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

Five: The value of child benefit over time

Notes

In 2006/07, child benefit is worth £17.45 per week for the first/eldest eligible child.1 Other children receive £11.70 per week. This chapter examines how child benefit has got to this level, and how it has varied in both its purchasing power (that is, in relation to prices) and its relationship to typical living standards (for which average earnings is used as an indicator). It asks two central questions:

• How has the value of child benefit and its different rates varied over time?
• What would child benefit be worth now if it had been uprated consistently in line with either prices or earnings?

This examination does not go back to the beginning of family allowances in 1946, but starts with child benefit in the late 1970s. For clarity, most of the analysis in fact begins in 1979 (after the full implementation of child benefit). For simplicity, it also ignores one parent benefit, an addition for lone parents, which was integrated into child benefit and abolished for new claimants in 1998. Chapter 4 on the history of child benefit gives more detail on the background to the changes in the value of child benefit described below.

Following its full introduction in 1979, child benefit was increased by less than the rate of inflation. It then rose in value to the mid 1980s. But following the implementation of the 1986 Social Security Act, which repealed the statutory requirement to consider an annual increase in child benefit,2 child benefit was frozen for several years. Before 1991, the rates for the first child and subsequent children were equal; but, as explained in Chapter 4, a new higher rate was introduced for the first/eldest eligible child in 1991, and the rate for other children was frozen for longer. At the same time as this new structure of child benefit was created, the Government committed itself to increasing child benefit with price inflation from 1992 onwards.

Inflation-related uprating has protected the value of the rate for second and subsequent children in relation to prices through the 1990s and up to the present day, but it has not reversed the decreases in value in the 1980s. The gap between the first and subsequent child rates was increased in 1999, with a one-off increase directed at the first child that more than reversed the 1980s reduction in the value of child benefit for these children. As the Government said in its response to the Work and Pensions Committee’s report on child poverty, it has increased the rate of child benefit for the first or eldest eligible child by 25 per cent in real terms.

The Appendix records the rate of child benefit in each year since its introduction. There is no current statutory requirement to uprate child benefit,3 though in recent years the practice has been to uprate it annually with increases in prices, in line with movements in the retail prices index. Different uprating policies have been used over the period to protect, or reduce, the value of different elements of child benefit compared with inflation and with changes in living standards (as over time incomes have risen faster than prices). Figure 5.1 expresses the rate of child benefit in real terms – ie, holding its value constant over time in terms of April 2006 prices.

Figure 5.1

Child benefit in real terms (2006 prices), 1979-2006

Note: benefit rates are drawn from Institute for Fiscal Studies, Fiscal Facts, available at www.ifs.org.uk, accessed June 2006. The rates have been converted into 2006 prices using Department for Work and Pensions, The Abstract of Statistics for Benefits, Contributions and Indices of Prices and Earnings: 2004 edition, DWP and National Statistics, 2005 (figures prior to 1987) and National Statistics, Retail Prices Index: monthly index numbers of retail prices 1948-2006 (RPI) (RPIX), downloaded from www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=229&More=N&All=Y, accessed June 2006.

By 2006, therefore, the first/eldest eligible child rate was worth more in real terms than in the 1980s, and the rate for other children much less. However, over the same period growth in average earnings outstripped prices as living standards rose. Many people would argue that child benefit and other benefits should be uprated in line with prices or earnings, whichever is higher, in order that those claiming them keep up with any improvement in general living standards. Examining the value of child benefit as a proportion of average earnings offers a measure of the extent to which children – through child benefit – have gained (or not) from rising living standards in society as a whole.

Figure 5.2 examines what each element of child benefit is worth as a percentage of average earnings. If children shared equally in any growth in average earnings, the percentage would hold constant. By contrast, the chart shows that the value of each element declined consistently after the mid-1980s (with exceptions for first children in the early 1990s, and with the one-off increase to the first child rate in 1999). The increases to the first child rate in the 1990s arrest a falling trend, but are eroded by the subsequent growth in average earnings, while child benefit only went up with prices. The rate for second and subsequent children has fallen, being worth 2.7 per cent of average earnings in April 2006, compared with around 5.2 per cent in 1979.

Figure 5.2

Child benefit as a share of average earnings (1979-2006)

Note: benefit rates are drawn from Institute for Fiscal Studies, Fiscal Facts, available at www.ifs.org.uk, accessed June 2006. Average earnings have been estimated from National Statistics, 2005 Annual Survey of Hours and Earnings, downloaded from www.statistics.gov.uk/StatBase/Product.asp?vlnk=14203, accessed June 2006, deflated using the average earnings index drawn from Department for Work and Pensions, The Abstract of Statistics for Benefits, Contributions and Indices of Prices and Earnings: 2004 edition, DWP and National Statistics, 2005, prior to 1990, and National Statistics, Average Earnings Index for the Whole Economy, not Seasonally Adjusted, downloaded from www.statistics.gov.uk/StatBase/tsdataset.asp?vlnk=392&More=Y, accessed June 2006, after 1990. Average earnings are for all adult earners (the figures here are higher than in The Abstract of Statistics for Benefits, Contributions and Indices of Prices and Earnings: 2004 edition because this publication uses full-time earnings only; but the trend is the same). The April 2006 average earnings index figure has been estimated using the average of the previous three years’ increases.

The story told in Figures 5.1 and 5.2 is different in pattern, but fits together. While the cash level of child benefit went up (see Appendix), in real terms its value has held more constant. Over the period, the value of the rate for second and subsequent children fell, but the rate for first children rose, thereby weighting the system towards smaller families. While uprating in the 1990s and 2000s has inflation-proofed child benefit, as a share of rising incomes the value of child benefit has fallen back since the early- to mid-1980s. To demonstrate the long-term impact of this: if child benefit had held the same value as a percentage of (rising) average earnings as in 1979 (around 5.2 per cent), in April 2006 children would have been getting around £22.85 per week, £5.40 more than first children received and double what second and subsequent children got.

Notes

1 Some lone parents entitled to one parent benefit prior to its abolition also get an extra 10 pence per week for the first/eldest eligible child, as one parent benefit was frozen at the amount for which they previously qualified.
2 K Greener and R Cracknell, Child Benefit, Research Paper 98/79, House of Commons, 1998
3 Department for Work and Pensions, The Abstract of Statistics for Benefits, Contributions and Indices of Prices and Earnings: 2004 edition, Department for Work and Pensions and National Statistics, 2005, Appendix A

Child benefit: fit for the future: CPAG policy briefing

Contents page
Executive summary
1: Introduction
2: Background
3: The importance of child benefit
4: The history of child benefit: key issues and challenges
5: The value of child benefit over time
6: Policy options
7: Conclusions
Appendix

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