Cut child benefit but not tax credits | Julian Le Grand
If an income benefit for children is to be defended, tax credits are a better way of reaching the poorest parents than child benefit
Recently, Zoe Williams and I (separately) defended the universality of child trust funds. Part of our argument was that one of the benefits is its impact on savings. As the recent economic crisis has demonstrated, there is a universal market failure on savings. Even the middle-classes do not save enough for themselves or their children, so successful long-term savings schemes such as CTFs, into which grandparents and friends can save as well as parents, serve an important economic function as well as a social one.
Now the Guardian reports that another universal benefit directed at children is under threat: child benefit. A much bigger one this time: at £11.8bn this year, the cost of child benefit is more than 22 times the cost of CTFs (£520m). Should the universality of child benefit be defended too? Should the middle-classes get as much as the poor, or indeed get it at all? If so, on what grounds?
Child benefit supplements incomes and expenditures, rather than savings. And it has to be said that, unlike savings, there is not much sign of a universal market failure with respect to income or expenditure. There is no evidence of which I am aware that the middle-classes spend too little on their children – rather, we can all provide anecdotes suggesting that they spend too much. In any case, there is certainly little indication that they need government encouragement to spend more.
So the only real defence of universal child benefit has to be the usual one of the undesirability of the alternative: means testing. If a benefit is not universal, but is dependent on household income or means, then this can lead to complexity and stigma and, in consequence, discourage take-up, especially among those who really need it.
Excessive means-testing can also create a disincentive to work. The more you work, the more you earn; but the more you earn, the more benefit you lose.
But the relatively successful experience of the means-tested child tax credits has rather dented those arguments. The take-up rate in terms of eligible families is around 80%, and, in terms of the proportion of the eligible money claimed, it is about 89% – not much sign of discouragement there. And the previous government made considerable efforts to reduce the size of any work disincentives, especially for second earners. In fact, there is evidence that tax credits may have increased employment, particularly among lone mothers.
So, if an income benefit for children is to be defended at all, it would probably be best to concentrate on tax credits. Like child benefit, they are paid to the mother. Most of the spending goes on people for whom markets do fail: the poor and disadvantaged. They do not discourage work and, precisely because they are means-tested, they are more redistributive, so they have a greater impact than child benefit on what is perhaps the most unfortunate legacy of the previous government: the persistence of inequality.
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