Child benefit: fit for the future
60 years of support for children

Three: The importance of child benefit

Multi-purpose
Essential
Simplicity
Take-up
A ladder out of poverty
Payment to the mother
Labelled for children
Stability
Family fluidity

Notes

Multi-purpose

As noted in Chapter 2, child benefit is multi-purpose. It is an instrument of ‘horizontal’ redistribution, from those without children to those with. It acts as a form of savings bank, redistributing resources over the individual/family lifecycle, from those times when people need the money less to those times when they need it more, whatever the level of income they live on. It also performs a ‘vertical’ redistribution function, in that those with children are likely on the whole to be less well off than those without.

Essential

One father who was interviewed in 2006 for the Within Household Inequalities and Public Policy research project for the Gender Equality Network (GEN5)1 said: ‘In an ideal world [child benefit] would belong to the children – and in a way it does, because it helps us live’. And a mother interviewed for the same research, who had had the main responsibility for spending on the children when living on a low income in a previous relationship, said: ‘I had child benefit – as long as I had that, they never went without’. It is not accidental that many organisations with the greatest practical experience of working closely with families living in poverty are among the most enthusiastic supporters of child benefit, because they know that many rely on it.

Simplicity

“[I] put on the political map the idea of the child benefit as a great simplification of the many ways in which our governments had tried to bring help to those caring for our nation’s future citizens.”
Letter to The Times, 29 October 1987, from Sir John Walley, former Deputy Secretary in the Ministry of Social Security in the 1960s

Child benefit is easy to claim and only has to be claimed once for each child, the qualifying rules are simple, and its amount and structure do not change as children get older.2 Its ‘costs of compliance’ are, therefore, low for claimants. It does not distinguish between lone parents and couples, married or unmarried parents, or those in or out of paid employment. In 2004/05, only 1.05 pence in the pound was spent on administration costs,3 compared with some 3 pence in the pound spent on managing and paying child tax credit.4 At a time when the Government is actively investigating the possibilities of simplifying the benefits system, child benefit could be seen as a model.

Take-up

Child benefit has reached more children living in low-income families than any of the benefits or tax credits specifically designed for them, and also reduces the numbers who need them. Means-tested systems have been described as better at excluding all the better-off than at including all those living on low incomes.5 As Peter Kellner once argued:

“If ‘targeting’ is the central aim of the benefits system, then in one important sense universal benefits are better than means-tested ones, for virtually everyone entitled to them takes them up.”6

Child benefit has almost universal take-up, with the Government estimating this recently at 98 per cent.7 The new child tax credit reached 79 per cent of those eligible in its first year, 2003/04.8 But this includes families who were still on income support or income-based jobseeker’s allowance and getting support for their children via those benefits, not child tax credit.9 There were higher take-up rates among the lowest income families, with 93 per cent take-up for families with children on incomes in work of less than £10,000 per year. While this low income group is not broken down between lone-parent and two-parent families, other figures show that 91 per cent of working lone parents,10 compared with 73 per cent of eligible couples with children with one or more earners claimed child tax credit and it is likely that many of those with an earner, and with incomes of under £10,000, will have been headed by lone parents. (Take-up by those entitled only to all or part of the family element was only 69 per cent.)11

The Government should be congratulated for managing to boost the take-up of child tax credit compared with working families’ tax credit and family credit – though this is not really comparing like with like, as it admits.12 The more comparable figure, according to the Government, was 89 per cent take-up of child tax credit among families with children on low incomes in employment, higher than the take-up of working families’ tax credit.13

This is very encouraging. It does follow the pattern of means-tested benefits in the past, when those who had most to claim were more likely to take up their entitlement, and those out of work, and lone parents in work, were more likely to claim than two-parent families with an earner. Take-up of child tax credit is higher. But the reforms to a means-tested system to remove the stigma of claiming – by paying it to parents in and out of employment, by associating it with the tax system, and by including a per family element paid to most families – have still, however successful, not managed to raise the take-up rate to the same level as for universal child benefit. The Government contrasts the number of individuals on child tax credit (20 million) with those on family credit (under 3 million).14 But it would be more accurate if such comparisons also included the children’s rates and family premium in means-tested benefits which low-income families out of work used to get, as well as the various tax allowances/credits for families. Moreover, the report on take-up of tax credits by the Government states that ‘there are a number of methodological challenges involved’ in obtaining a clear picture of take-up, and that whilst many have been dealt with ‘fully or partially’, ‘others ... remain unaddressed’.15 There is presumably room for improvement, therefore, in the take-up figures published.

What is also of concern is the evidence emerging about some families deciding not to renew their claims for tax credits because of their experience of overpayments and administrative problems. This evidence is so far anecdotal. But the published figures on terminations of tax credit awards in 2004/05 show high numbers of families who must be either failing to report their incomes for the previous tax year by the right date, not returning their signed award notice, or ceasing to meet the qualifying conditions.16 The breakdown between these categories is not available, but may suggest that one reaction to the problems some people have experienced is not to renew a claim. Because of the two-part structure of child tax credit, this means that such families would miss out on the family element, to which most families should be entitled, as well as the child element for low- to moderate-income families. And working tax credit, if relevant, would also be lost.

A ladder out of poverty

Child benefit helps provide a ladder out of poverty because it is not reduced when other income goes up. It does not contribute to the unemployment trap – the situation in which people may be little or no better off in work than out – because it is paid at the same level whether a family has a parent in employment or not. This should also be true of child tax credit, which has been described as a ‘seamless’ system of support, once all those on income support and jobseeker’s allowance have been moved onto it. But tax credits still contribute to the poverty trap – the situation in which people may be little or no better off earning additional income – because they are reduced (along with means-tested benefits, such as housing benefit and council tax benefit) when other family income increases when a family has a parent already in employment. Housing benefit and council tax benefit are withdrawn first, and then working tax credit, followed by child tax credit.17

This may act to help dissuade a parent already in employment from working longer hours, or a parent at home in a two-parent family from taking up paid work.18 While the numbers of ‘heads of working households’ with marginal deduction rates of over 70 per cent have been reduced by half a million, from 740,000 to 240,000 between April 1998 and 2006/07, the numbers with rates of over 60 per cent have increased from 760,000 to 1,730,000.19 (The increase in those with marginal deduction rates of 40-70 per cent results primarily from the introduction of tax credits and the extension of working tax credit to new categories of people.) Child benefit, by contrast, provides people with a floor to build on through their own efforts.

Perceived disincentives may be just as important as actual ones. For example, those contemplating going into work often think they will not be entitled to any help with their rent. And it is not clear how important financial (dis)incentives are to parents’ decision making, compared with other factors, such as the ages of their children and the availability of childcare provision. Research has suggested that previous tax credits and associated reforms are likely to have increased employment overall, in particular among lone parents. (Evidence suggests that tax credits contributed nearly half of the rise in lone parents’ employment from 46 to 56 per cent since 1997.)20 This net increase in employment, however, probably included a reduction in second earners’ employment in couples (mainly affecting mothers).21 The Government is aware of this problem and changed the structure of tax credits to try to lessen disincentives for second earners.22 And from April 2006 it has also raised the amount of income disregarded ten times, from an increase of income compared with the previous year of £2,500 to £25,000 to get round some of the recent problems of overpayments.23

But perhaps more important than any potential disincentive effects are the mixed messages which seem to be being sent by the Government if parents’ efforts to increase their income result in high marginal deduction rates, as the withdrawal of tax credits and means-tested benefits is added to the payment of higher income tax and national insurance contributions. This is particularly important now, given the Government’s focus on encouraging ‘second earners’ within couples into employment as a key feature of its accelerated anti-poverty strategy.24

Payment to the mother

CPAG has studied the payment of child benefit to mothers, and revealed how highly it is valued by them.25 This has also been borne out by official studies, including qualitative research commissioned by the Government.26 Research evidence has shown that money coming into the family via the ‘purse’ rather than the ‘wallet’ is more likely to be spent on children.27 In addition, child benefit is particularly valuable for women who may not receive a fair share of the resources coming into the household. There is a series of studies which demonstrates the importance of child benefit to mothers, both as a form of independent income and to meet children’s needs.28 In terms of individual income, around one-fifth of income from benefits (not including tax credits) received by women in 2004/05 came from child benefit.29

Participants in the GEN5 study were asked what they thought about child benefit usually being paid to the mother. There was overwhelming support for this in principle. It was clear that most people just took it for granted. One or two people drew on their own experience to say that it should be paid to whoever is looking after the child. Several people said that it would make no difference in their own relationship, but that they knew of other families where the children would not get as much if child benefit was not paid in this way. One woman said that child benefit provided an ‘independent income’ for mothers.

Child benefit confers protection for the individual’s pension record, through home responsibilities protection, if entitlement to child benefit persists for a whole tax year. This is an important means of preserving the future rights of parents caring for children. This protection is going to be made more flexible under the Government’s recently published pension proposals (contained in a White Paper published in May 2006).

Although child tax credit is paid to the main carer, usually the mother, take-up depends on a joint claim being completed, including details of both partners’ incomes. And child tax credit may be reduced when the other partner’s income increases, without a guarantee that any such increase will be passed on to the person mainly responsible for meeting the children’s needs. Child benefit still seems to be the only almost completely regular and reliable benefit paid for children, and can be claimed without loss of dignity or privacy.30

Labelled for children

An allowance for children should be paid in a way which lends itself to being seen as ‘children’s money’.31 Participants in the GEN5 study were completely clear that child benefit was meant for the children’s needs: ‘…never thought who child benefit belonged to – it never crossed my mind – it’s for the kids’. As one mother said: ‘It was his [her son’s] – to help me provide what he wanted – school trips, shoes etc.’ There was no ambiguity about this. In practice, however, those on the lowest incomes found it difficult to separate it out from the general housekeeping: ‘…we can’t afford to set money aside. It just pays what we need to pay.’ This bears out evidence in Mother’s Life-line: a survey of how women use and value child benefit32 and elsewhere, which demonstrates the constraints on low-income families’ budgets.

Stability

Child benefit provides some security and stability to children and their parents in the changing labour market of the twenty-first century, with its growing proportion of part-time and temporary jobs and increasing self-employment.33 The Commission on Social Justice suggested that the increasing prevalence of fluctuating incomes was one of the reasons why arguments against means-testing were not old-fashioned but, on the contrary, particularly relevant to today’s conditions.34
Those living on low incomes are particularly likely to have incomes that fluctuate. One respondent in the GEN5 research contrasted the stability of child benefit favourably with their experience of income based jobseeker’s allowance and child support:

“Child benefit isn’t like that; it goes towards the kids and it’s a set amount, doesn’t matter what the circumstances. But the others are all forms and paperwork ... it’s not worth the hassle.”

The difficulties surrounding the introduction and impact of tax credits show how important this is. This family had decided not to apply for child tax credit again because of their recent experiences of overpayments and administrative difficulties. This was not the only family in the small GEN5 study in this position. The new tax credits are as vulnerable as all complicated means-tested systems are to administrative overload and other similar problems, and while many low-income families budget on a monthly basis, they operate on annual income.

On average, as a recent study showed, benefit incomes are more variable than net pay.35 But benefits had a mixed pattern, with child benefit being stable,36 which for some families led to somewhat more regular total income.37 In the list of different items of income, child benefit had the highest number of respondents reporting that the amount was ‘approximately the same’ each time they had received it over the past nine months. In nearly a third of cases, on the other hand, income was more variable after tax credits than before.

Family fluidity

Child benefit remains the only benefit for children paid to the main carer in couples regardless of the resources of their partner. It therefore has a child protection function.38 Times of transition (in parental relationships and/or employment status) seem to be associated with severe or persistent child poverty.39 A significant advantage of child benefit, therefore, is that it ‘follows the child’ through changes in the family unit. This makes it a thoroughly modern benefit40 – and is different from child tax credit, for which a new claim must be made with any change in partnership status.41 It is not clear what the scale of this problem is, however, since it seems that information about the number of child tax credit awards which ended in 2003/04 because of a change in partnership status is not available.42

This was one of the reasons why the Women’s Budget Group, in its recent report on the links between women’s and children’s poverty, argued for:

“…higher priority for child benefit within the overall package of financial support for children, as the best means of protecting children, particularly during transitions in parents’ partnership status.”43

It could be argued that the family element of child tax credit performs some of the functions described above, either partially or fully. But it does so only at the expense of higher administrative costs and joint assessment for many couples, because it is still based on an income test, although it represents an attempt to make the tax credit system more inclusive.44

Notes

1 Work in progress as part of the Gender Equality Network funded by the Economic and Social Research Council (RES-225-25-2001) (www.genet.ac.uk – see Project 5). The research for Project 5 is being led by Fran Bennett, Sue Himmelweit and Holly Sutherland, and the qualitative research is being carried out by Fran Bennett and Sirin Sung. The examples here represent preliminary findings only. Subsequent references to the research in this report use the acronym GEN5.
2 Apart from the payment for the first eligible child passing to the next child in families with more than one child as the first child becomes too old to be eligible (hence ‘first or eldest eligible’).
3 House of Commons Hansard, Written Answers 30 March 2006, col 1111W
4 This is calculated by the authors on the basis of the net amount spent on child tax credit in 2004/05 (£10 billion); Department of Inland Revenue, Annual Report and Accounts 2004/05, HC 446, The Stationery Office, 2005 – see Note 3 to Trust Statement, pp77-78
5 J Brown, Child Benefit: investing in the future, CPAG Ltd, 1988
6 Peter Kellner, the Guardian, 12 November 1988
7 House of Commons Hansard, Written Answers 7 March 2006, col 1296W
8 HM Revenue and Customs, Child Tax Credit and Working Tax Credit: take-up rates 2003-04, HMRC, 2006
9 See note 8, p9
10 ‘Work’ and ‘working’ in this publication refer to paid employment unless otherwise specified. This is not intended to imply that unpaid caring is not work.
11 See note 8, p9
12 See note 8, p5
13 Take-up of working families’ tax credit was 62-65 per cent in its first full year, 2000/01, and reached 72-76 per cent in its last year of operation, 2002/03. See note 8, Table 2, p8
14 HM Treasury Press Notice, 1 February 2006
15 See note 8. For example, the source of information about income used in the take-up estimates is the Family Resources Survey. But this asks largely about current income – i.e., providing a snapshot, rather than the annual income level which is the basis of calculating definitive entitlement to tax credits (pp13-14).
16 HM Revenue and Customs, Child and Working Tax Credits Statistics: finalised awards 2004-05, supplement on payments in 2004-05, HMRC, 2006, Table 4
17 Once working tax credit has been withdrawn, the child element of child tax credit is then phased out; but the family element is retained at a flat rate, until an annual joint income of some £50,000, when it begins to be withdrawn. So the ‘poverty trap’ does not bite uniformly up the income scale.
18 Technically, the latter could be described as an example of the unemployment trap. But the Government’s analysis of marginal deduction rates tends to look at families as a unit, not individuals.
19 House of Commons Hansard, Written Answers 22 May 2006, col 1441W. ‘Marginal deduction rates’ means the percentage of an extra pound earned which is reduced by paying additional tax and national insurance contributions and reductions in tax credits and means-tested benefits.
20 D Primarolo, Statement to Select Committee on Treasury for its enquiry into administration of tax credits, 1 February 2006
21 M Brewer and J Browne, The Effect of the Working Families’ Tax Credit on Labour Market Participation, Briefing Note 69, Institute for Fiscal Studies, 2006 (web publication only at www.ifs.org.uk)
22 HM Treasury, The Child and Working Tax Credits, The Modernisation of Britain’s Tax and Benefit System No. 10, HMT, 2002
23 This reduces or eliminates the effect of extra earnings in any one year (although this will be taken into account if it continues in the following year). The impact of the disregard is not reflected in calculations of the numbers subject to certain marginal deduction rates.
24 J Hutton MP, Secretary of State for Work and Pensions, Speech to Fabian Society on launch of Commission on Life Chances and Child Poverty report, 10 May 2006
25 See for example, A Walsh and R Lister, Mother’s Life-line: a survey of how women use and value child benefit, CPAG, 1985. For this study, CPAG sent out a self-completion questionnaire via the Pre-School Playgroups Association, and although the response rate was low, 2,000 questionnaires were analysed.
26 A Hedges and J Hyatt, Attitudes of Beneficiaries to Child Benefit and Benefits for Young People, Social and Community Planning Research, 1985; Department of Health and Social Security, Green Paper, Reform of Social Security, Vol 1 Cmnd 9517 and Vol 2 Cmnd 9518, HMSO,1985
27 J Goode, C Callender and R Lister, Purse or Wallet? Gender inequalities and income distribution within families on benefits, Report No. 853, Policy Studies Institute, 1998; S Lundberg, R Pollak and T Wales, ‘Do Husbands and Wives Pool their Resources? Evidence from the UK Child Benefit’, Journal of Human Resources, Vol. 32, No. 3, 1997 pp 463-480
28 R Walker, S Middleton and M Thomas, ‘Mothers’ Attachment to Child Benefit’, Benefits, September/October 1994, pp14-17
29 Unpublished analysis by the Department for Work and Pensions of data from G Johnson and J Semmence, Individual Income 1996/97-2004/05, Women and Equality Unit, 2006
30 J C Brown, Child Benefit: options for the 1990s, Save Child Benefit, 1990
31 See note 30
32 See note 25
33 F Bennett, ‘Foreword’ in J Brown, Child Benefit: investing in the future, CPAG Ltd, 1988
34 Commission on Social Justice, Social Justice: strategies for national renewal, Vintage, 1994
35 J Hills, R Smithies and A McKnight, Tracking Income: how working families’ incomes vary through the year, CASEreport 32, Centre for Analysis of Social Exclusion, London School of Economics, 2006
36 See note 35, p5
37 See note 35, p50. The authors do point out that fluctuations in some benefit and tax credit income make up in practice for fluctuations in other forms of income, as they are intended to.
38 See note 30
39 L Adelman, S Middleton and K Ashworth, Britain’s Poorest Children: severe and persistent poverty and social exclusion, Save the Children, 2003
40 See note 5
41 See note 22, para 4.7
42 House of Commons Hansard, Written Answers 21 November 2005, col 1579W
43 Women’s Budget Group, Women’s and Children’s Poverty: making the links, WBG, 2005, pv
44 House of Commons Select Committee on the Treasury, The Administration of Tax Credits, Sixth Report, Session 2005-06, HC 811 Vols I and II, The Stationery Office, 2004 suggests that the Government should cost the removal of the family element from child tax credit and its addition to child benefit instead (para 51).