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Trading Lessons

Coalition Frankenstein Government Child Benefit Cut Middle Class Shocker

Politics / Economic Austerity Oct 04, 2010 - 02:56 PM GMT

By: Nadeem_Walayat

Politics

Best Financial Markets Analysis ArticleThe Conservative half of the frankenstein coalition government announced today that it will pull the plug on 1.2 million middle class families by withdrawing Child Benefit for all households (with children) where anyone's gross annual earnings are £44,000 or more (40% tax bracket) from April 2013, which amounts to an effective tax hike of as much as 7% for most of the 1.2 million families.


The announcement aimed at an annual saving of £1 billion, represents a huge switch from Conservative election campaign promises of not ending universal Child Benefit, which was accompanied with much hype about protecting family values whilst this announcement seeks to destroy families with single wage earners and stay at home mothers.

The policy is deeply flawed and suggests that the coalition government is primed as a consequence of its two party structure to make huge blunders such as this which in its implementation will targets single income households whilst completely failing to impact on dual income households that may have near double the income as the following example illustrates.

Two families each with 3 children.

Family 1

One Worker earning £44,000 gross per year, will lose £2,200 Child benefit per year.

Family 2

Two wage earners on £43,000 gross per year. totaling £86,000 per year, will continue to receive Child benefit of £2,200 per year.

As the above example illustrates the announced policy is deeply unfair in that benefits are withdrawn from households with far less incomes then families with 2 wage earners.

However the policy also seeks to destroy the incentive to work for ALL workers as those earning below £44,000, have aspirations to achieve higher pay of £44,000+ which has now been destroyed, because as soon as someone earnings a penny more to hit £44,000 they effectively LOSE gross pay equivalent to £3,080. Which also means that those with 3 children already earning £44,000 to £47,000 have an incentive to become less productive so that their pay is cut to below £44,000. Therefore the announcement acts as an earnings cap on the workforce (with families) where there needs to be a sizable pay hike for workers to be any better off by working harder. A competent implementation would have entailed tapering off of child benefit the more people earn.

A better policy would probably have been to scrap child benefit altogether resulting in an annual saving of £12 billion instead of this policies £1 billion that is a hugely unfair monstrosity.

The policy is a huge vote loser for the conservatives as it hits some 2 million traditional tory voters, this leads me to conclude that it may never be implemented i.e. either that it goes the way of Labours 10p tax fiasco and gets scrapped, or that the announcement is a political ploy ahead of spending cuts to be announced within the next 3 weeks that will be implemented before the proposed benefits cut.

The chancellor also announced a £500 weekly benefits cap (£26k annual) that will hit 50,000 benefits scroungers that work the system to achieve benefits that are double the rate of average earnings, which effectively means being on benefits for life as they could never achieve employment that would deliver gross equivalent earnings of more than £50k per year with several thousand in receipt of more than £75k per year in benefits.

Labours Legacy

Unfortunately the real fault for announcements such as this lies at the last Labour governments feet, which left a near bankrupt scorched earth economy that demands urgent and unpleasant actions to bridge the huge £156 billion gap between that which the government earns and spends.

The coalition government will shortly confirm concrete measures aimed at getting a serious grip on the budget deficit that it plans on reducing from £156 billion for 2009-10 to £20 billion by 2015-16. My earlier analysis (29 Jun 2010 - UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt ) concluded in the above trend expectation for the UK budget deficit, that expects the coalition government to maintain its deficit reduction target into 2012-13, after which I expect a divergence from the Coalition Government's plan as the government seeks to engineer an election boom going into May 2015.

Comments and Source : http://www.marketoracle.co.uk/Article23229.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 24 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Feejay
05 Oct 10, 02:51
good cuts

I am not a Tory in any sense of the word, but this is the most sensible thing that they have done yet. Have been saying that this has needed doing for years and although I would have put the limit at 50k I agree. Any one you has that much coming into a household has enough to reduce their outgoings to suit!

Other people have a lot less to live on and manage.


Prima
05 Oct 10, 03:48
child benefit

Slashing child benefit in such an ill conceived unfair way is a massive own goal - for both the Tories and the Lib Dems - and will dominate the conference. They should be quiet - if after 13 years in opposition and five years locked away coming up with ideas this is their opening gambit, it's a bit pathetic and dreadfully communicated.

Clegg is such a shameless opportunist, I wouldn't put it past him to change his mind and hook up with brother Ed in an alternative coalition should things cut up rough over the next year. And I bet Cameron thinks this too. Watch this space indeed...


Angel
05 Oct 10, 07:46
Chikld benefit cut

It's tough to lose £1700 a year - my family will too - but it is difficult to justify why families on this level of income should be getting a tax-payer funded bail-out. Why should a single person on £20k a year be subsidising people like us? This universal benefit is just not socially justifiable.

Where the government has really missed the "common-sense" test is in the way it proposes to end it. "Tough but fair" is Osborne's mantra. But can it be fair that a dual income family earning £80k gets a top-up while a single income family on £50k does not? No!

This could become the Coalition's 10p tax band - Gordon Brown never really recovered from that ill-thought out move. The middle classes know the country's finances are pretty bad. We are all going to have to address that. Personally, I'm prepared - if not pleased - to take the "tough" option but only if it truly is "fair".

I think this coalition government has a lot to offer the country if it really can push through a"tough but fair" reforming agenda . But it only has a short window of opportunity to make this particular tough move fair because ill-conceived moves such as this could so easily tear it apart.


Robert Berke
05 Oct 10, 15:56
US Stock Market

Walayat: "Summer correction could hit low of 9800 than rally to 10,700."

The only analyst who has been absolutely right on all counts.


Tony
06 Oct 10, 01:03
Cut it out.

Too right, this antiquated subsidy should be completely revoled. You want kids, you pay for them. I'm damned if I see why I should!


Simon Green
06 Oct 10, 09:23
benefits

Tony

if you make it impossibly expensive for the middle class to have children then all this country will comprise of are baby making factories on benefits.

Which means higher taxes for you as you will pay for their benefits for life!


Nadeem_Walayat
06 Oct 10, 10:33
child benefit

Tony,

Don't forget all the free services youve enjoyed and your part in the £850 billion debt bill that your leaving for the next generation, thats £28k of debt per current tax payer that the next generation will have to pay for.

NW


Tony
07 Oct 10, 06:06
Ah yes, all the 'Free' services

Hi Nadeem,

I will take this opportunity to say how much enjoy reading your market and economic analysis, it's top notch, so thanks for sharing.

As to your reply, thanks. 'Free' is very mis-used word these days, I pay my taxes, so I'm not entirely sure what "all the free services I've enjoyed" means.

In the context of living in a democratic society, and in light of the fact that to a large degree I believe that society gets the government they deserve, then yes I do have a 'part' in the £850 billion debt from a collective perspective. However, let's put that 'part' into perspective, the government does not phone me up and ask me to make the final decision, or even to cast an individual vote, on where we deploy our troops, or how big a pay increase we should give GP's, or how many new managers we should create in the NHS.

With the greatest of respect the rest of your reply, in the context of my comment suggests you endorse the idea of kicking the can down the road. I do not. (I'm fairly certain you don't either, that's just the way it reads in this context)

Child benefit, or as it was originally known, family allowance was brought in post WW2 with a specific purpose in mind. Fast forward to today, encouraging people to have as many kids as possible to swell the future taxpayers, so we can "play now, pay later" is not a sustainable policy.


Nadeem_Walayat
07 Oct 10, 08:27
child benefit

Hi Tony

If it were up to me ALL child benefit would be scrapped to pay down the debt.

To be blunt the problem with this governments policy change and Labours string of policies before it, is that it favours (as commented above) baby producing factories to maximise benefits for life churning out ferral youth roaming the streets that resulted in dumbing down of the population thus paying child benefit to the middle classes induced them to have children that grow up to become the doctors, dentists, and most importantly TAX payers to counter the dumbing down of the population, now thats gone!

Do way save anything from this policy change in the long-run ?

Lower future tax revenues, higher benefits bill EQUALS MORE DEBT.

The policy change has NOT been thought out, as I said above they should either scrapped it altogether or have kept the status quo.

This is the worst possible decision that will result in LESS wealth generation. Look at all of the consumption that the middle class famlies spend on their 'little preciouses' mothercare will take a hit so wil many other UK companies.

Instead of cutting benefits they should have ENTICED the middle class to have MORE children !

They should enticed families to STAY together so that there is less burden on the state from single parent families.

The frankenstien government has made a huge blunder.

I hope that clarifies where I stand.

Best

NW


jonnysingapore
07 Oct 10, 09:55
child benefit bribe

the double income families that are individually each below the top tax rate are aspirational voters who may defect from the tories. Hence their child benefit wasn't attacked.

Cynical.


Tony
07 Oct 10, 15:08
Child Benefit

Hi Nadeem,

Thanx, understand your point totally

Best wishes.


jonnysingapore
08 Oct 10, 20:28
benefit cap

Max £26K benefit per family:

welfare cap to large families (niche case), assuming it doesnt encourage a large family on welfare to break up and split the kids between them to get double the money:

In addition, there are larger families that work (most housing benefit is paid to people in work apparently) that have never needed state assistance but have been displaced from the workforce by east european labour. Suddenly they can't afford to work even if they could find a job anymore. Radio 5 has had people in this category calling in. Its a real problem even before this welfare cap was raised.

The real problem with this capped welfare policy is it doesnt reduce welfare dependance as you can still go ahead and have 2 kids at least and get the house which you have no chance of ever buying in any case. But its good politics.

I do understand you saying scrap child benefit, but there has to be a mechanism of helping out children of single parents particularly - a lot it is just circumstance.


Nadeem_Walayat
08 Oct 10, 20:42
Capping benefits

Don't be under any illusion by the economic calm you see around you as the bottom line is that the country WILL go bankrupt (high if not hyper inflation destroying the value of the paper that they call the british pound), if the deficit is not cut.

The government is effectivelty saying that it is capping housing benefit at £500 a week to east into the £20 billion housing benefit bill.

The announced cuts are only the first step, because TOTAL debt will still INCREASE by 50% over the next 5 years regardless.

The government will now use REAL inflation (about 6%) to ERODE the purchasing value of benefits and earnings.

Best

NW


jonnysingapore
09 Oct 10, 11:18
bankrupt Britain

I agree with you that deficit must be cut. You can't keep spending what you don't have (it was only done to prevent depression after the global crisis which the tories wont admit to).

I just don't think it matters if you cut it all in 4 years or 7 years. for that decision overall employment levels are far more important since our debt is very much longer term bonds with less rollover required than even Germany in the coming year or two.


Nadeem_Walayat
09 Oct 10, 13:52
Deficit and Debt

The difference between cutting the deficit over 4 years and 7 years is approx £200 - £250 billion of more debt.

The point is, when governments lose control of deficits then the markets forced cuts are near immediate as evidenced by the depression in Ireland / Greece and the hyperinflationary collpase in Iceland.


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