OPINION: WITH INTENSE pressure to cut Government spending, child benefit – which goes to all families with children regardless of income – is very much in the firing line. While cuts in social welfare rates generally have not been ruled out, it has been signalled that child benefit will certainly be targeted, write TIM CALLANand BRIAN NOLAN
Three options for cutting the cost of child benefit have been considered by the McCarthy report and the Commission on Taxation: making it taxable, reducing the payment rate for everyone, or means-testing it.
Cuts in payment rates would affect low-income families disproportionately, as recent research makes clear (see Tax Reform: Selected Issues, by T Callan, C Keane, JR Walsh, available at www.esri.ie) but there is a strong case for making child benefit taxable.
In the current debate the role of child benefit has been widely misunderstood amid assertions that it is plainly foolish and misguided to pay it to “the rich”. Like other countries, Ireland’s system of child income support aims not only to assist low-income families but also to make some contribution towards the costs of children more generally. All western European countries have a universal child benefit for this purpose, since society has an interest in families having children and raising them well.
Most of the expenditure goes to the lower and middle parts of the income distribution, very little to the top – the focus on millionaire recipients is a red herring as very little would be saved by excluding them. Low-income families also get extra support, mainly through child dependant additions to social welfare payments. With savings in public expenditure clearly required, this mix of objectives has to be kept to the forefront in deciding how best to make these savings.
Making child benefit taxable would mean that those below the tax threshold continue to receive the full rate of €166 per month for first and second children (and €203 for the third and subsequent children). Those paying tax at the standard rate would still obtain a net benefit of €133, while those on the top rate of tax would receive a net benefit of €98 per month. This would raise approximately €400 million for the exchequer – a very substantial amount.
The same aggregate saving could also be achieved by cutting rates of payment for everyone, along the lines considered in the McCarthy report, to a standard figure €140 per month. However, this option would have a very different impact on the income distribution. The rate cut would lead to a fall in net income of about 3.5 per cent for the poorest one-fifth of families, compared to a fall of less than 1 per cent for the richest one-fifth. By contrast, making child benefit taxable would lead to a fall of less than 1 per cent for the poorest one-fifth of families, and a fall of 1.5 per cent for the richest one-fifth.
What about means-testing? This would involve a full payment to those below an income limit, gradually withdrawn from those above it. The withdrawal rate for the benefit would act like a new tax rate, on top of existing taxes, and consequently would reduce the financial incentive to work.
By contrast, broadening the income tax base to include child benefit would allow the existing tax system and tax rates to improve targeting, without incurring the disincentive effects associated with a further benefit withdrawal rate. It appears that the administrative problems in making child benefit taxable, particularly in time for budget 2010, are perceived as an obstacle in official and political circles. However, it should be possible to overcome such administrative difficulties given political will.
If more time is needed, an interim solution would be to reduce child benefit rates in 2010, while firmly committing policy and administration to a reversal of the rate cut combined with taxation of child benefit in 2011.
Compensation to those on low income could be provided by increasing the child dependant additions for social welfare recipients temporarily for 2010.
Tim Callan is a research professor at the Economic and Social Research Institute; Brian Nolan is professor of public policy at UCD