5 October 2010

Clumsily Progressive Child Benefit Cuts

Remember this chart?

This was from an IFS report from six weeks ago on the distributional effect of the Treasury's deficit reduction programme. It shows that the Government's claim that the impact of the Budget is progressive. With the exception of the households with the 10% biggest incomes, it appears the less you have coming in, the more you will feel the pinch of the austerity measures.

However, take a look at the timescale that this chart: it includes measures announced in the April and June Budgets running all the way until 2014. Later on into this time frame, there will have been several more Budgets that will no doubt include measures that will alter the distributional impact. These are obviously completely unforeseeable - it is impossible to model this impact without a crystal ball.

Helpfully, the same IFS report also contained this graph that only goes up to 2012, a shorter timescale that has less potential to being altered:

To compare apples with apples, focus on the black line - the loss as a proportion of household income. It shows that until 2012, the defect reduction measures are largely proportional, apart from the richest 10% who take a big hit early on. This means that the big hit to poorer households is expected to kick in around 2013 and 2014.

How Child Benefit Fits In

Clearly the allegation that the austerity measures were hitting the poorest hardest has shaken the government. So yesterday we heard that there will be a clampdown on Child Benefit for higher earners. This will undoubtedly hit households at the top end of the household income spectrum, and will have the effect of dragging down the richer deciles on the top graph, giving a more progressive appearance.

That's not to say that the proposal isn't littered with problems. The government has no mandate to be doing this. It clumsily looks at individual rather than household incomes. It means families could be worse off if an earner gets a pay rise that tips them into the upper tax band. It means that money could force an abused partner and their children to remain in a violent household if there is no Child Benefit to survive with if they were to escape. I seriously hope the policy is thoroughly revised before 2013.

But despite all its flaws, the policy shows that the government is attempting to ensure that the relatively wealthy take their fair share of the austerity. I just wish they weren't being so sloppy in doing so. The country needs a government with its head in the right place, not just its heart.

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