Why Cameron has rejected Nadhim Zahawai's child benefit plan

The Tory MP's plan to limit all child-related benefits to two children would undermine the 'striver'/'scrounger' divide by hitting all families, regardless of their employment status.

Earlier this week, George Osborne vowed to cut "billions" more from welfare if the Tories win the next election. In an op-ed in today's Mail on Sunday, Conservative MP Nadhim Zahawi suggests one way he could do so. The No. 10 policy board member calls for the government to limit all "child-related welfare" to "the first two children". Here's the key passage:

This would include Child Benefit and Child Tax Credit but would exclude disability payments.

It would apply to all households, both in and out of work, and only to new births after the change became law. Capping welfare at two children may seem tough, but setting the cap at three simply wouldn’t deliver the savings we need.

At first sight, this might merely appear to be a restatement of the proposal previously floated by Iain Duncan Smith. The Work and Pensions Secretary said in September 2012: "My view is that if you did this you would start it for those who begin to have more than say two children. Essentially it's about the amount of money that you pay to support how many children, and what is clear to the general public, that they make decisions based on what they can afford for the number of children they have. That is the nature of what we all do."

But there are several key differences with the Duncan Smith plan, which was vetoed by the Lib Dems before the 2012 Autumn Statement. The first is that Zahawi's cap would apply to all child-related benefits, rather than child benefit alone. The second is that it would apply to all families, rather than just those claiming out-of-work benefits. It's the latter point that explains why No. 10 has been quick to stamp on the idea, with a source commenting: "this is not government policy and is not supported by the prime minister."

Were the Tories to limit child-related benefits for all families, regardless of their employment status, it would undermine the 'striver'/'scrounger' divide they have worked so hard to create. As Grant Shapps said of the Duncan Smith plan earlier this year: "A lot of people worry that the way welfare operated under the last government meant claimants were free from taking the difficult decisions you would take if you are in work – none more starkly obvious than when you have children.

"If you are a working family and you have another child, you know it’s going to mean quite a severe impact on your living costs. Yet in the welfare system, it’s almost turned on its head, so additional children are actually recognised, with no limit. We need to create a choice for people on welfare which mirrors that which millions of people in work who aren’t receiving state support have to make. It’s only fair to the taxpayer."

This, of course, is nonsense. There is no evidence that significant numbers of families have more children merely to claim benefits and nor is it clear why it would be a less "difficult decision" for them to do so (unlike in-work families, they cannot draw on private salaries as well as social security). But Shapps rightly believes there is a ready audience for his rhetoric.

While the Duncan Smith proposal would help to reinforce the artificial divide created between "working" and "workless" families (owing to the insecure labour market, many cycle in and out of work), the Zahawi plan would undermine it. For that reason, while the former idea will almost certainly appear in the next Tory manifesto, the latter will not.

David Cameron talks during a PM Direct event at the Tetley Tea factory in Darlington on December 13, 2013. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR