January 4, 2013 6:22 pm

Harsh criticism for child benefit cut

The coalition’s plan to remove child benefit from higher earning parents has been fiercely criticised by the Institute for Fiscal Studies, which has warned it could discourage people from aiming for pay rises.

In a brief note, the respected economic think-tank was strongly critical of the policy, which some Conservative MPs are worried could backfire when it is rolled out on Monday.

The IFS analysis found that the measure would effectively create much higher marginal income tax rates for people earning from £50,000, the level at which child benefit would start to be withdrawn, to £60,000, where it would disappear completely. A parent with one child who earns £50,000 stands to lose more than 52p of each extra pound, while the figure for those with three children is as high as 65p.

The institute found other problems with the policy. There is the already controversial fact that ministers have decided to base their means test on the income of a single earner in a family, meaning a family with one parent earning over £50,000 will lose money, but one with two parents each earning £49,000 will not.

Another problem highlighted by the IFS is that the limit of £60,000 is not due to rise in line with inflation, or even wages, raising the possibility that many more earners could eventually lose their eligibility for child benefit. There is also potential for confusion because the parallel child tax credit system is means-tested at family rather than individual level, and set at a different limit.

Robert Joyce, the IFS economist who wrote the paper, said: “Perhaps the biggest concern is the incoherence it creates in the welfare system . . . It is unclear whether the net effect of all this will be to improve the welfare system.”

Meanwhile, Labour has also come under attack for its latest welfare policy, announced by Ed Balls, the shadow chancellor, on Friday.

Mr Balls said Labour would limit tax relief on pension contributions for higher earners, in order to pay for guaranteed jobs for people out of work for more than two years. The Conservatives accused him of promising too much, after it emerged Labour had previously said it would use such funds to pay for a reverse of coalition cuts to tax credits.

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