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

Four: The history of child benefit: key issues and challenges

Child benefit introduced
Child benefit under threat
Child benefit withering away?
Child benefit reprieved, but restructured
Labour abolishes one parent benefit, reinforces new child benefit structure and restricts entitlement
Child benefit for the over-16s: under scrutiny, but extended
Child benefit to be taxed?
Child benefit withdrawn for truancy?
Child tax credit introduced
Sustainability of child benefit

Notes

Child benefit introduced

Child benefit has now been an established part of the social security system in the UK for almost thirty years.1 It was phased in from 1977 to 1979 by Labour, replacing family allowances and child tax allowances. Child benefit was, therefore, intended to improve the distribution of resources both within the family (by increasing the amount payable to mothers) and between families (by being fairer than child tax allowances). Child benefit was an alternative to the previous Conservative government’s proposals to implement a system of tax credits, which would have led to the payment of family allowances to fathers.2

Eleanor Rathbone and others had campaigned for financial support for children like family allowances for many years before their introduction.3 One telling argument was that attempting to vary men’s wages by family size did not seem sensible, but wages could not be expected to meet the needs of all kinds of family, especially those with several children. Family allowances were introduced in 1946, with the first payments being made on 6 August. At that time, they were only paid for the second child onwards, in a watering down of Beveridge’s scheme under pressure from the Treasury. So child benefit was the first social security benefit payable to all first children as well.4 (This may seem rather paradoxical now, given that the current structure of child benefit means that there is a much higher payment for the first or eldest eligible child.)5 Many mothers in fact still call child benefit ‘family allowance’. The value of family allowances was not maintained throughout the 1950s and 1960s. And, as mentioned in Chapter 1, CPAG was established (in 1965) to lobby the new Labour government for an increase in family allowances as a major means of combating family poverty.

Child tax allowances had a much longer history. They were first introduced in 1798, though they were abolished again in 1805. They were reintroduced in 1909.6 The amounts of child tax allowances paid were related to the age of the child. They were of more value to taxpayers than family allowances, and were worth even more to higher rate taxpayers (the better off) who benefited at their marginal, highest, rate of tax. In addition, they were available for the first child as well, and they continued as long as a child was dependent, even if this went on beyond the age of 18, when family allowances stopped.

Child tax allowances were usually paid to fathers, because men were more likely to be earning. They were obviously meant for children but, as they just formed part of tax-free allowances, they were not separately paid or identified as money for children, unlike family allowances.7 Not surprisingly, they also cost the Treasury more in lost income tax than the amount spent on family allowances. As a Conservative Chancellor put it much later:

“I am clear…that [reintroducing child tax allowances] would not be an effective way of channelling resources to those who need them. A better way of directing help straight into the pockets of mothers…is child benefit.”8

Child benefit under threat

Labour had originally intended to merge family allowances and child tax allowances in the new benefit called child benefit in the mid 1970s, but under financial pressure originally decided to abandon these plans. CPAG revealed leaked Cabinet papers about the way in which this volte-face had happened.9 The public furore this caused helped to lead first to the introduction of one parent benefit, a small non-means-tested benefit for lone parents, and then to the phasing in of child benefit from 1977 to 1979.

When the Conservatives came to power in 1979, therefore, child benefit had only just been fully phased in. And it had been introduced by Labour. For the new Conservative government, child benefit was popular and did not create disincentives to work, but it was also universal and cost a lot. And it was a benefit, not a tax allowance or tax relief, so it increased public expenditure. No increase was implemented in 1979 by the Conservatives, despite the existence of legislation which by then obliged governments normally to index-link personal tax allowances,10 and a suggestion from the Conservative Party that it would treat child benefit in the same way in government:11

“…Tensions within the party led eventually to the decision to retain the benefit but increase its value well below the rate of inflation in 1980.”12

But, after much pressure from CPAG and others, the Government did make good the resulting shortfall in the value of child benefit before the 1983 election. Child benefit was, however, still seen as ‘welfare’ spending.

There was then a major social security review, announced by the Conservative government in 1984 and leading to a Social Security Act in 1986, with a new system being introduced in 1988. Many supporters of child benefit believed that it might be abolished, means-tested, or taxed. CPAG was the catalyst behind the formation in 1985 of Save Child Benefit, a grouping of originally about sixty organisations, ranging from women’s organisations to trades unions and from churches to children’s charities. In the event, as a result of campaigns by Save Child Benefit and others, child benefit was retained. Indeed, the relevant Green Paper opened its chapter on support for children by stating:

“The principle that we should give financial support to those who bear the extra responsibility of bringing up children is one to which this government are committed.”13

And it described child benefit as ‘simple, straightforward, well understood and preferred as it is.’

Child benefit withering away?

In the middle of the social security review in 1985, however, child benefit was cut in real terms by 5 per cent.14 In 1986 and 1987, it was increased in line with prices, but the cut was not made good. And after 1987, child benefit was frozen for three years at £7.25 per week per child. Save Child Benefit argued that families on the basic tax rate got less support for their children than in the 1950s. The Government made clear that its priorities were tax cuts (especially in the 1988 Budget) and a new structure of means-tested benefits, which was introduced in 1988. Even supporters of child benefit were arguing that it might be better to make changes to secure the future of support for all children.15

So by the late 1980s, Save Child Benefit had over seventy national organisations as members, and debate was again rife about the future of child benefit. Rumours of an internal government review abounded: ‘universal child benefit ... is to be consigned to a slow death’.16 One argument was that it was outdated and no longer necessary.17 Women’s equality had progressed so far, it was argued, that women did not need an independent income from child benefit. The economy had grown and better-off people had benefited from tax cuts, so they did not ‘need’ child benefit. ‘Targeting’ was the buzzword of the day, and means-testing was (paradoxically) presented as somehow new and modern. In opposition, as noted earlier, Conservatives had seemed to see child benefit increases as equivalent to tax cuts for families; this was no longer mentioned. The fear was that child benefit might either be allowed to wither away until it could be argued that it was not worth keeping, or be radically restructured by means-testing or taxing it.

Malcolm Wicks (then Director of the Family Policy Studies Centre) wrote that child benefit had only been saved by the existence of a comma in the sentence in the Conservative election manifesto of 1987 that ‘child benefit will continue to be paid as now, and direct to the mother.’18 He argued that, had it not been for the comma, child benefit could have been means-tested. Yet, as one commentator pointed out, no one had suggested that personal tax allowances be taken away from ‘the rich’.19 It was only child benefit, as a benefit rather than a tax relief or allowance, which was threatened in this way, despite the fact that public expenditure and revenue foregone – money not collected in tax – have the same effects on the economy. This suggested that there was a double standard in operation, for ideological rather than practical reasons.

Child benefit reprieved, but restructured

Many proposals were put forward to restructure, reduce or radically change child benefit. But in 1990, the Government, under its new Prime Minister John Major, declared that child benefit ‘is and will remain a strong element in our policies for family support’. It announced a restructuring of child benefit, to introduce a higher rate for the first or eldest eligible child. There would be an increase of £1 per week, but only for the first or eldest eligible child, from April 1991, and a further increase of £1 per week from October 1991 (together with 25 pence extra for other children). The Government also pledged to increase child benefit in line with inflation in future.

As a result of this reprieve, Save Child Benefit symbolically announced that it would rename itself the Coalition for Child Benefit. But there was criticism of the new structure of child benefit, with its higher payment for the first or eldest eligible child. The rationale put forward by the Government was that there was a larger difference between the resources of those with one child and no children, compared with the difference between families with one child and those with more children. But this justification was examined and found wanting.20 Among other things, one study examined the Government’s argument that a major reason for the difference in income relative to needs between people with and without children was not just the direct costs of children (such as food and clothing) but also indirect costs, especially in foregone earnings – the likelihood of one parent, usually the mother, giving up paid work. But a few pounds extra in child benefit could not make up for this, and also confused the indirect costs of having children with the direct costs.

Other studies using different approaches over the next few years found that having any children at all did make more difference to costs than the number of children,21 but that, while the first child did bring greater costs, larger families tended to fall into lower income groups.22 The real reason for the new structure of child benefit was in reality probably political, in that it was the cheapest way for the Conservative Government to ensure that every family with dependent children received an increase in child benefit.

So child benefit increased in cash value under the government of John Major (1990-97), which was much less hostile to it. The differential between the first child and others increased significantly. For the first child, child benefit was close to its 1987 value. But overall, between 1979 and 1997 total financial support for a family on average earnings with two children fell by 6 per cent because of the previous freezing of child benefit and because the direct tax contribution from such a family, taking account of child benefit, rose from 19 to 21 per cent.23

Labour abolishes one parent benefit, reinforces new child benefit structure and restricts entitlement

Before the 1997 election, the Conservatives had committed themselves to abolishing the additional benefits for lone parent families. One parent benefit (the addition to child benefit for lone parents, originally introduced in 1976) was therefore frozen in the 1995 Budget. Labour won the election, but continued with the Conservatives’ policy intention by incorporating one parent benefit into the main child benefit rates. In July 1998, it was abolished for new claimants; existing claims were frozen, but no new claims were accepted. The new Labour Government was keen to prove its credentials in terms of managing the economy, and so had persevered with the Conservative Government’s proposed cuts, despite evidence suggesting that there was a case for a form of one parent addition for child benefit.24 While one parent benefit was only a small amount, there was strong opposition to the reduction of benefits for lone parents, including a backbench rebellion by Labour MPs. For most families, the subsequent increases in benefits for all children have compensated for this,25 but it took several years for them fully to do so.

The Labour Government then not only retained but also reinforced the new structure of child benefit, with its higher rate for the first/eldest eligible child. Between April 1997 and April 2003, the rate of child benefit for the first child increased by 25.3 per cent and the rate for subsequent children by 3.1 per cent in real terms.26 Most of this increase took place in 1999 for the first/eldest eligible child, with additional small real increases for all children in April 2000.

In 2004, the Government introduced new immigration rules, which now mean that someone has to have a ‘right to reside’ in the UK in order to be able to claim child benefit, therefore excluding many migrants from entitlement.

Child benefit for the over-16s: under scrutiny, but extended

The abolition of child benefit for the over-16s was also mooted before the 1997 election. This may also have been intended to convey a tough message about Labour’s ability to control public spending and manage the economy. Labour argued that child benefit was not ‘universal’ for the over-16s because some did not receive it. But this was because they did not qualify under the eligibility rules because they were no longer in full-time non-advanced education. At one point, it looked as though the Government was going to abolish child benefit for the over16s to pay for the national extension of the pilots of means-tested educational maintenance allowances paid direct to children from low-income families staying on at school. This was despite evidence that child benefit made an important contribution to the incomes of families with 16 to 18-year-olds.27

However, in the 2002 public expenditure review, the Government stated that educational maintenance allowances would be paid for by reduced social security spending and debt repayments, rather than by withdrawing child benefit for older children.28 This was important, in that it allowed parents to continue to receive some income to maintain their children. And in fact, in the subsequent review of financial provisions for young people, ‘Supporting Young People to Achieve’, the Government took the opportunity to extend eligibility for child benefit. Under the 2005 Child Benefit Act, child benefit is now available for young people completing a course which they started before their nineteenth birthday (up to age 20). Those in specific unwaged training programmes will also be eligible.29 These reforms rectify long-standing anomalies.

Child benefit to be taxed?

In April 1997, child benefit was £11.05 per week for the first or eldest eligible child and £9 per week for other children. In the March 1998 Budget, the Chancellor announced that from April 1999, the rate for the first or eldest eligible child would be increased significantly – by £2.50 per week in addition to the normal uprating.30 But he also said that were child benefit to be raised in future, there would be a case for child benefit payments to be taxed, at least at the higher tax rate. However, research by the Institute for Fiscal Studies demonstrated that to do this ‘either raises almost no revenue or significantly increases the complexity of the tax system while raising relatively little revenue.’31 The alternative suggested was a decrease in the higher rate tax threshold for everyone, with the revenue spent on increasing child benefit and related benefits.

Save Child Benefit had argued that it would seem odd to tax a benefit that had developed in part from a tax allowance. The Social Security Select Committee also questioned the proposal, suggesting that unmarried couples would evade the tax and urging the Chancellor to avoid breaching the principle of independent taxation.32 The suggestion of taxing child benefit has never been taken any further and this government is now on record as saying that it will not tax child benefit.33

However, this was not the final word on taxation. The married couple’s tax allowance, after being reduced in value, was abolished in 2000.34 Over 6 million couples who received it had no children.35 The Government was aware of the arguments, put by CPAG among others, that the resources released as a result should be directed into child benefit, and in fact said that it had used the savings from phasing out the allowance to help fund the increase in child benefit in 1999. But it was also keen to develop further its ideas for additional means-tested support for children directed through the tax system.

It could not do so immediately, though.36 So in the meantime – though only after a year’s delay – it introduced an interim mechanism known as children’s tax credit (one per family, like the married couple’s allowance). This was a traditional form of tax credit, more like a tax allowance, which was not available to those who did not have enough income to pay any income tax. It only lasted for two years (2001/02 and 2002/03). About 5 million families were eligible,37 some via self-assessment. Most couples could choose how they shared the tax credit (or not), but in couples with one partner on higher rate tax, that partner had to claim, and it was withdrawn as income increased. Some of the complications envisaged in taxing child benefit therefore applied to this temporary tax credit.

Child benefit withdrawn for truancy?

In 2002, the Prime Minister suggested taking child benefit away from parents whose children were persistently truanting from school.38 This was despite the fact that the Social Exclusion Unit had reported on truancy in a report published in 1998 which made no mention of financial penalties as one of the policy options. As research shows that child benefit is seen as specifically for children, any such withdrawal was likely to be detrimental to children’s welfare. In separated families, it was also likely to punish the parent who was already trying to take responsibility for the child/ren. The proposal was withdrawn several months later in response to criticism, including from within government.39 As Ruth Lister (former CPAG Director) wrote in a letter to the press, ‘the many objectives of child benefit have never included the inculcation of good behaviour’.40

Child tax credit introduced

From the time Labour took office in 1997, the Chancellor was enthusiastic about introducing something in the UK resembling the earned income tax credit in the United States. But the Government was not able to introduce tax credits in the form it favoured immediately. So working families’ tax credit was implemented in 1999, replacing family credit (a benefit, despite its name) as an alternative form of in-work support for families with children. The Government initially wanted to pay working families’ tax credit through the pay packet, but after widespread opposition – and new research evidence confirming the importance of paying money for children to mothers41 – it decided to give couples the choice of who claimed and was paid.

In April 2003, the Government introduced new tax credits – working tax credit and child tax credit – to replace working families’ tax credit. Support for children was separated from support for low income in work. Child tax credit rolled up means-tested allowances for children whose parents were in and out of work,42 and subsumed children’s tax credit. All remaining non-means-tested additions for children were to be phased out for new claimants, except for child benefit. Child benefit administration was moved to the Inland Revenue (now HM Revenue and Customs) at the same time, to match child tax credit.43

Child tax credit has two elements – a per family payment and a per child payment – and the only part families on higher incomes may get is the per family payment. For families above a low to moderate income, this is essentially a flat-rate payment, which begins to be withdrawn once joint income reaches some £50,000 per year. The per family element of child tax credit is doubled in the first year of a baby’s life. Child tax credit is paid to the main carer; it is up to the couple to declare which of them is the ‘main carer’.44

Child tax credit has generally been welcomed as a rationalisation of existing means-tested help for children, as a payment which will not vary solely as a result of parents’ employment status and because it is significantly more generous than previous means-tested support. The Government’s claim that child tax credit ‘builds upon’ child benefit was intended to support its definition of ‘progressive universalism’: ‘support for all, and more help for those who need it most, when they need it most’.45 But in practice child benefit remains completely separate from child tax credit. The family element of the child tax credit has been frozen recently, while the child element of child tax credit is being increased in line with earnings, and child benefit in line with prices.

Sustainability of child benefit

The history of child benefit above shows that it has been resilient to a series of threats over nearly thirty years since its introduction. The only significant changes have been the new structure giving more to the eldest child from 1991 onwards, and the rules enacted in 2004 which restrict child benefit to those with a ‘right to reside’ in the UK. (One parent benefit for lone parents had also been abolished.) In comparison, means-tested support for children has been changed many times.

A benefit which goes to virtually all children is of course expensive. But it can also be argued that it is more likely that such a benefit will have ‘substantial and wide-ranging support’,46 and may be difficult to abolish; provision for the poorest children only, whilst cheaper, is often more precarious. The multiple purposes of child benefit, as described above, mean that it has many constituencies of support. The Government has tried to imitate this in the new child tax credit, in particular by incorporating the family element, which means that child tax credit was intended to be paid to some nine out of ten families with children following an income test. But so far, it does not appear to have succeeded in ‘branding’ child tax credit in the same way as child benefit, despite the generous help which child tax credit undoubtedly gives to many families.

Notes

1 J Bradshaw and C Stimson, Using Child Benefit in the Family Budget, The Stationery Office, 1997, provides a useful history of both child benefit itself and publications about child benefit, though only up to 1997.
2 See note 1
3 E F Rathbone, The Case for Family Allowances, Penguin, 1940
4 If (as CPAG would argue) tax allowances and reliefs are seen as equivalent to cash benefits, child tax allowances were the first form of family support to be paid to first children.
5 This means that in a family with more than one child, the higher rate of child benefit passes to the second child once the first child is old enough to be no longer eligible (and so on, in larger families).
6 J Brown, Child Benefit: investing in the future, CPAG Ltd, 1988
7 J C Brown, Child Benefit: options for the 1990s, Save Child Benefit, 1990
8 Norman Lamont MP, Chancellor of the Exchequer, Budget speech, 20 March 1991, reported in Financial Times, 21 March 1991, p20
9 New Society, 17 June 1976; H Land, ‘The Child Benefit Fiasco’ in K Jones (ed), The Yearbook of Social Policy in Britain, Routledge and Kegan Paul, 1977
10 This is usually known as the Lawson-Rooker-Wise amendment, and means that there is a usual presumption of annual index-linking, in order to counteract ‘fiscal drag’ (more income being drawn into the tax net automatically because of the effects of inflation).
11 Private Office of the Prime Minister in a letter to CPAG, May 1979
12 J Clasen, Reforming European Welfare States: Germany and the UK compared, Oxford University Press, 2005, p167
13 Department of Health and Social Security, Green Paper, Reform of Social Security, Vol 1 Cmnd 9517 and Vol 2 Cmnd 9518, HMSO, 1985, p47
14 Save Child Benefit leaflet, 1990
15 See note 7
16 David Hughes, Sunday Times, 23 October 1988
17 This was examined by F Bennett in J Brown, Child Benefit: investing in the future, CPAG Ltd, 1988
18 The Independent, 26 October 1989
19 Janet Daley, in the Independent, 1 November 1989
20 J Ditch, S Pickles and P Whiteford, The New Structure of Child Benefit: a review, Coalition for Child Benefit and CPAG, 1992
21 R Berthoud and R Ford, Relative Needs, Policy Studies Institute, 1996 and Social Policy Research Findings 109, Joseph Rowntree Foundation
22 R Dickens, V Fry and P Pashardes, The Cost of Children and the Welfare State, Social Policy Research Findings 89, Joseph Rowntree Foundation, 1995
23 HM Treasury Press Release, 5 April 2001
24 As commentators have noted (for example, S Adam and M Brewer, Supporting Families: the financial costs and benefits of children since 1975, The Policy Press for Joseph Rowntree Foundation, 2004), there is still some recognition of lone parents’ position in parts of the financial support system, in that they have the same allowance structure as couples for working tax credit.
25 K Stewart, ‘Towards an Equal Start? Addressing childhood poverty and deprivation’ in J Hills and K Stewart (eds), A More Equal Society? New Labour, poverty, inequality and exclusion, The Policy Press, 2005, pp143-165
26 Department for Work and Pensions, Abstract of Statistics 2003, DWP, 2003 cited in K Stewart, ‘Towards an Equal Start? Addressing childhood poverty and deprivation’ in J Hills and K Stewart (eds), A More Equal Society? New Labour, poverty, inequality and exclusion, The Policy Press, 2005 (April 2003 prices)
27 See note 1
28 It has been suggested that this was linked with the Government’s decision to introduce higher education tuition fees (Financial Times, 16 January 1998) – ie, that ministers thought it would be damaging for the Government to impose both at once.
29 Child Poverty Action Group, Welfare Rights Bulletin 191, pp3-4
30 This was also passed on to families on income support, via an increase of the family premium.
31 T Clark and J McCrae, Taxing Child Benefit, Institute for Fiscal Studies, 1998, p12. This is in part because of the effects of independent taxation, introduced in 1990, and in part because the vast bulk of taxpayers do not pay tax at the higher rate.
32 Social Security Select Committee, Child Benefit, HC 114, Fourth Report, Session 1998-1999, The Stationery Office, 1999
33 See for example, House of Commons Hansard, Written Answers 12 January 2006, col 765W
34 The additional personal allowance, the equivalent for lone parents, was also phased out at the same time.
35 House of Commons Hansard, Written Answers 24 March 1999, col 255
36 HM Treasury, The Child and Working Tax Credits, The Modernisation of Britain’s Tax and Benefit System No. 10, HMT, 2002, para 2.28
37 HM Treasury Press Release, 5 April 2001
38 The Times, 30 April 2002
39 The Independent, 19 July 2002
40 The Independent, 20 July 2002
41 For example, 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
42 Not all families out of work have been moved onto child tax credit yet, but this is expected to happen imminently. In the meantime, they are receiving the same amount of support in their means-tested benefits as those already on child tax credit.
43 Working tax credit, which is available to childless people too and is claimed on the same form as child tax credit for families with someone in paid work, is not dealt with in detail here. Neither are the changes to in-work support for disabled people and some of those aged 50 plus.
44 In cases of dispute, couples can contact HM Revenue and Customs, which uses guidance to determine the issue.
45 HM Treasury, Budget 2003: building a Britain of economic strength and social justice – economic and fiscal strategy report, and financial statement and Budget report, HC 500, The Stationery Office, 2003, para 5.1. See also M Brewer, T Clark and M Wakefield, ‘Social Security in the UK under New Labour: what did the third way mean for welfare reform?’, Fiscal Studies, Vol 23, No 4, December 2002
46 See note 7