Crude two-tier child benefit system in danger of creating a new poverty trap

ANALYSIS:Another cut to income could tip families on the breadline over

There’s little doubt over who would be hit hardest by changes to child benefit: middle- to low-income families who are already struggling to get by.

Under a proposed new two-tier child benefit payment system, only families with an income of less than €25,000 would qualify for the full child benefit rate; others would face a cut of about €20 in monthly benefits per child.

The result is those just outside the income threshold would take a bigger and disproportionate income hit compared to any other group.

To put it into context, €25,000 is in or around the poverty line for a family of two adults and two children.

Many of these families are on the breadline, or just hovering above it. They are typically termed the working poor: those who qualify for almost nothing, but pay for everything.

Full force of cuts

Outside of income thresholds for back-to-school allowances, rent allowances or medical cards, they are exposed to the full force of spending cuts or tax increases.

Many of those are saddled with negative equity and high mortgages and are just about keeping their heads above water. Another cut to their income could easily send them under.

There’s a real danger, then, that a crude two-tier system would create a new poverty trap, given what a low-income family would stand to lose in benefits through even a modest increase in earnings. The result – if the system isn’t configured carefully enough – is partners turning down paid work or, quite possibly, parents potentially splitting up so they’re not classified as a single family unit.

It’s early days, of course, and lots of details will need to be thrashed out. One thing is clear though: while the reforms are billed as a way of tackling poverty, it’s hard to see them having any major impact if past experience is anything to go by.

Figures released earlier this week show Ireland spends more than any other EU country on direct payments for children.

Direct payments

Yet, Irish child poverty rates are higher than average for developing countries. Much of this is down to the fact that we’re fond of giving direct payments, rather than investing the money in affordable or high-quality childcare.

Direct payments are important in making sure there’s enough money to heat, feed and clothe a family. But child benefit payments are hugely inefficient as a way of tackling an issue such as child poverty. Much of the €2 billion we spend goes to families who don’t need the money. This won’t change under the new system.

Research consistently shows that a high-quality or Scandinavian-type approach to childcare provides far better outcomes for children and their families. In a neat piece of timing yesterday, the European Commission agreed a draft “social investment strategy”, urging member states to step up investment in areas such as childcare.

Ireland is below average among countries when it comes to providing pre-school places for children. As the European Commission noted: “Countries that pursue a social investment approach and prioritise investments in social services . . . have lower levels of poverty and social exclusion, better educational outcomes, more and better jobs, and more sustainable public finances and growth.”