The welfare money-go-round

Next week’s spending review will involve hard decisions. Hundreds of thousands of jobs will go. People in work will find employment conditions less generous with, for example, greater contributions required for their pensions. People out of work will find benefits provide less assistance and be under greater pressure to return to work. Goods in shops will be more expensive, with the basic VAT rate going up, some new schools will no longer be built, more hospitals will be under pressure to close and students will face higher tuition fees.
 
These changes are necessary but are just the start. To get the deficit under control in this Parliament, much more will be needed than this. A good place for further attention would be middle class welfare. Every year the Government spends the tens of billions of pounds on welfare payments to families who are well-off. Cutting this assistance would save money and make the welfare system fairer.
 
Current recipients of middle class welfare may be angry at the thought of the loss of their benefits. But the truth is that that they have not gained from the increase in their benefits over the last decade. While their benefits increased their taxes did too. As Reform has illustrated, while middle and high earners received an extra £15 billion in welfare benefits in 2008-09 compared to 1998-99, and an extra £27 billion in benefits in kind, this apparent gain was just an illusion. They also paid an extra £35 billion in direct taxes such as income tax and £6 billion in indirect taxes such as VAT. Effectively government is giving on one hand and then taking on the other – creating a money-go-round that needs more and more bureaucracy to keep track of the churning of money.
 
This is why the Coalition was right to announce that the Child Benefit should no longer be received by all families irrespective of their incomes. But their approach to reforming this benefit is flawed. Basing entitlement on families’ tax status creates anomalies and means that families on single incomes are disadvantaged relative to families where both parents work. The Coalition is doing the right thing but in the wrong way, and risks throwing the whole concept of means-testing into disrepute.
 
A better approach, discussed in a recent Reform report, would be to abolish the Child Benefit entirely and increase the value of the existing Child Tax Credit for poorer families. This would remove the anomalies in the proposals without needing a new means-testing system to be established. Scrapping the Child Benefit must be the first step in ending the money-go-round and encouraging more families to be truly independent of the state.
 
Patrick Nolan is chief economist at Reform