Child benefit is arguably the most socially regressive payment in our system, writes Noel Whelan
MOST COMMENTATORS who were asked for budget predictions this week offered the view that while it will be severe, it will not include any changes to child benefit. I hope they are wrong.
If child benefit is left unreformed the Government will have missed an opportunity to use the payment more effectively as a means of tackling relative poverty. Taking child benefit away from more wealthy households, or at least asking them to pay tax on it, would be a prudent and progressive step.
Child benefit is arguably the most socially regressive payment made in our social welfare system, not because child benefit is a bad thing but because paying it to all families with children, irrespective of household income, wastes resources which could be better utilised if targeted at families most in need. All taxpayers - poor and wealthy alike - are funding a payment which is universally provided tax free to all, irrespective of means.
The significant increases in child benefit over the last decade makes it more regressive. In 1997 the child benefit rate for a first child was €38.10; it is now €166, representing a four-fold increase in a decade.
Since April 1st, 2006, the Government has introduced a new €1,000-a-year early childcare supplement payment for parents with children under six. This four-fold increase in child benefit and the new early childcare supplement payment have had a dramatic impact on lower-income households and have led to a significant fall in absolute child poverty rates.
However, the overall effect of these increases has been to exacerbate inequality.
Households currently in receipt of child benefit stretch across a spectrum of need. At one end are households on or about the poverty line who rely on the child benefit payment to provide basic necessities.
These parents wait anxiously for the first Tuesday of each month when one of them - almost always the mother - will queue early outside the post office to collect the payment and maybe use it to pay an overdue utility bill or buy saving stamps for the next utility bill.
For households who are a little better off, the child benefits means they can do a "big shop", fund a monthly family treat or put some money aside for seasonal costs like back to school or Christmas. Nobody could argue for a cut in child benefit for these families. The largest group of households receiving child benefit are at the middle of the needs spectrum. For this group, if children are still of pre-school age, the monthly payment goes towards childcare costs or covers some of the shortfall in the family income. If children are older, it helps with the many incidental costs associated with rearing and educating teenagers or younger children. The bulk of these households should continue to receive child benefit but could be asked to pay tax on it.
There is, however, another large group of recipient households for whom child benefit is surplus to immediate requirements and where it is akin to pocket money for small luxuries or is simply transferred into savings accounts for future education expenses or some future indulgence for the child.
The results of a 500-sample national survey published by Bank of Ireland two months ago suggested that 35 per cent of those receiving child benefit do not spend it in the month they receive it. Apparently, of the 35 per cent who save the child benefit, 55 per cent use a deposit savings account, while 45 per cent use a long-term investment plan. Even allowing for the fact that the survey was internet-based, these are astonishing figures and they are supported by anecdotal evidence.
Child benefit recipients who collect at the post office rather than opt for direct lodgement to an account can collect it anytime within three months. Those involved in paying it out estimate that as many as one fifth of recipients collect payment once every three months, which says a lot about whether they need the payment.
One estimate suggests that a child whose total child benefit every month is lodged into a long-term savings account for the next 18 years would end up with pot of €60,000 when they reach adulthood.
Saving is a habit which should be encouraged but there is no justification in these stringent times for the general taxpayer funding contributions to the future college funds or gap year trips of such children.
If their family's disposal income is already such that they can forgo the child benefit payment each month then they are likely to be able to afford college.
Child benefit is a good idea for many reasons. It is a useful weapon against child poverty and an effective means of subsidising the costs associated with childcare. It is also redistributive within the household since in most cases it is paid to the mother, who in many instances is not earning.
However, as an untaxed direct payment paid irrespective of family income size, it is regressive. It would be a pity if fear of a political backlash from the middle classes again scares the Government off reforming child benefit.