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Chancellor George Osborne announced today that child benefit will be withdrawn from families containing a higher-rate taxpayer from April 2013. This move is expected to affect around one-in-six (1.2 million) families with children, and save the Government £1 billion per year.
The Government intends to claw back the amount of child benefit paid to a family from higher-rate taxpayers through the income tax system. Higher-rate taxpayers who receive child benefit, or whose partner receives child benefit, will have to make additional payments through income tax self-assessment equal to the amount of child benefit they receive.
This form of means-testing has a number of implications.
First, child benefit will continue to be paid in full to all who claim it. Instead of reducing the payment of child benefit, the Government's proposed reform would increase tax payments by those on high-incomes; in a stereotypical couple with children where the higher-rate tax-payer is a man, and the woman receives child benefit, then the Government's proposed reform would mean that the father effectively pays for the mother's child benefit.
Second, some may think the proposed scheme is unfair because child benefit is withdrawn where an individual in a couple is a higher-rate taxpayer, regardless of the joint income of the couple. To give an extreme example, the Government's proposed reform implies that a one-earner couple with an income of £45,000 would lose all their child benefit, but a much better-off couple where each has an income of £40,000 would keep all their child benefit.
A third implication, and the most serious from an economic point of view, is that this reform seriously distorts incentives for some families with children. In particular, adults with children whose income places them below the higher-rate income tax threshold might be find themselves considerably worse off from a small rise in income. This is because such a family would effectively lose all their child benefit as soon as the adult's income rose just above the higher-rate income tax threshold.
A family with two children currently receives £1,750 a year in child benefit, so a one-earner couple with two children with a gross income between £43,876 and £46,850 would be worse off than if their income were £43,875. Equivalently, a one-earner couple with an income of £43,875 would need a pay rise of £2,975 or more to ensure they were no worse off after paying income tax and national insurance and losing child benefit.
The Government might argue that using the income tax system to means-test child benefit is cheaper for it to administer than devising a brand-new means-test, and can be done more quickly. But there is already a system of means-testing support for families with children through the tax credit system, and the Government could have straightforwardly reduced spending on child benefit by combining it with the child tax credit in some way. Using the means-test in tax credits could be considered fairer to single earner couples, and would not distort incentives so dramatically. But this proposed means-test of child benefit might be just a stop-gap measure; Iain Duncan Smith, the Secretary of State for Work and Pensions, said today that his proposed universal credit system - which he hopes will be fully in place by the end of the next Parliament, and would replace all existing benefits - would taper away child benefit 'more fairly' from higher income families.
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Cutting the deficit: three years down, five to go?
The UK is in the fourth year of a planned eight-year fiscal tightening. Following further announcements made in Budget 2013, this fiscal consolidation is now forecast to total £143 billion by 2017–18. The UK is intending the fourth largest fiscal consolidation among the 29 advanced economies for which comparable data are available. By the end of this financial year, half of the total consolidation is expected to have been implemented. However, within this tax increases and cuts to investment spending have been relatively front-loaded, while cuts to welfare spending and other non-investment spending have been relatively back-loaded.
The March Budget forecast that borrowing would fall by £0.1 billion from £121.0 billion in 2011–12 to £120.9 billion in 2012–13. On Tuesday, the Office for National Statistics is due to release its first estimate of public sector net borrowing in March 2013 and, therefore, for the whole of 2012–13. Borrowing could easily end up being higher or lower than it was in the previous year, either due to backwards revisions, the uncertainty inherent in forecasting borrowing even a month in advance, or both. However, whether borrowing is slightly up or down in cash terms is economically irrelevant. Either way, the bigger picture is that having fallen by roughly a quarter between 2009–10 and 2011–12, borrowing is forecast to be broadly constant through to 2013–14.
Women working in their sixties: why have employment rates been rising?
Employment rates through the recession have been remarkably robust, with today’s ONS figures showing employment remaining close to 30 million. The young have experienced historically low employment rates and high unemployment rates but the employment rate of women aged 60 to 64 has increased as fast since 2010 as it did during the 2000s. An important explanation is the gradual increase in the state pension age for women since 2010, which has led to more older women being in paid work. Without this policy change, the employment rate for 60 to 64 year women would have been broadly flat since 2010.