In Sharp Change, Britain Will Reduce Child Benefits for the Middle Class04 October 2010
The British government said Monday that it would no longer pay a universal child subsidy to wealthier families, opening a campaign that may end up transforming Britain's welfare system by reducing benefits to the middle and upper classes.
The decision, announced by George Osborne, the chancellor of the Exchequer, at the Conservative Party conference in Birmingham, departs from the Tory campaign promise to not place income restrictions on this hugely popular benefit and represents perhaps the most direct attack yet on the rich menu of broad-based entitlements that have underpinned European welfare states.
The government is scheduled to disclose on Oct. 20 how it intends to cut about $130 billion in spending over the next four years, cuts intended to sharply narrow a budget deficit that, at 11 percent of G.D.P., is one of the biggest in the world.
The exercise has been fraught with political infighting among Tories and with their governing coalition partner, the left-leaning Liberal Democrats, who have argued that middle-to-upper-income Britons should bear more of the brunt of welfare cuts than those who are poor or jobless.
"This is a big moment for the U.K. welfare state," said Patrick Nolan, an economist at Reform, a free-market-oriented advocacy group in London. "The fact that the government is saying that it can't afford universal benefits is very important. It's where the money is, but it is also where the votes are. That is the conundrum."
In his speech, Mr. Osborne, whose job is the equivalent of a finance minister, said that as of 2013, families making $70,000 a year would not qualify for the benefit, which pays $32 a week for a first child and $21 for each subsequent one.
"A system that taxes working people at higher rates only to give it back in child benefits is very difficult to justify at a time like this," Mr. Osborne said. "We have got to be tough but fair, and that's why we will withdraw child benefit from households with a higher-rate taxpayer."
The government estimated that 1.2 million families, or about 15 percent of the total, would no longer receive the payments.
The government will introduce the cuts in Parliament later this month, where the ruling coalition holds a solid majority. The measure will deepen the dividing line with the opposition Labour Party, which has recently crowned a new leader, Ed Miliband, who won his position with union support and who has promised to fight austerity moves that threaten that constituency.
Universal child benefits were put in place after World War II to encourage childbearing in a nation deeply damaged by the war, and they now cost about $19 billion a year. Critics say that as much as 42 percent of this amount goes to middle- and upper-class families that are not in dire need.
Indeed, according to a coming report by an economist at Lancaster University, many higher-income parents spend the child benefit mostly on consumer goods for themselves.
At roughly $310 billion a year, overall welfare spending, known here as social protection, is the largest component of the British budget. Since the government has ring-fenced the next largest spending category, health care, and is under pressure from the conservative wing not to cut military spending as much as initially suggested, it has been forced to retreat from its campaign promises to protect the middle class from such cuts.
To be sure, the $1.6 billion in savings is a tiny part of the overall deficit, but symbolically it carries much greater weight by suggesting that other universal benefits that have disproportionately benefited the middle class, including heating allowances, free bus passes and television licenses for the elderly, might also be vulnerable.
The government's decision to single out middle-class families is also likely to resonate in other debt-plagued economies in Europe, particularly Ireland's.
The Irish government, having just devoted the equivalent of 30 percent of its G.D.P. to bailing out its devastated banks, is again under severe pressure to cut spending further. Like Britain, Ireland pays a benefit to families with children, one that may be even more generous than Britain's. On Monday, the Irish minister for children said he could not rule out cuts in child benefits.
And in Iceland, another country grappling with a mountain of debt, politicians are saying that child benefits for higher-earning families are likely to be trimmed in the next budget.
The move on middle-class benefits is part of a broader push by the British government to redo a welfare system that was enshrined after World War II. Unlike in the United States, unemployment benefits here do not run out; currently more than five million people are being paid because they do not work.
In his speech on Monday, Mr. Osborne said the government would also cap benefits for nonworking families at $790 a week.
Under the Labour government, these benefits grew in scope and breadth as spending reached record levels during the decade-long economic boom. But with a debt that now approaches 70 percent of total economic output, such long established entitlements have come under attack as never before.
Labour has said it will make a political stand to defend middle-class benefits. But it is unclear whether the issue will strike the type of chord with the public that could turn a wave of union protests into a political movement capable of leading Labour back to power.
Union leaders have promised to rally across the country on Oct. 19, the day before the spending review is to be made public. But so far, public opinion polls have not registered any dramatic outcry.