First Supplementary memorandum from the
Institute for Fiscal Studies
THE CHILD BENEFIT DISREGARD IN HOUSING BENEFIT
AND COUNCIL TAX BENEFIT
1. Budget 2008 announced that, from October
2009, child benefit will be disregarded in the calculation of
housing benefit and council tax benefit (HB/CTB).
2. At present, child benefit counts as income
for HB/CTB, and so technically lowers entitlement to those benefits.
In practice, the child allowances in HB/CTB are set to a value
that effectively incorporates child benefit. For example, when
the real value of child benefit changes, governments usually alter
the real value of the child allowances in HB/CTB so that families
on HB/CTB see the effect of the higher child benefit.
3. Disregarding child benefit in HB/CTB
does not affect families who are receiving the full entitlement
of HB/CTB, as it is impossible for them to be entitled to any
more HB/CTB; it only affects those families who are on the taper
of HB/CTB, and those families who, without the disregard, have
incomes sufficiently high to not be entitled to HB/CTB and who
will become entitled with the disregard. In practice, this means
that the disregard benefits working families with children on
HB/CTB.
4. The taper in HB is 65%, and in CTB is
20%, and so this measure can potentially increase families' HB
awards by 65% of their child benefit entitlements, and increase
CTB awards by 20% of their child benefit entitlements. For a 1
child family entitled to both, this amounts to a potential gain
of £17 a week in 2009-10 (when child benefit for the first
child is due to reach £20). Assuming that child benefit for
subsequent children in 2009-10 is 3.25% higher than in 2008-09,
the maximum gain for families with 2/3/4 children is £28/£39/£50
a week.
5. However, families will gain by less if
they earn less than they receive in child benefit (in which case
they will gain by up to 85% of their earnings) or if they have
incomes sufficiently high that they are not entitled to HB/CTB
without the disregard (in which case they will gain somewhere
between £0 and the amounts stated above). Furthermore, the
gain for a particular family clearly cannot exceed that family's
maximum entitlement to HB/CTB.
6. In Budget 2008, the Government estimated
that this measure would cost £350 million in 2010-11 (the
first full-year effect). Assuming full take-up of HB/CTB, we estimate
the measure could cost around £600 million a year and benefit
900,000 families. Given the low take-up of HB/CTB, it is highly
likely (and perfectly sensible) for the Treasury to be assuming
less than full take-up, and so one might estimate that up to 0.5
million families could benefit from this measure.
7. The disregard makes a dramatic difference
to the gain to work for the primary earner in families with children
entitled to HB/CTB. Although the reform will benefit both couples
and lone parent families, lone parents are particularly likely
to be entitled to HB. As a recent report showed, such families
have extremely weak incentives to work at present because of the
steep withdrawal rates in HB/CTB, and this reform is very well
targeted on those families.[27]
It is therefore possible that this change could induce a significant
behavioural response in encouraging out of work families with
children to work, particularly part-time. The measure should be
particularly important in areas with high rents and high council
tax, such as London and the south east.
8. The Figure below shows how net income
varies with gross earnings for a lone parent family before and
after this reform. At low wages, this reform increases the gain
to work by amounts stated above (£17/£28/£39/£50
a week for 1/2/3/4 child families entitled to HB/CTB).
Assumes: two children aged seven and five, no
childcare, minimum wage, rent of £80/wk, CT of £17.22/wk.
9. There are several drawbacks of this reform.
10. First, it extends HB/CTB entitlement
to more families. Given the existing difficulties that some local
authorities have in administering HB claims, this may not be an
obviously desirable outcome.
11. Second, the increased entitlement to
HB/CTB will increase the number of working families facing the
extremely high marginal effective tax rates that come about when
a rise in earnings leads to reduced tax credits, reduced HB/CTB
as well as extra payments of income tax and national insurance.
However, a recent study by IFS and One Parent Families/Gingerbread
suggested that the positive impact of a measure like this on the
proportion of lone parents working would outweigh the negative
impacts of some affected lone parents choosing to work fewer hours.[28]
12. Finally, the reform will only help families
if they claim HB/CTB, and recent estimate is that take-up of HB
amongst working lone parent families is around two-thirds, considerably
lower than take-up amongst non-working families.[29]
Government-funded research found widespread perception amongst
potential claimants and even Jobcentre Plus staff that HB/CTB
were not available to working families.[30]
The true impact of this reform will only be seen if the government
can raise take-up of HB/CTB amongst working families.
13. The reform also highlights that working
families who are not renting are not entitled to any help with
their housing costs. Theoretically, any increase in entitlements
to HB, such as this reform, further increases this discrepancy.
Whether this discrepancy should be seen as an unwelcome distortion
depends on one's view towards housing policy, social housing and
the role of housing benefit.
14. The Government announced in Budget 2008
that it was undertaking a fundamental review of HB for working-age
recipients, and so may be able to address some of these drawbacks
in that review.
27 May 2008
27 Bell, K Brewer, M and Phillips, D. Lone parents
and "mini-jobs", York: JRF. Back
28
Bell et al, op cit. Back
29
Bell et al, op cit. Back
30
Turley, C and Thomas, A. (2006), Housing Benefit and Council
Tax Benefit as In-work Benefits; Claimants' and Advisors' Knowledge,
Attitudes and Experiences. DWP Research Report No. 383. Leeds:
CDS Back
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