05 November 2009
By Kate Stanley and Clare McNeil
The time has finally come to limit universal benefit payments for the middle classes, argue the IPPR’s Kate Stanley and Clare McNeil
Debate about the role of universal benefits in our welfare system is heating up. Calls to cut benefits for the middle classes have attracted criticism from those who argue against undermining taxpayer support for the welfare state. But the recession and coming public spending drought mean that no area of policy, including benefits, can be immune to scrutiny.
Reform of benefits must be considered seriously if politicians are to find ways to reduce or cap spending while ensuring the worst off don’t suffer.
State benefits are an enormously powerful vehicle in that they directly affect people’s ability to spend and save. But they also come at a high price, accounting for 24% of public expenditure in 2008/09 (and that’s excluding pensions).
Benefits therefore cannot be out of bounds when thinking about creative solutions to get us out of the financial mess we find ourselves in. However, there is currently little creativity on offer from the main political parties in this area.
Introducing reforms that are ‘progressively universal’ could be the answer. Simply put, this means more support for families who need it most and less for more affluent families. This approach, spelt out in a forthcoming Institute for Public Policy and Research report, would target payments more effectively and address the need to limit government spending, while retaining a welfare system in which everybody has a stake.
The first area to be addressed must be Child Benefit. This has long been considered untouchable. It has very high take-up rates and passionate support across the political spectrum. However, the twin challenges we are now faced with – making progress on such goals as reducing child poverty while cutting spending – demand that we challenge its status as the sacred cow of the welfare state.
In the year to June 2009, the slow, hard work of reducing the number of children living in poverty in the UK began to unravel. Between 1999/2000 and 2003/04, 600,000 children escaped poverty, mostly as a result of their parents finding work. But progress slowed and, when the recession hit, the downward trend reversed. Between June 2008 and June 2009, 160,000 more children were in workless households and, inevitably, in poverty than in the previous 12 months.
The welfare state must become much more efficient in reaching poor children, and Child Benefit is one of the government’s primary tools in ending child poverty. We know that increases in Child Benefit produce immediate effects in reducing the number of children living in poverty - and it’s easy to administer. We need to bite the bullet and make it progressively universal so that everyone gets something but poorer families get most.
There are several ways to do this. One option would be to means test all future increases in the rate so that they are awarded only to families with annual household incomes of less than, say, £50,000. A second option would be to tax Child Benefit and use the tax to increase the rate of benefit paid to second and subsequent children.
Proposing such changes to Child Benefit is controversial, with campaigners concerned about weakening support for the welfare system, especially among the better off. Politicians are equally reluctant, anxious that such a policy could lose them public support.
But new polling data commissioned by the IPPR suggests that these fears might not be well founded. In a poll of over 1,000 people in September, 45% said they would be more likely to vote for a party that pledged that future increases in Child Benefit would go only to lower income families. Twenty per cent of those polled said they would be less likely to vote for such a party; the remaining one-third either didn’t know or said it wouldn’t make any difference to their voting decision.
The UK would not be alone in taking this opportunity to reach more poor children while limiting spending. Australia, New Zealand and Ireland have all introduced means testing of Child Benefit to reduce their deficits.
Another benefit for families is the Child Trust Fund. This is exactly the kind of policy that should be scaled up, allowing us to set the foundations for a new economy built on universal
saving and assets.
Many young people enter adulthood without any savings at all. Yet we know that those who have a small pot of savings or other ‘assets’ tend to do better later in life. For this reason, five years ago, the CTF was introduced. It is designed to ensure all young people enter adulthood with an asset. Every child born since September 2002 has received a government voucher for £250, which parents can use to open a CTF account in their child’s name.
The CTF is fairly small beer in terms of government spending (it costs around £500m a year), but it is a genuinely creative policy and inherently long term with the potential – over a generation – to make a profound difference to attitudes to saving across the board. In one survey, an overwhelming number of poorer families (94%) agreed that the CTF had encouraged them to start saving for their child’s future.
It’s a policy for the long term but it is already starting to have an impact. A substantial proportion of lower income families are managing to save for their children – one provider reports that 29% of families with a household income of £19,000 add monthly to their child’s CTF. And since the CTF was introduced, 75% of all accounts have been opened by parents – perhaps the financial product with the highest take up of all time?
So why stop here? Already the policy is progressively universal – but it could go further. Options include government matching the savings of the poorest families, or smaller amounts for the better off to finance more generous payments for the poorest.
It is striking that the two main political parties will both be fighting the next general election on how progressive their policies are. What policy could be more empowering for families than one that gives every child more control over their future, regardless of their background? It is also one that sows the seeds for the ‘nation of savers’ that shadow chancellor George Osborne would like us to become.
Yet at the Conservative Party conference, Osborne announced that, if elected next year, he would radically cut back the CTF. At the same time, he reaffirmed the pledge to lift the Inheritance Tax threshold to £1m as soon as possible, dubbing it an ‘unfair tax on ordinary families’.
One is left to wonder about the phrase ‘ordinary family’ here, meaning those with assets of up to £999,999. A more conventional ‘ordinary family’ on an income of, say, £17,000 would no longer get Child Trust Funds under a Tory government.
Squaring the circle of making spending cuts while tackling poverty and inequality means difficult political decisions will have to be made. And it doesn’t get much tougher than making changes to universal benefits for families. But rather than threatening the future of universal benefits, making changes now could in fact protect these payments for generations to come, as well as accelerating the pace of achieving progressive goals.
For the careful balance at the heart of progressive universalism to work, politicians of all parties must do more to make the case for a robust welfare system and the need to do more to support the poorest and most vulnerable. This is even more important at a time when public spending will be scrutinised like never before to see where precious resources are going.
The response to the 50% tax rate shows that bold moves can even be popular. Our polling confirms that the same could be true for universally progressive reforms to Child Benefit and Child Trust Funds. Now whoever wins the next election must be prepared to put this to the test.
Kate Stanley and Clare McNeil are, respectively, programme director and research fellow at the Institute for Public Policy Research www.ippr.org.uk
By Kate Stanley and Clare McNeil
The time has finally come to limit universal benefit payments for the middle classes, argue the IPPR’s Kate Stanley and Clare McNeil
Debate about the role of universal benefits in our welfare system is heating up. Calls to cut benefits for the middle classes have attracted criticism from those who argue against undermining taxpayer support for the welfare state. But the recession and coming public spending drought mean that no area of policy, including benefits, can be immune to scrutiny.
Reform of benefits must be considered seriously if politicians are to find ways to reduce or cap spending while ensuring the worst off don’t suffer.
State benefits are an enormously powerful vehicle in that they directly affect people’s ability to spend and save. But they also come at a high price, accounting for 24% of public expenditure in 2008/09 (and that’s excluding pensions).
Benefits therefore cannot be out of bounds when thinking about creative solutions to get us out of the financial mess we find ourselves in. However, there is currently little creativity on offer from the main political parties in this area.
Introducing reforms that are ‘progressively universal’ could be the answer. Simply put, this means more support for families who need it most and less for more affluent families. This approach, spelt out in a forthcoming Institute for Public Policy and Research report, would target payments more effectively and address the need to limit government spending, while retaining a welfare system in which everybody has a stake.
The first area to be addressed must be Child Benefit. This has long been considered untouchable. It has very high take-up rates and passionate support across the political spectrum. However, the twin challenges we are now faced with – making progress on such goals as reducing child poverty while cutting spending – demand that we challenge its status as the sacred cow of the welfare state.
In the year to June 2009, the slow, hard work of reducing the number of children living in poverty in the UK began to unravel. Between 1999/2000 and 2003/04, 600,000 children escaped poverty, mostly as a result of their parents finding work. But progress slowed and, when the recession hit, the downward trend reversed. Between June 2008 and June 2009, 160,000 more children were in workless households and, inevitably, in poverty than in the previous 12 months.
The welfare state must become much more efficient in reaching poor children, and Child Benefit is one of the government’s primary tools in ending child poverty. We know that increases in Child Benefit produce immediate effects in reducing the number of children living in poverty - and it’s easy to administer. We need to bite the bullet and make it progressively universal so that everyone gets something but poorer families get most.
There are several ways to do this. One option would be to means test all future increases in the rate so that they are awarded only to families with annual household incomes of less than, say, £50,000. A second option would be to tax Child Benefit and use the tax to increase the rate of benefit paid to second and subsequent children.
Proposing such changes to Child Benefit is controversial, with campaigners concerned about weakening support for the welfare system, especially among the better off. Politicians are equally reluctant, anxious that such a policy could lose them public support.
But new polling data commissioned by the IPPR suggests that these fears might not be well founded. In a poll of over 1,000 people in September, 45% said they would be more likely to vote for a party that pledged that future increases in Child Benefit would go only to lower income families. Twenty per cent of those polled said they would be less likely to vote for such a party; the remaining one-third either didn’t know or said it wouldn’t make any difference to their voting decision.
The UK would not be alone in taking this opportunity to reach more poor children while limiting spending. Australia, New Zealand and Ireland have all introduced means testing of Child Benefit to reduce their deficits.
Another benefit for families is the Child Trust Fund. This is exactly the kind of policy that should be scaled up, allowing us to set the foundations for a new economy built on universal
saving and assets.
Many young people enter adulthood without any savings at all. Yet we know that those who have a small pot of savings or other ‘assets’ tend to do better later in life. For this reason, five years ago, the CTF was introduced. It is designed to ensure all young people enter adulthood with an asset. Every child born since September 2002 has received a government voucher for £250, which parents can use to open a CTF account in their child’s name.
The CTF is fairly small beer in terms of government spending (it costs around £500m a year), but it is a genuinely creative policy and inherently long term with the potential – over a generation – to make a profound difference to attitudes to saving across the board. In one survey, an overwhelming number of poorer families (94%) agreed that the CTF had encouraged them to start saving for their child’s future.
It’s a policy for the long term but it is already starting to have an impact. A substantial proportion of lower income families are managing to save for their children – one provider reports that 29% of families with a household income of £19,000 add monthly to their child’s CTF. And since the CTF was introduced, 75% of all accounts have been opened by parents – perhaps the financial product with the highest take up of all time?
So why stop here? Already the policy is progressively universal – but it could go further. Options include government matching the savings of the poorest families, or smaller amounts for the better off to finance more generous payments for the poorest.
It is striking that the two main political parties will both be fighting the next general election on how progressive their policies are. What policy could be more empowering for families than one that gives every child more control over their future, regardless of their background? It is also one that sows the seeds for the ‘nation of savers’ that shadow chancellor George Osborne would like us to become.
Yet at the Conservative Party conference, Osborne announced that, if elected next year, he would radically cut back the CTF. At the same time, he reaffirmed the pledge to lift the Inheritance Tax threshold to £1m as soon as possible, dubbing it an ‘unfair tax on ordinary families’.
One is left to wonder about the phrase ‘ordinary family’ here, meaning those with assets of up to £999,999. A more conventional ‘ordinary family’ on an income of, say, £17,000 would no longer get Child Trust Funds under a Tory government.
Squaring the circle of making spending cuts while tackling poverty and inequality means difficult political decisions will have to be made. And it doesn’t get much tougher than making changes to universal benefits for families. But rather than threatening the future of universal benefits, making changes now could in fact protect these payments for generations to come, as well as accelerating the pace of achieving progressive goals.
For the careful balance at the heart of progressive universalism to work, politicians of all parties must do more to make the case for a robust welfare system and the need to do more to support the poorest and most vulnerable. This is even more important at a time when public spending will be scrutinised like never before to see where precious resources are going.
The response to the 50% tax rate shows that bold moves can even be popular. Our polling confirms that the same could be true for universally progressive reforms to Child Benefit and Child Trust Funds. Now whoever wins the next election must be prepared to put this to the test.
Kate Stanley and Clare McNeil are, respectively, programme director and research fellow at the Institute for Public Policy Research www.ippr.org.uk
