BEWARE the law of unintended consequences.
That could well end up as the epitaph for the Coalition Government and its welfare reform programme in particular. In its first weeks, there was much talk about its goals of simplicity and fairness. On the basis that everyone should pay their fair share towards reducing the deficit, Chancellor George Osborne decreed that higher rate tax payers would lose child benefit (CB) from January 2014, saving the Treasury £2.4bn a year.
It took those versed in basic numeracy about 30 minutes to calculate that this would create a startling anomaly. This is because the tax system treats couples as individuals while the benefits system treats them as a unit. A dual income couple earning £84,000 (£42,000 each) would keep all their CB, while a single income couple earning £43,000 would lose the lot. It gets worse. Because CB is tax free, such a couple with three children would lose the equivalent of £3,500 a year.
Clearly, such a "cliff edge" in the benefits system would create massive disincentives to work and earn more for those just under the higher rate threshold.
Deputy Prime Minister Nick Clegg appeared to confirm on radio yesterday that the Coalition is having a rethink, so a compromise can be expected in the Budget on March 21. Options include raising the threshold to £50,000, introducing a tapered clawback or withdrawing the benefit only after a child reaches age five. The problem is that this takes a splendidly simple benefit and makes it complicated (and more expensive to administer), contrary to the Coalition's stated objective.
This is a real issue. Around 1.2m households UK-wide will be affected. CB is the government's recognition of the importance it attaches to raising the next generation of workers and taxpayers. Perhaps the least painful way of raising a similar amount would be to add 0.5% to income tax but, of course, that would involve slaughtering another of the Coalition's sacred cows.
Why has the campaign against this change attracted so much attention when only 15% of the population earn enough to pay higher rate tax? The answer may be that many of them live in Tory and LibDem marginals.
A more immediate issue in Scotland is the fate of low-income couples reliant on child tax credits. From next month the work threshold for tax credits goes up from 16 to 24 hours a week. Shadow Scottish Secretary Margaret Curran calculates that more than 11,000 Scottish families will lose nearly £4000 a year if they cannot work the extra hours. As there are already an estimated 1.3m in the UK who are underemployed (unable to work as many hours as they wish), many already struggling households are dreading this change, which will leave many of them better off living entirely on benefits. Another unintended consequence and one that will do nothing to reduce the deficit?
Which is more unfair? High income families losing £2,500 a year next year or low income families losing £3,800 a year next month?
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