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28 October 2010

Why the child benefit cut may not happen

Treasury warns that plan to abolish child benefit for higher earners is “unenforceable”.

By George Eaton

Has universal child benefit been saved? The Wall Street Journal’s Iain Martin reports that the Treasury has warned that the coalition’s plan to abolish the benefit for all higher-rate taxpayers ” is “unenforceable”. Government sources believe that the measure is likely to be abandoned before its scheduled introduction in 2013.

The spanner in the works is the fact that the benefit is paid directly to the mother. This means that she is under no obligation to tell the father that she receives it, and that his tax status is irrelevant. As Martin explains: “If a mother claims it there is nothing forcing her to flag up to the taxman that her husband earns above the level that Osborne stipulates should mean no child benefit.”

In those cases where the mother pays at least 40 per cent tax that’s not a problem. But in those where she doesn’t, the Treasury will struggle to find out if she lives with a higher-rate taxpayer. The only solution is either the creation of an expensive new database to match mothers with their partners, or the abolition of child benefit altogether.

There was talk of merging the benefit with Iain Duncan Smith’s universal credit, but since then Cameron has promised that it will survive as an independent payment. As for the creation of a new database, the precedents aren’t encouraging, to say the least.

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David Cameron and George Osborne will be extremely reluctant to change course now. The child benefit cut is one of the few measures they can cite as evidence of their “tough but fair” approach, and it would save the government £1bn. To admit that all that heavy lifting was for nothing would be too painful.

But as the Treasury mandarins scramble around for a solution, here is a cautionary tale of the dangers of policy made on the hoof. Iain Duncan Smith must be furious.