In the News
06 October 2010
The Welfare State
The announcement by Chancellor George Osborne of plans to cut child benefit for people on the top rate of income tax has created a mixed reaction - to say the least. For some time it has been argued that universal benefits were a luxury and things like the winter fuel allowance, the TV license fee for the elderly and child benefit, imposed huge financial burdens on the welfare state which the UK could not afford. These benefits are given to everyone - hence the term universal - regardless of their financial position. It means that a person earning £250 000 a year receives the same benefits as someone earning £25 000 a year.
Child benefit at the time of writing is £20.30 per week for the first child and £13.40 per week for each subsequent child. Mr Osborne has decided that the UK cannot now afford to maintain universal child benefits and that the appropriate cut-off point for claiming it is where an individual qualifies for the 40 per cent tax rate, which in 2013 when the cut will come in, will be around £44 000. On first inspection of this decision the equity argument seems fair; does a person earning £846 per week and above really need the extra income that child benefit provides? Is it fair that a millionaire aged 76 can get his/her TV license fee paid by the state? There are many people who would agree that universal benefits like child benefit is well overdue for reform. Mr Osborne was at pains to point out that 8.8 million families would not be affected by the proposal and that only 15 per cent of households (around 1.2 million families) would lose the benefit.
On the other side of the argument are those who believe that universal benefits are a right for everyone regardless of income or wealth and that Mr Osborne had promised at last year's Conservative Party conference that such benefits would be safe in his hands. Critics have pointed to the fact that the marginal tax rate for someone entering the higher rate tax band will be very high; an individual with three children for example, would lose around £2 400 at this point. There may be significant disincentive effects which begin to take effect as a result. In addition, there is considerable anger expressed by many that a couple, with each earning £42 000, would still be eligible for child benefit.
The Chancellor has countered this argument by pointing out the trade-off between equity and efficiency. If additional rules were introduced to try and smooth out such anomalies the whole system would become even more complex and many people as a result might lose out. Mr Osborne pointed to the extensive efforts made by Gordon Brown when he was Chancellor to make the child tax credit very fair which resulted in such a complex system that thousands of families received incorrect payments which later had to be clawed back.
It is likely that child benefit will not be the only universal benefit that will be targeted as plans for the Coalition Government's cuts are finalised. The announcement by the Chancellor marks the start of one of the most fundamental upheaval of the benefits system for many years. No doubt there will continue to be sharply divided opinion on the decisions that will be made.