Is George getting cold feet about his plan to scrap Child Benefit?
Ever since the Chancellor announced that he was to scrap Child Benefit for higher rate taxpayers from January 2013, the proposal has been like a rumbling appendix in the coalition Government's digestive tract. In theory, the LibDems are all for redistributing some wealth from the well-off to the less well off, but many Conservatives are finding this very difficult to swallow. But could George be softening his hard stools stance, and could we see a more equitable solution some time soon?
Like many headline grabbing PR stunts of tax policies, George didn’t really think through his shiny new policy before he announced it at the 2010 Conservative Party Conference. The cull on Child Benefit, which had previously been praised for its universal application, will only apply where one parent is a higher rate taxpayer. On current figures (for 2011/12 and 2012/13) that would mean earning £42,475 a year or more. The problem is that this is a very arbitrary measure and actually punishes the stay-at home parent- where two parents work, they could each earn just over £42,400 a year, total family income £84,800, and still get to keep their child benefit. And no matter what your politics, this doesn’t seem very fair.
The Institute for Fiscal Studies (IFS), who estimate the cap will save the Treasury around £2.4 billion in 2013-14, are also not fans of the policy as-is. They calculated that 1.5 milion families would lose their beneft, and that the “cliff-edge feature of the policy” — where all benefits are lost when crossing a threshold by £1— would “create a bizarre and economically damaging set of incentives for people within certain income bands”.
For example, a couple with two children currently receive about £1,750 per year in Child Benefit. If only one parent is working that parent would have to earn an additional £3,000+ a year to make up the difference, after taking account of income tax and NI contributions. Someone earning £42,400 would therefore be financially better off refusing a pay rise of £2,500 a year, which would take them over the Child Benefit cut threshold.
So far the Government have been stubborn steadfast in their commitment to follow through with their ill-conceived plans, regardless of the torrents of criticism, so why are there official murmurings of a rethink now gathering ground?
It’s all a case of damage limitation. Later today, a House of Commons debate is likely to see a number of Conservative backbenchers speak out against their own party. Many doubt the Government would be able to get enough support to pass any bill containing the provisions as they stand.
Mark Reckless MP, one of the leading Tory opponents of the move, told The Daily Telegraph: “None of this deals with the fundamental unfairness of taking benefits away from single earners while allowing double earners to keep it for up to twice that threshold. I am not convinced that enough Conservatives will support it to get it through if Labour maintains their opposition.”
Treasury officials have so far refused to make any comment on the details of any changes but confirmed that a number of ideas were being considered to “make it better”. Any official announcement is likely to be withheld until the Budget on March 21.
So far, three ideas are being mooted:
The first would be to simply increase the cap from £42,475 to £50,000 to allow more families to keep their benefit. However, this would just make the inequity worse, as then doubl earners could bring in up to £100k and still get their four-weekly handout.
Another possibility is to only apply the cut to benefit, but at the same income level, when children reach the age of five. Currently, parents can automatically claim the benefit until their children are 16, and up to the age of 20 if they are in qualifying (non-higher) education.
A third idea is to only take away half of the benefit from families in which only one earner pays higher rate tax on their income. This would still punish families with one higher rate earner and not those with two high-but-not-high-enough earners though, albeit not taking quite as much from them each year.
So, although the exact form of the change to Child Benefit is currently undergoing some remodelling, the final (?) version of which is likely to be revealed in a couple of weeks’ time, it seems clear that there will be a change to Child Benefit, it just might end up being slightly more acceptable than the current proposals.