Helping families with children

From April, children will be supported through the tax and benefit system by four different mechanisms: child benefit, income support, the working families' tax credit, and the new children's tax credit. One of these - child benefit - goes to all families, regardless of their income, but the other three are assessed against income in some way. Plans were recently announced by the Government to unify these three means-tested parts of child support into a new integrated child credit. This radical reform could bring together around ù billion of existing payments to families into a single benefit claimed by around 6 million families in 2003. However, many practical details must be worked out first. For example:

• how can three mechanisms which are assessed on different measures of income, over different time periods, and are of differing generosity, be combined into one?
• how generous should the new credit be? Should the greatest support be given to younger or older children?
• will the credit involve a massive extension of means-testing? Does this matter?
• how much will the introduction of the integrated child credit cost?

New research published today by the Institute for Fiscal Studies aims to answer these questions by using a simulation model of the way the integrated child credit will work, and building on past work on child poverty and the administration and design of taxes and benefits. Some of the main findings are:

• around 2.5 million families with children in the UK currently undergo a means test assessed against joint family income. The introduction of the integrated child credit will extend a means test to 6 million families, nearly all families with children in the UK.
• introducing the integrated child credit is likely to cost around ñ billion a year. From April, the poorest families will not receive the highest levels of support for their children because they do not pay income tax and so will not benefit from the Children's Tax Credit. Creating an integrated system means giving all low-income families the same support, so the introduction of the integrated child credit will help families at the bottom end of the income distribution.
• depending on exactly how the Government implements the credit, some better-off families could gain or lose from the move to full joint assessment of income in an integrated child credit. It would cost an extra ö50m to guarantee that no family loses from the move to joint assessment;
• paying the integrated child credit to the main carer in couples - usually the mother - may affect the distribution of income between partners in couples in a large number of families, but this switch may increase children's well-being.
• it will be difficult for the Government to meet its objectives for a new integrated child credit without losing some of the welcome features of the current system.

Michal Myck, one of the authors and a Research Economist at the Institute for Fiscal Studies said, "The integrated child credit represents a radical reform of the tax and benefit system for families with children. It will affect nearly all of the 7 million families with children in the UK. The reform represents a unique chance for the Government to simplify the financial support for families with children. It will mean that out-of-work families will be treated in the same way as low-paid families."

Another author, Mike Brewer, a Senior Research Economist at the Institute for Fiscal Studies said, "From 2003, more money could be spent on children through the new integrated child credit than through Child Benefit. But many details of the integrated child credit have yet to be decided upon and announced by the Government. We hope this report provides information and analysis to contribute to a full debate about these important issues."

Ends

Notes to editors

1. The Commentary is available from The Institute for Fiscal Studies, 7 Ridgmount Street, London WC1E 7AE, telephone 020 7291 4800, fax 020 7323 4780, email [email protected]. The Commentary costs ñ5 for IFS members and ò0 for non-members.
2. The Commentary will be launched on Wednesday 24th January. Please contact the IFS for further details.
3. The Government's plans for the integrated child credit were announced in HM Treasury, Tackling Poverty and Making Work Pay: Tax Credits for the 21st Century, The Modernisation of Britain's Tax and Benefit System 6. It is available from HM Treasury's Public Enquiry Unit (020 7270 4558) or http://www.hm-treasury.gov.uk/budget2000/taxcredit.pdf.