Cuts can be more unpopular if they're more timid

October 08, 2010 11:53 AM

In our work on how to cut spending we recommended cuts in Child Benefit, with measure to support the poorest.  Not because we wanted to bash the middle classes, who have had a tough deal with tax hikes on everything from driving to work to buying a home, but because it just doesn't make sense to take people's money in taxes then give it back in benefits.  Middle class, universal benefits are a con, politicians trying to buy people's loyalty with their own money.


So we should have been applauding and defending the Government's decision earlier this week.  Unfortunately in their efforts to try and position the cuts as only affecting the rich they wound up producing changes that were deeply flawed and profoundly unfair.  Those problems are becoming more apparent over time.


Allister Heath, editor of City AM, summarised the two biggest problems earlier this week:



"Imagine your neighbour and his partner are making £43,000 each (a family total of £86,000) and have one child. They will keep their benefit, worth £1,000. Imagine that you are on £43,876, with a stay at home partner who doesn’t work and two children. You will lose your child benefits, worth £1,750. How is that just?

Families with a stay at home parent are already discriminated against because the tax free allowance isn’t transferrable. To go back to our example, a couple relying on one earner on £86,000 pays far more direct tax than a couple relying on two earners on £43,000 each, who benefit from two separate zero-rated allowances. The change to child benefits will make this worse. What is really needed is family-based, not individual based, accounting.

There is another major issue. Imagine this time that you are just below the 40 per cent tax rate. Your boss offers you a promotion and a pay rise of £1,000 – astonishingly, rather than celebrating, you will refuse. As the Institute of Fiscal Studies points out, a family with two children receives £1,750 a year in child benefit. A one-earner couple with two children with a gross income of £43,876-£46,850 would be worse off than if their income were £43,875. Crazy. A one-earner couple with an income of £43,875 would need a pay rise of £2,975 to ensure they were no worse off after paying direct tax and losing child benefit. This doesn’t make sense – especially given that Osborne wants to eradicate perverse anti-work incentives elsewhere in the system."



More problems are emerging rapidly.  In a blog for the Telegraph Ian Cowie write about how salary sacrifice schemes can be used to keep your Child Benefit:



"Leasing cars for yourself and family members, medical insurance, childcare vouchers and holidays are among the things you can buy direct from your gross salary to beat the Child Benefit cutbacks  – as well as staying on the right side of important new tax and National Insurance Contributions (NICs) thresholds that take effect next April.

[...]

Depending on how much you earn and your family circumstances, tax efficient salary sacrifice could also help you beat cutbacks on Child Tax Credit which take effect next April, withdrawal of personal allowances on earnings above £100,000 which took effect last April, and restrictions on pension tax relief for people earning more than £150,000 from next April.

Self-employed people and owners of small businesses may be able to achieve the same effect by adjusting annual profits, so they do not exceed the new annual threshold by a small amount every year but instead stay below them most years and exceed them by a large amount in a single year. Similarly, self-employed single-earner families should consider transfering income to the non-earning spouse; perhaps for secretarial or administrative purposes."



He also writes about how changes to the higher rate threshold, designed to stop relatively high earners saving with increases in the personal allowance, will mean that the cuts to Child Benefit will hit people who don't expect it.


All of these problems would have been avoided if the Treasury had taken either of the two approaches we recommended:



  1. Abolish Child Benefit and increase the child element of the Child Tax Credit to address child poverty concerns.  As recommended in How to Cut Spending (and Still Win an Election) this would mean no new means test, though it would continue some of the existing problems with tax credits.

  2. Abolish Child Benefit and look after those who really need support with a new, better welfare system.  That is the approach we took in our recent report Welfare reform in tough fiscal times.


Either of those would cut more money from the Child Benefit bill while avoiding the fiasco that has unfolded over the last few days.  There is a real danger that politicians convince themselves cutting spending is unpopular, when it is actually just their ham-fisted approach, in an attempt to avoid tough decisions, that puts people off.

In our work on how to cut spending we recommended cuts in Child Benefit, with measure to support the poorest.  Not because we wanted to bash the middle classes, who have had a tough deal with tax hikes on everything from driving to work to buying a home, but because it just doesn't make sense to take people's money in taxes then give it back in benefits.  Middle class, universal benefits are a con, politicians trying to buy people's loyalty with their own money.


So we should have been applauding and defending the Government's decision earlier this week.  Unfortunately in their efforts to try and position the cuts as only affecting the rich they wound up producing changes that were deeply flawed and profoundly unfair.  Those problems are becoming more apparent over time.


Allister Heath, editor of City AM, summarised the two biggest problems earlier this week:



"Imagine your neighbour and his partner are making £43,000 each (a family total of £86,000) and have one child. They will keep their benefit, worth £1,000. Imagine that you are on £43,876, with a stay at home partner who doesn’t work and two children. You will lose your child benefits, worth £1,750. How is that just?

Families with a stay at home parent are already discriminated against because the tax free allowance isn’t transferrable. To go back to our example, a couple relying on one earner on £86,000 pays far more direct tax than a couple relying on two earners on £43,000 each, who benefit from two separate zero-rated allowances. The change to child benefits will make this worse. What is really needed is family-based, not individual based, accounting.

There is another major issue. Imagine this time that you are just below the 40 per cent tax rate. Your boss offers you a promotion and a pay rise of £1,000 – astonishingly, rather than celebrating, you will refuse. As the Institute of Fiscal Studies points out, a family with two children receives £1,750 a year in child benefit. A one-earner couple with two children with a gross income of £43,876-£46,850 would be worse off than if their income were £43,875. Crazy. A one-earner couple with an income of £43,875 would need a pay rise of £2,975 to ensure they were no worse off after paying direct tax and losing child benefit. This doesn’t make sense – especially given that Osborne wants to eradicate perverse anti-work incentives elsewhere in the system."



More problems are emerging rapidly.  In a blog for the Telegraph Ian Cowie write about how salary sacrifice schemes can be used to keep your Child Benefit:



"Leasing cars for yourself and family members, medical insurance, childcare vouchers and holidays are among the things you can buy direct from your gross salary to beat the Child Benefit cutbacks  – as well as staying on the right side of important new tax and National Insurance Contributions (NICs) thresholds that take effect next April.

[...]

Depending on how much you earn and your family circumstances, tax efficient salary sacrifice could also help you beat cutbacks on Child Tax Credit which take effect next April, withdrawal of personal allowances on earnings above £100,000 which took effect last April, and restrictions on pension tax relief for people earning more than £150,000 from next April.

Self-employed people and owners of small businesses may be able to achieve the same effect by adjusting annual profits, so they do not exceed the new annual threshold by a small amount every year but instead stay below them most years and exceed them by a large amount in a single year. Similarly, self-employed single-earner families should consider transfering income to the non-earning spouse; perhaps for secretarial or administrative purposes."



He also writes about how changes to the higher rate threshold, designed to stop relatively high earners saving with increases in the personal allowance, will mean that the cuts to Child Benefit will hit people who don't expect it.


All of these problems would have been avoided if the Treasury had taken either of the two approaches we recommended:



  1. Abolish Child Benefit and increase the child element of the Child Tax Credit to address child poverty concerns.  As recommended in How to Cut Spending (and Still Win an Election) this would mean no new means test, though it would continue some of the existing problems with tax credits.

  2. Abolish Child Benefit and look after those who really need support with a new, better welfare system.  That is the approach we took in our recent report Welfare reform in tough fiscal times.


Either of those would cut more money from the Child Benefit bill while avoiding the fiasco that has unfolded over the last few days.  There is a real danger that politicians convince themselves cutting spending is unpopular, when it is actually just their ham-fisted approach, in an attempt to avoid tough decisions, that puts people off.

Latest Blogs:

TaxPayers' Alliance Icon

Working for the taxman

6:00 AM 26, Nov 2016 Harry Fairhead

TaxPayers' Alliance Icon

Further thoughts on the Autumn Statement

4:56 PM 24, Nov 2016 James Price

TaxPayers' Alliance Icon

Have we had too much austerity?

10:57 AM 23, Nov 2016 Alex Wild

TaxPayers' Alliance Icon

Launch a War on Waste and simplify taxes

9:45 AM 23, Nov 2016 The TaxPayers' Alliance

TaxPayers' Alliance Icon

Reforming capital taxes

6:00 AM 19, Nov 2016 Harry Fairhead