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George Osborne's child benefit cut shouldn't be permanent

By Paul Goodman

Screen shot 2010-10-04 at 15.54.44Can all state payments to better-off people be lumped together as "middle class benefits"?  Some say yes.  I don't agree.  My answer is: no - because it depends what the payment's for.

The Winter Fuel Allowance is a classic "middle class benefit".  Better off older people shouldn't receive an allowance to keep them warm.  Free bus passes for old age pensioners is another.  Both are unjustifiable - which is why, as I've said before, they should go altogether or, given David Cameron's election commitments, be restricted (to, say, the over-75s).

Child Benefit looks like yet another.  But matters aren't quite so simple.  This is because it's not a benefit at all.  It's basically a tax allowance which recognises the costs to parents of raising children.  During the late 1970s, it was reformed, and paid directly to the mother (in most cases) rather than the father.  The change was made because mothers usually bear the brunt of family childcare.  The new payment was called Child Benefit - a mistake because, as we've seen, it's an allowance, not a benefit.

Let's step back from all this, and look at child tax allowances/child benefit from first principles.  There are two main points of view -

  • The state should support all families with children in some way via the tax and benefit system.  The basic case for this view is that the state should support families with children - and not build disincentives to earn into the tax and benefit system by withdrawing family allowances as incomes rise.  I agree with it.
  • The state should only support families with children if they're in genuine need.  The case for this is obvious, but it follows from it that family allowances will be taxed or means-tested as incomes rise, with all the accompanying red tape, poverty traps, take-up problems, anomalies and disincentives to earn that means-testing brings with it.

Which leads neatly to George Osborne's announcement this morning.  I think that it's big, big news - perhaps the beginning of the end of family allowances in Britain.  Gary Gibbon of Channel 4 News had a good post this morning about the past - the post-war history of such allowances in Britain.  Alex Baker of the Financial Times (£) has just as strong a post about the future - and where the Chancellor seems to be going.

All in all, Britain seems to be taking a very different road to many other European countries, which assume that supporting all families (and especially married couples) through the tax and benefit system is in everyone's interest.

The Government's priority must be to reduce the deficit.  For this reason, I believe that Osborne's decision is right for the short-term - despite the startling anomalies. (And watch for possible unexpected consequences, too - such as the effects on women's pension rights.)  Better-off families should help to balance Britain's books.

But in the longer-term, the Chancellor's in danger of writing further disincentives to earn into the tax and benefit system.  It already has in it a 50p top rate which was brought in by Brown simply to "soak the rich", raises little revenue (in the big scheme of things), and is a disincentive to earn.  It also has a 40p rate which bites at just over £40,000 - a threshold that's been reduced by fiscal drag since Nigel Lawson lowered the top rate during the 1980s.

Coalition has meant the shelving of the inheritance tax cut and the postponement of the marriage tax cut - which, again, will apparently be restricted to basic rate taxpayers.  Vince Cable seems to have set himself against any reduction in either the 50p or 40p rates - and both David Cameron and Osborne are keen to keep him on-side.

In short, the Coalition is strong on spending, because its deficit reduction plan is brave and bold, but weak on tax - because disincentives to earn, prosper, and create wealth are increasing, not decreasing.  Once again, one asks: where's the growth agenda?  Osborne should restore the child benefit cut as soon as he responsibly can.


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