IEA Blog

A single claimant of Jobseeker’s Allowance or Income Support aged 18-24 receives £51.85 a week. This goes up to £65.45 for those aged 25 and over.

Tax credit and child benefit payments for a first child are significantly higher at £75 per week, while subsequent children will earn claimant households an additional £58 per week.

It would seem to be unfair that child-related benefits are paid at a higher rate than those for young adults. In particular, young adults may have to spend around a third of their income on utility bills, whereas families will enjoy the economies of scale resulting from shared living space, meals and transport etc. Moreover, it is inconsistent that the benefits system recognises economies of scale within families (hence the first child premiums) but not in its treatment of families vis-a-vis single households.

A fairer system would standardise first child payments at the young adults’ rate of £51.85 per week, with lower payments for additional children. This could be achieved in practice by halving the child element of child tax credits. The measure would have the additional advantages of improving work incentives and cutting billions from the annual £24 billion tax credits bill.

The UK still has a higher proportion of children living in workless households than any other member state of the EU-27. This is the result of an unfortunate combination of two circumstances: first, the UK has a high overall rate of economic inactivity; second, households with children are overrepresented among the inactive.

A governmental PR department would probably present it this way: “Ten years ago, in a benign economic climate, 2.2 million children lived in households with no member in gainful employment. Today, in a severe recession, this figure is down to 1.8 million.” But it is also true that after ten years of extensive and costly policy efforts to raise employment rates, especially among lone parents, the UK is still at the bottom of the pack.  

It is a bit strange that this fact is not really among the flagship arguments of the anti-child-poverty advocacy community. Instead, they emphasise that more than half of all children in relative poverty live in “working poor” households.  

This statement is true when looking at snapshots of relative low income, but it overlooks the dynamics. Those who are in employment exit relative low income much more frequently than those who are not – which is hardly surprising. The chances of experiencing a pay rise or finding a better-paid position are higher inside the labour market than outside. Work continues to be the most promising route out of poverty and low-pay.

Therefore, in the longer run, child poverty should be understood and approached in very different ways than is done today. But as a first-aid measure, we should consider a substantial increase in the personal tax allowance, and likewise for National Insurance contributions.

For example, Tom Clougherty at the Adam Smith Institute proposes a near-doubling of the tax-free allowance to £12,000 per person. This would decrease tax revenues by £18.9bn, but it could well be a good investment. It would make work, even in low-skilled jobs, more attractive to those currently outside the labour market. To those half-way inside, it would boost incentives to go further, by disentangling tax liability and tax credit withdrawal to some extent. Old-fashioned economic incentives could, once again, prove a more powerful force than well-intentioned government projects.

Reform have today launched a report calling for the end of middle class benefits to stave off increases in tax. Before querying that proposal, let me say first that I am glad that they have waded into the debate and I don’t want to sound as if I am hanging on to my entitlements hoping (as I believe Ronald Reagan said) “that I can carry on feeding the crocodile hoping it will eat me last.”

However, I do have a problem with the proposals if they are implemented alone. The underlying assumption seems to be that the tax burden will increase ON THE MIDDLE CLASS without Reform’s proposals. I suppose if that is the counterfactual, I would prefer the cut in benefits. However, having had 12 years of dramatically expanding means-tested welfare provision and provision for those not working and relatively badly off, there is a danger that taking away universal benefits (or raising taxes on the middle class) will simply reduce further the net returns to working, to education and so on. 

We cannot deal with the current recession by simply piling further burdens on the middle class. The first extension of Reform’s programme would be to abolish free TV licenses, free bus and tube travel and the winter fuel allowance for all pensioners…