Progressives or regressives? The Lib Dems must choose on childcare policy

The coalition hasn’t resolved the role the welfare system should play in supporting families with children. The impasse on childcare policy reflects this.

Often it takes the deadline of an impending announcement to really expose underlying tensions about the future direction of policy. The coalition’s recent sorry saga on childcare policy  – breathless briefings about a major expansion in tax-relief meant to herald the coalition’s renewed vitality, followed by an awkward silence and then the inevitable stories about who is to blame for the lack of progress - is a case in point.  Never mind what this tells us about the coalition’s aptitude for media management, it also reflects something important about underlying attitudes towards the nature of the tax and benefit system. 

There have, of course, always been different objectives in our welfare system with different parties placing varying amounts of weight on them: social insurance or poverty reduction; targeting individuals or households. But when it comes to the question of how to support families with children through the tax and benefit system the current government seems to be in more of a muddle than most. Which in some respects is odd given that there is actually a fair amount of agreement within it.

To unpick this we need to consider that different governing logics are shaping current tax and benefit reforms. First, there is the agenda of targeting financial support at poorer households and doing this in a way that seeks to support work incentives. That’s the logic of Universal Credit (leave to one side whether it will be successfully delivered); just as it was for much, though not all, of the tax credit system that was built up under Labour. Both coalition parties agree there is still a role for this approach; but both think it should be a much diminished one (in part because of fiscal constraints, but not only because of this). Hence spending in pursuit of this objective has been cut back sharply and child poverty is set to climb steeply as a result.

Then there is the agenda of ensuring ‘fairness’ for individual tax payers as opposed to households. This second logic results in the personal tax allowance being prioritised. It is completely blind to household income or family circumstance: it matters not a jot to the size of your tax allowance whether you have no children or five. Again, both coalition parties have agreed it is right to spend very large sums of money on supporting individuals in the tax system – though the Lib Dems have been in the vanguard. The unnecessary collision between raising the personal tax allowance on the one hand, and the design of the Universal Credit on the other (something that has been highlighted before on this blog), meaning that low income claimants will lose the majority of any gains arising from future increases in their tax allowance, perhaps reflects the different political homes of the two flagship policies. 

There is a third and contrasting logic that says the tax and benefit system should be designed to recognise the financial pressures facing different types of households, for instance those with children compared to those without. This is sometimes referred to as a ‘tax-rebate’ objective – the point being that it’s not right to ask a family with three children to pay the same tax-bill as the single person on the same earnings (‘tax-rebate’ is in fact a misnomer as it’s about the additional costs a household may face whether or not they are supported through the tax or benefit system).

It was this  ‘rebate’ argument that led to child tax allowances being created in the People’s Budget by Lloyd George, renewed by Beveridge (alongside the family allowance), and then replaced by their more progressive and female-friendly successor, Child Benefit, ushered in by Barbara Castle in the mid-1970s. It was also this logic that underpinned a poorly explained part of Labour’s tax credit system: the ‘family element’, which was in effect a form of flat-rate payment, a bit like a tax allowance, which went to the majority of families with children though not the richest. This majoritarian component of tax credits was never really communicated in ‘rebate’ terms - and for both political and administrative reasons it was probably a mistake to include it in the tax credit system. Either way, that’s the role it played.

Support for this ‘rebate’ argument has recently also been in sharp retreat – at least when it comes to the benefit system. Child benefit has been frozen and clumsily affluence tested, and tax credits stripped away from middle income households. The result is that there are now two systems of means-tested support for families in operation at different parts of the income distribution. Again, both coalition parties have agreed to these changes - though I very much doubt either would have designed from scratch what has emerged as a result. 

So far this describes a picture of politically harmonious messiness on the question of how the tax and benefit system should support families. But sharper coalition tensions emerge when it comes to using the tax (as opposed to benefits) system to give recognition to different types of households. The Conservative Party is, of course, formally committed to a tax allowance to support marriage – a proposal which the Lib Dems can’t conceal their contempt for (along with, in private at least, a number of ‘liberal’ Tories). Tellingly, some influential voices on the right are pushing for the (re)creation of child tax allowances as opposed to a marriage allowance. Meanwhile, in a new twist to this ‘rebate’ logic, David Cameron and George Osborne want to use the tax system to support families with children so long as this is specifically for the costs of childcare, not those incurred more generally in raising a child. Tax-breaks (good thing) rather than tax credits or cash benefits (bad thing) are the order of the day: tax-break universalism appears to be alive and well; benefit-universalism is very last season.

On this note, at least, the Lib Dems appear, for now, to demur – hence the current childcare impasse (though doubtless a compromise will eventually be reached). Some, at least, are acutely aware that tax-reliefs - while often quite popular - are almost inescapably regressive. They exclude those who don’t work along with the rapidly growing numbers of the low paid who earn too little to pay tax – together amounting to roughly 40 per cent of the working age population. They are tilted against even larger numbers who earn too little to take full advantage of the relief on offer. And, of course, tax reliefs do much more for dual earning households who tend to be better off than their single earning counterparts. (It’s noteworthy, however, that the same Lib Dems have a tin ear when much the same arguments are applied to the personal tax allowance itself). Whether you love or loathe it, the policy of ‘taking people out of tax’ accentuates the distributional impact of tax-breaks. 

The result? Either Lib Dems reconcile themselves to the fact that the biggest gains from tax-breaks will be captured by higher income households - all the more so because of their own flagship tax policy - or they push back against the proposed use of reliefs and make an argument for the direct funding of universal childcare services as a central element of the welfare state. Which, as it happens, is the sort of argument they would have to sign up to if they find themselves in any sort of governing arrangement with Labour after 2015.

For now, we are left with the appearance of coalition confusion on how best to use the tax and benefit system to support families. Though, perhaps it’s less confusion and more that there are different parts of government who are each clear about the variety of welfare logic they want to prioritise - and no part of government capable of successfully reconciling them. Whoever wins the next election will inherit a system of support for families that no party will feel comfortable with.

David Cameron and Nick Clegg speak at a press conference inside 10 Downing Street to mark the coalition's half-way point earlier this month. Photograph: Getty Images.

Gavin Kelly is a former Downing Street adviser to Gordon Brown and Tony Blair. He tweets @GavinJKelly1.

Photo: Getty
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Another trade minister walks away from David Cameron's failed project

Francis Maude is lucky enough to be able to walk away from this Government and their failing policies – if only the rest of us could do so.  

After just nine months in the role Francis Maude has announced he will be stepping down as trade Minister. It means David Cameron will have gone through four trade ministers in six years.

The nine months that Maude has been in the role have not been happy ones – for him, or the British public.

Our trade deficit in goods has grown to a record £125bn and our overall trade deficit has risen to £34.7bn. Meanwhile, under the Tories the current account deficit increased to its largest level since 1830 – when the Duke of Wellington was Prime Minister.

We’ve also seen a widening gap between the Chancellor and the Trade Minister in that time. While initially championing Osborne’s much vaunted “£1 trillion trade target by 2020” recent weeks have seen Maude pouring cold water over the target – referring to it as a “big stretch” and indicating it is unlikely to be met. The “stretch” he refers to is the whopping £350bn that the Office of Budget Responsibility says Osborne’s 2020 target will be missed by.

Despite saying yesterday that he would be stepping down having devised a plan to tackle Britain’s huge trade problems these new figures – incidentally released on the same day as Maude announced he’d be leaving - are evidence that if there is a plan, it’s done no good so far.

While Maude might be able to just walk away from Britain’s dire trade situation others aren’t so lucky. Domestic export industries such as steel and manufacturing, where output is still lower than 2008, have come under huge pressure in recent years from soaring energy costs and cut price competition from markets such as China.

Boosting exports is key to tackling the historic deficit, but the government shows no sign that it really understands this. While Osborne fails to provide crucial support to the steel sector, which has seen devastating job losses, he isn’t failing to take every opportunity to court the increasingly unstable Chinese market which leaves Britain even more exposed to global headwinds. It was just a few months ago the Bank of England warned that if Chinese GDP were to fall by three per cent relative to its trend then the output in the UK would be around 0.3 per cent lower as a result, yet Osborne is undeterred.

It is workers in Britain that will be paying the price for these failing policies. Those losing their jobs at Tata steel, small manufacturing businesses suffering in the industry’s stagnation and many other ordinary workers are not lucky enough to walk away from the situation like Maude.

Their situation is compounded by the Government attacking ordinary people on middle and low wages in other ways.

Although Osborne pledged in November to stop all tax credit cuts, he is still going ahead with a proposed cut to the income disregard costing 800,000 people an estimated £300 a year. This is on top of the IFS’s analysis from just a few days ago that shows the Government’s planned cuts to Universal Credit will see 2.1 million working people lose out by an average of £1,600 a year.

And coming down the line Osborne’s ‘tenant tax’ which will force all but the very poorest council tenants to ‘pay to stay’ – charging them huge market rents to stay in their home – which many will be unable to afford.

Under the new measures a couple earning £15,000 each per year – scarcely over minimum wage each – would be asked to pay market rent for their home, or reduce their working hours in order to take them out of the income bracket.

Osborne claims to want the Tories to be ‘the Party of the workers’ but this policy shows how much of a farce that is. People who work hard on low pay will be forced from their homes.

Maude is lucky enough to be able to walk away from this Government and their failing policies – if only the rest of us could do so.  

Jon Ashworth is Labour MP for Leicester South.