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The Government is to take the axe to middle class benefits. So it should.

By Paul Goodman

DUNCAN SMITH 2 The main political story of the day is shouting out from the newspaper front pages.  The Times, the Daily Telegraph and the Daily Mail all lead with a coming bonfire of the benefits - in this case, those paid to the middle classes.  The Winter Fuel Payment will be scaled back.  Child Benefit probably will be too.  The Child Tax Credit and Child Trust Funds have already been pruned.  A senior official is quoted as saying that "Everything is on the table."

All this is Iain Duncan Smith and George Osborne's way of solving the problem recently described by the Taxpayers Alliance.  It pointed out that there's generally an "iron triangle" to welfare reform - that it's impossible at once to "directly raise the incomes of the poor, increase the employment of the poor and reduce welfare spending". Osborne's priority as Chancellor is to reduce welfare spending.  Duncan Smith's, as a champion of social justice, is to increase the employment of the poor (thus raising their incomes).

The two have thus been at loggerheads about the degree to which welfare savings should be used to help pay off the deficit or reform the welfare system.  Iain Martin recently reported a stand-up row between the two men over the matter.  Duncan Smith has been pushing for reductions in middle class welfare payments - thus reducing welfare spending without decreasing either the incomes or employment of the poor, and simultaenously solving the iron triangle problem.  Tim has been suggesting this answer for some time.

It sounds as though George Osborne, who gave a major speech yesterday after coming back from holiday, reached a deal with Duncan Smith on his return (for whom it's a victory).  The case for cuts in middle class welfare is unanswerable.  There's no point in taking money from people in tax and giving it back in benefits - minus the sums sliced off to feed the bureaucracy set up to run the system.  All else being equal, the Winter Fuel Payment should be scrapped entirely.  It was a Brown boondoogle to buy the votes of older voters, but rich pensioners don't need subsidies to heat their homes.

Child benefit is a different case.  It's essentially not a benefit, but a tax allowance - albeit one usually paid to the purse rather than the wallet.  There's no sense in taxing or means-testing what's essentially a tax allowance.  Furthermore, as Osborne argued in his budget speech, "to tax it would mean that working mothers received less than the non-working partner of a millionaire.  Means test it and we would have to create a massively complex new system to assess household incomes".

That's why he rightly chose to freeze it for three years.  He should go further.  The Government's hemmed in by the terms of Conservative pre-election commitments (David Cameron wanted to ward off accusations of a coming Tory slash-and-burn attack on welfare) and the post-election Coalition Agreement.  But Ministers still have plenty of room for manoevre.  Child benefit's of greatest value to couples when a working mother's losing income to care at home for a very young child.  It should be scaled back for older children.

Such a move wouldn't break the Coalition Agreement.  Nor would raising the Winter Fuel Payment qualifying age to 75.  Nor would making a similar move in relation to pensioners' free bus passes.  Such action would raise a complaint: why should the middle classes bear the burden of bailing out Britain?  I asked the question myself recently in the Daily Mail.  It takes one back to the fundamental purpose of benefits and taxes.  Sure, better off people shouldn't be getting welfare payments.  But they shouldn't be paying so much tax, either.

After all, high taxes simply create disincentives to earn, thereby preventing worse off people from becoming better off (while also decreasing revenues in the medium term).  The real test for the Coalition isn't whether or not it should scale back middle class welfare. (It should.)  It's whether it will cut taxes if the deficit's tamed and growth comes.  Capital Gains Tax has been raised by ten per cent.  Inheritance tax cuts have been shelved.  Vince Cable's holding out against longer-term higher rate income tax cuts.  To date, the Government's made a good start on welfare, but the prospects for tax don't look as encouraging. 


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