The child benefit reforms are a disaster waiting to happen

Osborne has underestimated the perverse incentives that removing the benefit from higher earners will create.

Starting next week, child benefit will gradually be withdrawn from over a million families with the aim of saving the government around £1.3bn a year. But the new system is complex to understand, difficult to administer and costly to implement. After U-turns and climb downs, the government has ended up with a dog’s breakfast.

From Monday, all families claiming child benefit, where one partner earns over £50,000, will have one per cent of their child benefit withdrawn for every additional £100 of income they earn up to the threshold of £60,000, at which point the benefit is completely withdrawn. Although the government has softened its original stance on child benefit withdrawal, it will still affect roughly 1.1 million families.

By complicating what is a very simple benefit, as reflected by its high take-up rate (97 per cent), this reform is set to create all sorts of perverse incentives. The Chancellor will effectively increase the marginal tax rate for families where one person earns between £50,000 and £60,000. The rate of child benefit is £20.30 a week (or £1,056 a year) for the first child, and £13.40 a week (£697 a year) for each additional child. Based on these figures the marginal tax rate for an individual earning over £50,000 with one child will be 52.6 per cent, rather than 42 per cent. But in the extreme case, a person with six children and earnings over £50,000 will face a staggering marginal tax rate of 87.4 per cent. This translates into a net income gain of just 12.6 pence for every pound earned.

Given these high marginal tax rates, the Chancellor may have underestimated the impact this change will have on work incentives. For people with children who earn between £50,000 and £60,000, there may be little incentive to seek promotion, as any increase in their earnings will erode their child benefit entitlement. The benefit withdrawal will also seem unfair to some households. Two people in one household who both earn under £50,000, but together earn, say, £80,000 will not lose any child benefit, while a family with a single earner on £60,000 will lose it all.

The Chancellor may also have overestimated the savings that this move will bring. One logical response for someone facing a very high marginal tax rate due to the withdrawal of child benefit would be to increase their contributions to their pension. If enough people diverting earnings towards their pension pot, it could dramatically reduce the amount the government saves.

Rather than making complex changes to child benefit, the government would do better to conduct a more fundamental review of its support for families. There is evidence to suggest that spending on services for families instead of benefits is more effective in reducing child poverty. The government could extend its freeze on child benefit and use the savings to fund affordable childcare. This would avoid complicated reforms, cliff edges and perverse work incentives. Providing quality universal childcare should be a national strategic priority for public service and welfare reform, particularly as the cost of childcare largely influences parental decisions on whether work pays.

If the government is genuinely committed to welfare reform, then affordable childcare, rather than fiddly means testing, would offer the best help to struggling families.

Amna Silim is a researcher at IPPR

Chancellor George Osborne leaves Number 11 Downing Street. Photograph: Getty Images.
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Is Yvette Cooper surging?

The bookmakers and Westminster are in a flurry. Is Yvette Cooper going to win after all? I'm not convinced. 

Is Yvette Cooper surging? The bookmakers have cut her odds, making her the second favourite after Jeremy Corbyn, and Westminster – and Labour more generally – is abuzz with chatter that it will be her, not Corbyn, who becomes leader on September 12. Are they right? A couple of thoughts:

I wouldn’t trust the bookmakers’ odds as far as I could throw them

When Jeremy Corbyn first entered the race his odds were at 100 to 1. When he secured the endorsement of Unite, Britain’s trade union, his odds were tied with Liz Kendall, who nobody – not even her closest allies – now believes will win the Labour leadership. When I first tipped the Islington North MP for the top job, his odds were still at 3 to 1.

Remember bookmakers aren’t trying to predict the future, they’re trying to turn a profit. (As are experienced betters – when Cooper’s odds were long, it was good sense to chuck some money on there, just to secure a win-win scenario. I wouldn’t be surprised if Burnham’s odds improve a bit as some people hedge for a surprise win for the shadow health secretary, too.)

I still don’t think that there is a plausible path to victory for Yvette Cooper

There is a lively debate playing out – much of it in on The Staggers – about which one of Cooper or Burnham is best-placed to stop Corbyn. Team Cooper say that their data shows that their candidate is the one to stop Corbyn. Team Burnham, unsurprisingly, say the reverse. But Team Kendall, the mayoral campaigns, and the Corbyn team also believe that it is Burnham, not Cooper, who can stop Corbyn.

They think that the shadow health secretary is a “bad bank”: full of second preferences for Corbyn. One senior Blairite, who loathes Burnham with a passion, told me that “only Andy can stop Corbyn, it’s as simple as that”.

I haven’t seen a complete breakdown of every CLP nomination – but I have seen around 40, and they support that argument. Luke Akehurst, a cheerleader for Cooper, published figures that support the “bad bank” theory as well.   Both YouGov polls show a larger pool of Corbyn second preferences among Burnham’s votes than Cooper’s.

But it doesn’t matter, because Andy Burnham can’t make the final round anyway

The “bad bank” row, while souring relations between Burnhamettes and Cooperinos even further, is interesting but academic.  Either Jeremy Corbyn will win outright or he will face Cooper in the final round. If Liz Kendall is eliminated, her second preferences will go to Cooper by an overwhelming margin.

Yes, large numbers of Kendall-supporting MPs are throwing their weight behind Burnham. But Kendall’s supporters are overwhelmingly giving their second preferences to Cooper regardless. My estimate, from both looking at CLP nominations and speaking to party members, is that around 80 to 90 per cent of Kendall’s second preferences will go to Cooper. Burnham’s gaffes – his “when it’s time” remark about Labour having a woman leader, that he appears to have a clapometer instead of a moral compass – have discredited him in him the eyes of many. While Burnham has shrunk, Cooper has grown. And for others, who can’t distinguish between Burnham and Cooper, they’d prefer to have “a crap woman rather than another crap man” in the words of one.

This holds even for Kendall backers who believe that Burnham is a bad bank. A repeated refrain from her supporters is that they simply couldn’t bring themselves to give Burnham their 2nd preference over Cooper. One senior insider, who has been telling his friends that they have to opt for Burnham over Cooper, told me that “faced with my own paper, I can’t vote for that man”.

Interventions from past leaders fall on deaf ears

A lot has happened to change the Labour party in recent years, but one often neglected aspect is this: the Labour right has lost two elections on the bounce. Yes, Ed Miliband may have rejected most of New Labour’s legacy and approach, but he was still a protégé of Gordon Brown and included figures like Rachel Reeves, Ed Balls and Jim Murphy in his shadow cabinet.  Yvette Cooper and Andy Burnham were senior figures during both defeats. And the same MPs who are now warning that Corbyn will doom the Labour Party to defeat were, just months ago, saying that Miliband was destined for Downing Street and only five years ago were saying that Gordon Brown was going to stay there.

Labour members don’t trust the press

A sizeable number of Labour party activists believe that the media is against them and will always have it in for them. They are not listening to articles about Jeremy Corbyn’s past associations or reading analyses of why Labour lost. Those big, gamechanging moments in the last month? Didn’t change anything.

100,000 people didn’t join the Labour party on deadline day to vote against Jeremy Corbyn

On the last day of registration, so many people tried to register to vote in the Labour leadership election that they broke the website. They weren’t doing so on the off-chance that the day after, Yvette Cooper would deliver the speech of her life. Yes, some of those sign-ups were duplicates, and 3,000 of them have been “purged”.  That still leaves an overwhelmingly large number of sign-ups who are going to go for Corbyn.

It doesn’t look as if anyone is turning off Corbyn

Yes, Sky News’ self-selecting poll is not representative of anything other than enthusiasm. But, equally, if Yvette Cooper is really going to beat Jeremy Corbyn, surely, surely, she wouldn’t be in third place behind Liz Kendall according to Sky’s post-debate poll. Surely she wouldn’t have been the winner according to just 6.1 per cent of viewers against Corbyn’s 80.7 per cent. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.