credits system is underway at a similar cost in the name of simplicity. Can anyone think of a better way out of the Child Benefit conundrum?


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