Labour's promises refuse to go away

BACKGROUND:WHEN TÁNAISTE Eamon Gilmore was reminded recently of his oft-quoted "it's Frankfurt's way or Labour's way" warning during the election campaign, he described it as "chapelgate language".

If the portents are true and child benefit is reduced by €10 a child in the budget, the Labour leader will find it more difficult to describe as election rhetoric one of only two preconditions he set down for Labour entering coalition government with Fine Gael.

A week before polling in February, Gilmore was unequivocal about what would not be tolerated in government.

“The Labour Party will not agree to having child benefit cut any more. Fine Gael need to drop their plans to drop child benefit,” he said then.

The disclosure over the weekend that cuts in benefit were on the table is potentially embarrassing for Labour.

Senior Ministers, including Taoiseach Enda Kenny and Minister for Finance Michael Noonan, said that no decision had yet been made. The point is though that at this late stage of the process, the prospect of cuts has not been ruled out and is still a live issue, notwithstanding it being a core difficulty for Labour.

From a purely arithmetical perspective, it’s not hard to see why.

Child benefit will cost the State €2.1 billion in 2011. That is 10 per cent of the overall welfare budget of €21 billion. With the Government committed not to cut primary social welfare rates, it was always one of the obvious payments to be examined.

In Fine Gael’s election manifesto published in early February, Kenny committed his party to reductions in child benefit. At the time Gilmore compared Fine Gael to the Tories and said the “stealth tax” would badly hit already stretched families. He said such a move would reduce benefit for a family with two children by €252 a year – ironically, exactly the same as the €10 a child a month cut now being mooted.

The programme for government states: “We will maintain social welfare rates.”

There is a debate as to whether or not child benefit is included in that goal. Over the weekend, senior party figures including Jan O’Sullivan argued that the goal referred to “primary” social welfare payments on which recipients rely for their main income. The Opposition argued that it is only now that that distinction is being made.

But a wider political issue exists with child benefit that was not addressed at all by the Labour Party in the run-up to the election and that is the universal nature of the payment. Irrespective of the parents’ means, the child benefit will be the same. This has led to arguments of it being inequitable and deeply unfair.

The question of means testing or, alternatively, taxing the benefit has cropped up regularly since its introductions in the 1940s.

Documents released by Department of Finance last year showed the difficulties inherent with any attempt to direct proportionately more of the benefit towards lower-income families.

Departmental officials reasoned a levy on child benefit would run into difficulties with children of cohabiting couples.

The Revenue Commissioners have a database of married couples but has no similar model for cohabiting couples. Revenue would find it difficult to ensure all parents in this group were paying tax on child benefit. Similar problems would arise for parents who had separated or divorced.

If an attempt to impose a tax was made and it was shown there were gaps in the information available, the Government would be vulnerable to a constitutional challenge.

Similarly, means-testing also presented major obstacles. The first was deciding which was assessed: a family’s gross income or its net income? Using net income would be fairer but would involve extra administration and would be more costly.

It would also necessitate significant and costly changes to IT systems. As Minister for Social Protection Joan Burton said yesterday: “The IT in Social Protection and IT in Revenue Commissioners do not talk to each other.”

More generally, introducing a tax or means test on child benefit could become a disincentive to take up employment, according to one study.

In May Burton set up an advisory group on tax and social welfare. One of the briefs was to examine child benefit. The department said yesterday that the group was looking at better targeting child benefit at families that need most support. However, its report is not now due to be published until March.

The last government cut some €26 from the rate for the first and second child over two budgets, cutting the monthly payment from €166 to €140. A further €10 cut could save the Government €150 million in a full year. However, politically, Labour would pay a heavy price for such a move.