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Chancellor George Osborne announced today that child benefit will be withdrawn from families containing a higher-rate taxpayer from April 2013.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Second, some may think the proposed scheme is unfair because child benefit is withdrawn where an individual in a couple is a higher-rate taxpayer, regardless of the joint income of the couple.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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Hard choices ahead for government cutting public sector employment and pay
Office for Budget Responsibility forecasts for public sector pay and employment suggest continuing cuts to public employment and large squeezes in pay relative to the private sector. Our analysis suggests that public sector pay relative to private sector pay will now return to its pre crisis level in 2013-14, two years earlier than implied by past forecasts. Forecast squeezes to public sector pay up to 2018-19 would further reduce the public-private pay gap below levels last seen in the early 2000s, when parts of the public sector had difficulties recruiting and retaining staff.
A give and take Autumn Statement?
The Autumn Statement is expected to contain a welcome upward revision to the forecast for economic growth this year and a welcome downward revision to the headline deficit. But any improvement will be small relative to the level of the deficit forecast in the Budget, and the deficit this year will still be very high by historical standards and relative to what was projected at the start of this Parliament and compared to what the Chancellor is ultimately hoping to achieve. So as the Chancellor George Osborne prepares for the Autumn Statement, if he is planning to make good on the promises of giveaways made during the party conference season he should also be considering new measures to pay for them.
Entry to grammar schools in England for disadvantaged children
New work by IFS researchers, funded by the Sutton Trust, suggests that grammar schools are disproportionately unlikely to admit students who are eligible for free school meals, even when conditioning on their academic performance in primary school. They are by contrast disproportionately likely to admit children who have attended private schools before age 11.