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Starting next week, child benefit will gradually be withdrawn from over a million families with the aim of saving the government around £1.3bn a year.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families claiming child benefit, where one partner earns over £50,000, will have one per cent of their child benefit withdrawn for every additional £100 of income they earn up to the threshold of £60,000, at which point the benefit is completely withdrawn.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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Jeremy Corbyn appoints Shami Chakrabarti to lead inquiry into Labour and antisemitism

“Labour is an anti-racist party to its core," says leader.

Jeremy Corbyn has announced plans for an independent inquiry into antisemitism in the Labour party.

The review – led by Shami Chakrabarti, the former director of the human rights campaign group Liberty – will consult with the Jewish community and other minority groups, and report back within two months.

Its vice chair will be the director of the Pears Institute for the Study of Anti-semitism, Professor David Feldman.

The move follows a week in which the party suspended Bradford MP Naz Shah and former London mayor Ken Livingstone, amid claims that both had made antisemitic remarks.

But Corbyn told the Guardian: “Labour is an anti-racist party to its core and has a long and proud history of standing against racism, including antisemitism. I have campaigned against racism all my life and the Jewish community has been at the heart of the Labour party and progressive politics in Britain for more than 100 years.”

He added that he would not see the results of next Thursday's local elections as a reflection of his leadership, and insisted that he would not be held to arbitrary measures of success.

“I’m keeping going, I was elected with a very large mandate and I have a huge responsibility to the people who elected me to this position," he said.

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.