The case for child benefit

George Osborne has his sights on child benefit. Yesterday, challenged repeatedly, he refused to rule out scrapping the benefit and merging it into means-tested universal credit.

He could hardly do otherwise, while also claiming he can find £12 billion in benefit savings by 2017. Scrapping child benefit is one of the few plausible reforms which might save anything like this amount: the Institute for Fiscal Studies reckons that turning it into a means-tested allowance could raise up to £4.8 billion.

This would be another assault on the incomes of families with children, who have suffered the most from tax and benefit changes under the coalition. On average, the coalition’s fiscal changes have reduced their incomes by more than 3 per cent. This compares to a loss of around 0.5 per cent for households without children. Should children really be the target again?

There are many good reasons to fight for child benefit. First, there is the traditional argument against means-testing and the ‘residualisation’ of welfare state provision. Restricting child benefit to low income families can be expected to lead over time to less support, even for poor households: when mid and high income groups do not receive an entitlement, there is less pressure to see it preserved.

But the case for child benefit is not just about poverty. The payment plays a vital role for all but the very wealthy, because people on middle and upper-middle earnings find it much harder to make ends meet with children than without.

Child benefit is a form of horizontal distribution, between people with similar earnings, to prevent adults without children having vastly higher living standards than parents. That’s the way it’s always been, ever since 1909, when child benefit’s first precursor, a children’s tax allowance, was introduced.

For Government does not exist just to provide a safety net, but to distribute resources across the lifecycle – and this includes giving support to people when they are facing the costs of raising children. This is the principle behind the state pension and the NHS too.

Instead of cutting child benefit, any government interested in fighting inequality and poverty should be thinking about how to affordably increase it. For example, a recent Fabian report, Inequality 2030, showed how a big hike in child benefit could be funded by the revenues generated by a fairer labour market.

The report shows that by 2030 a high national minimum wage and widespread take-up of the living wage would together generate an extra £8bn per year for the exchequer, compared to our central projection for that year (ie £6bn in higher taxes and £2bn in reduced social security). That would be almost enough to double the value of child benefit gradually over the next 15 years (an increase of 5 per cent every year).

The effects would be dramatic for poverty: it would reduce the number of poor children in 2030 by half a million. But the benefits would be felt more widely too. Middle incomes would rise by 2 per cent and overall income inequality would fall.

Child benefit is a fair and efficient way to reduce poverty and inequality, boost living standards for middle-income households and redistribute resources over the lifecourse.

Politicians should be finding ways to raise its value not scrap it.