Much of the recent debate over Child Benefit surrounds the Government’s recent means-testing for higher rate taxpayers. The need to reduce the budget deficit, the consequences for work incentives and relief for families are all issues that have been discussed. One issue that has not really been covered is what families actually spend Child Benefit on.
Buried deep within a study, “Who Benefits from Child Benefits?” by Laura Blow, Ian Walker and Yu Zhu of the IFS and Warwick and Kent Universities, is some fascinating data which sheds light on how families use the Child Benefit that they receive.
Using data from the Family Expenditure Survey over a 21 year period, the study looks at the spending patterns of couples and single parent families. The study aims to find how much of Child Benefit is used on ‘child goods’ such as children’s clothing and how much is used on ‘adult goods’ such as alcohol and tobacco. The authors find that rather than Child Benefit being used by parents to increase expenditure on ‘child goods’, the great majority of it is spent on ‘adult goods’.
Despite the fact that the Family Expenditure survey under-records household spending on alcohol, the Child Benefit payments appear to cause a significant increase in expenditure on alcohol for both couples and single parents. There is also a large increase in spending on adult clothing. In fact, in two parent families just 3% of their non-Child Benefit income is spent on alcohol, compared with an average 50% of Child Benefit income. In single parent families, approximately 20% of Child Benefit is spent on alcohol compared to just 2% of non-Child Benefit income. Furthermore, in single parent families, 70% of Child Benefit is spent on women’s clothing.
To be clear, the findings of the report do not show that most children across Britain are being neglected by parents; although undoubtedly that is the case for some children. Actually, the authors reach a much more comforting conclusion – that, on average, parents have fully insured their children against any changes in child benefit. This means that all the expenditure on children that parents deem necessary has already been carried out with their non-Child Benefit income. The payment which families then receive in the form of Child Benefit is therefore used to supplement parental expenditure.
Given how weighted against families our tax system is and given the substantial positive externalities in raising children it is right that the tax and benefit system recognise the extra burden in looking after children. The question however is: are there more efficient and equitable ways of doing it than Child Benefit?
Does it really make sense for families to work, then to have part of their incomes taken from them, then for a portion of that money to be given back to them which they proceed to spend on non-child related goods anyway? Such a system only serves to increase bureaucracy and the dead-weight loss of the administrative costs of government.
If the Government wanted to be more radical, it could enact a more fundamental reform than the means-testing which it is currently proposing. For example, it could merge Child Benefit with Child Tax Credits and later on with the Universal Credit as the IFS proposed which would at least reduce some of the unnecessary administrative costs. Or, if the £12 billion Child Benefit payments are being used as a supplement to family income, then why not cut taxes and cut child benefit altogether?