Child benefit - where to next?
Before the Budget, speculation was rife that child benefit, having increased since the last general election, would be taxed. This did not happen, even though child benefit and the children's allowances in income support will increase this year. In a little-reported section of his Budget speech, the Chancellor announced that his long-term goal was to bring together the different elements of benefits payable for children into a seamless system of support. Marilyn Howard looks at what may happen to child benefit in future.

What are the proposals?
Has this been done before?
What are the issues raised by the ICC?
What would be the pupose of the ICC?
What does this mean for the ICC?

What are the proposals?
In the Budget the Chancellor announced that a children's tax credit (CTC) will be payable to families with children from April 2001. Some five million families are expected to gain. The CTC is to be worth £8 a week, but once someone's taxable income reaches the 40 per cent higher rate of income tax, the CTC will be tapered off at the rate of £1 for every £15 above the threshold.

From April 2000, the married couples allowance (MCA) for couples under 65 and related allowances like the additional personal allowance (which reduces the tax liability for lone parents and people with a disabled spouse) will be abolished. This leaves a 'gap year' for families with children until April 2001 when the CTC is introduced.

The CTC is the first step towards an integrated payment. In a meeting with CPAG soon after the Budget, Treasury officials stated that there was, as yet, no blueprint for the ‘seamless payment’. However, in the longer term the CTC is expected to be integrated with the allowances for children in income support (IS), jobseeker’s allowance (JSA) and the working families tax credit (WFTC). For the purposes of this article, the new payment is called the integrated child credit (ICC).

It seems, according to Treasury officials, that child benefit will remain payable as now, although the possibility that child benefit will be included is still open. The ICC is likely to be payable whether or not the parents are in work, but would be paid to the main carer, and complemented by an adult 'employment tax credit' payable through the wage packet.

CPAG is looking at the implications of the longer-term proposals for an ICC and the role of child benefit under any new system.

Has this been done before?
The proposal for an integrated payment like ICC bears some resemblance to the systems of financial support for children introduced recently in Australia and Canada. In those countries, child payments are withdrawn through the tax system from households in the top 20 per cent or so of the income distribution. The withdrawal rates are very different; in Canada, benefit is withdrawn at 2.5 per cent for a family with one child and 5 per cent for those with two or more; in Australia, the family payment is reduced by 50 per cent (between minimum and maximum thresholds). Mendelson suggested that an equivalent integrated benefit for the UK would bring together all or some of the child-related benefits contained in IS, child benefit, family credit (FC) and the MCA, replacing all of them with a broad-based income-related child benefit. Obviously, the Treasury is interested in the idea.

The Canadian model replaced a system like the earned income tax credit in the USA. The advantages were thought to be in promoting social cohesion; permitting future increases in benefit for everyone; 'seamlessly' reducing barriers to work by continuing benefit from employment to unemployment; and encouraging a focus on active programmes for remaining adult.

In Australia, the family payment is said to be ‘integrative’, targets the ‘most needy’ and smoothes transition between unemployment and work (especially as there is no hours rule). However, there may be problems of delays and take-up in Australia, and it is too early to know how effective the new Canadian system is likely to be. It is always difficult to evaluate the success of a scheme in other countries because of the very different systems and contexts within which they operate. There may, nonetheless, be lessons to learn.

What are the issues raised by the ICC?
Smoothing the transition into work
As with the Australian and Canadian approach, an ICC, payable whether or not the parent was in work, could enable a smoother transition between benefit and work. Separating the adult and child payments might also focus work requirements and related benefit sanctions on payments for the adult, and not the child.

Payment to the main caregiver
Distinguishing between adult and child payments would mean that the element in the WFTC for adults would be payable to the main earner, integrated child payments being payable to the main carer. This could answer the 'purse-to-wallet' problem raised during debates about the WFTC.

Scope for more generosity
Tapering off the ICC for higher rate taxpayers helps to 'target' payments at families below that level. As with the Canadian system, it could be argued that distribution of tax credits may be less transparent than through the benefits system, allowing more help to be channelled towards poor families who are not in work.

Independent taxation
The ICC is bound to raise questions about whether the unit of assessment is the individual or the household. Since the introduction of independent taxation in 1991, the unit of assessment for tax and benefit purposes has been different (except for lone parents and single, non-cohabiting adults). Tax credits reintroduce some degree of assessment by household rather than by individual in order to ensure targeting of poorest households, which may call into question whether independent taxation remains the best method of assessment.

Tapers and thresholds
The rate of the ICC taper (assuming one is introduced) and the point at which it begins to be withdrawn will be crucial. The CTC withdrawal at the 40 per cent taxpayers threshold means that it begins to be reduced when earnings reach around £32,000 (at current tax and income levels). Would a lower threshold be contemplated when the ICC, replacing WFTC child rates, is introduced? The lower the threshold, the less likely it is to be cohesive. Similarly a taper needs to be sufficiently ‘soft’ to be effective as a bridge between welfare and work.

Child benefit
The issues raised by the ICC proposal mirror those raised in the debate about taxing child benefit, although through a different mechanism. If, as appears, child benefit is to remain separate from the ICC, there is a risk that future increases to child benefit may be less generous than the recent rises. Arguments about how to structure child benefit according to its purpose are likely to be reflected in debates about the ICC. Its precise structure is not yet known, but there will be many options to consider. Should payments be per child? Should there be a higher rate for older (or younger) children? Should the ICC contain a 'family premium'?

What would be the purpose of the ICC?
In assessing options we would need to consider whether the purpose of the ICC is to help with the direct or indirect costs of a child. No doubt there will be trade-offs to be made, but it may be worth revising some of the reasons for paying child benefit and IS/WFTC.

Child benefit - the costs of a child for all families
Since 1991, a higher rate of child benefit has been payable to the eldest child. The rationale was that this would help families with the major impact on family budgets, when a first child is born, and the additional costs arising from the presence of a child. The higher child benefit rate is similar to the family premium in IS, as it passes down to the next child when the eldest grow up - a payment for the family rather than the child. This was recognition of the greater difficulties that families with children faced in managing on benefit.

Child benefit meets approximately one fifth of average spending on a child. The costs of a child can be direct (and may vary by age, gender and so on), or indirect through the opportunity costs associated with lost earnings. However, giving more to under fives emphasises the indirect costs of a child (opportunity costs of the mother) rather than the direct costs.

Direct costs
Whilst there is some evidence that children tend to cost more as they get older, the impact on family budgets may not be as great as for younger children.

Average weekly spending on children in 1997 (excluding child care) ranged from £44.21 (for babies) to £52.38 for secondary school age children.

Whilst the higher child benefit rate assumes that a second/subsequent child costs 19 per cent less than the first or eldest child, Sue Middleton shows that the spending was actually on average 10 per cent less. The percentage of spending varies little from one fifth whether the child is the eldest or subsequent child, or on IS or not. However, the IS rates have assumed that under 11s only cost 86 per cent of the amount spent on 16-year-olds. This has meant that younger children have been relatively disadvantaged in the IS scale rates. The 1998 Budget changes included an extra £2.50 for the first child, bringing child benefit up to £13.95 and £9.30 (before uprating). This will magnify this difference as child benefit for second and subsequent children will be 34 per cent less. The low cost budget for a child under 11 in 1993 was £24.95; by 1998 this would have been £28.85. The new child rates from October 1999 are getting closer to this figure.

Indirect costs
Women reduce their chances of working when they have a child. Although more women are now in the labour market, this seems closely related to the number of children, and, more importantly, the age of the youngest child. Having children can reduce women's earnings at age 33 by one fifth; over half of the gender gap in pay is due to the effect of having children (unless the mother has access to maternity leave and is able to return to work). For one in three women, the birth of a child results in a fall in their relative living standards, and for between 10-15 per cent it results in poverty - a situation which is more likely to happen in the UK than in the US or Germany.

Clearly the birth of the first child is the point at which families incur most costs, as existing parents can re-use items. However, the extent to which this is done probably depends on the time between births, sex of the children and the attitude of parents. A more generous maternity payment can be a more direct way to give help with the initial costs of having a child. Over time more families may benefit from an eldest child higher rate, but only one-child families will ever be the real beneficiaries.

IS and FC - extra help to low income families
It can be argued that child benefit is primarily to help all families with children, but that IS and FC provide additional help to low income families with children. When IS was being introduced in the mid-1980s, the debate about child allowances was less to do with their purpose and more with whether the age bands were the right ones (such as should the rates for the youngest child end at the age of eight rather than 11). In the absence of detailed research about the costs of the child at different ages, the status quo has prevailed. Research now gives us a better idea of the relative costs of a child at different ages and has influenced the increases in the IS child allowances for under-11 in the previous Budget.

What does this mean for the ICC?
A differential ICC, that paid more to the eldest child, represents a recognition that indirect costs of the child are greater than the direct costs. However, as lone parents are more likely than couples to have only one child, a 'family' rate might be of more help to them. The ICC could also be varied in amount by income band; family size; age of children.

How a payment is funded can make the calculation of losers and gainers more complex. The October 1991 changes to child benefit were financed by freezing the MCA and the additional personal allowance for lone parents. As these are only allowable per family and not per child, the increased child benefit for one child families look less generous.

Conclusion
The ICC proposal presents opportunities and challenges. At this stage there are issues and options to consider for the best way to ensure that its social inclusion potential is maximised.

Marilyn Howard
Poverty 103 Summer 1999