House of Commons - Social Security

Select Committee on Social Security Minutes of Evidence

Memorandum submitted by Professor Jane Millar (ICC 11)

The new Integrated Child Credit (ICC) proposes a major change in our system of financial support for children. The key feature of the proposal is very simple: that all poor children should receive the same type of financial support regardless of whether their parents are working or not. At the moment we support poor children through two main types of payments. For children with unemployed parents there are child payments embedded within Income Support and Job Seekers Allowance. For children with employed parents support comes through the tax system in the form of the Children's Tax Credit and the Working Families Tax Credit. It is these two separate systems that the new ICC seeks to bring together, and to extend further up the income scale. Children of unemployed parents will receive support in the same way as children whose parents are working. As the Treasury put it, the aim is to create a system that will be both "seamless and transparent" and "portable and secure".

This note describes the ways in which integrated child payments have been introduced in Canada and Australia and uses this to comment on some of the key issues that this Inquiry is addressing. I understand that the Committee plans to visit Canada and to take evidence from Australian experts, so I hope my account (looking at these countries through UK eyes) will act as a starting point to help Committee members orientate themselves to these other systems.[1]

THE CANADIAN SYSTEM

In Canada the integrated system (Canada Child Tax Benefit, CCTB) was introduced in 1998 and builds on the fact that the Canadians were already using the tax system to assess entitlement to child benefits. The CCTB replaces the similar means-tested Child Tax Benefit/Working Income Supplement (their equivalent to the UK Working Families Tax Credit) and (eventually) the child-related components of social assistance benefits. It works roughly as follows:

— The CCTB has a two-tier structure. The "basic Child Tax Benefit" will be worth about $1,110 per child (under 18) per year when scheduled increases are implemented in July 2001 (this is equivalent to about £10 per week). There are small supplements for large families (three plus children) and for families not otherwise claiming for child care expenses. Families with net incomes below about C$30,000 receive the maximum basic payment. Above this threshold, the amount of basic Child Tax Benefit is reduced by 2.5 cents for every extra dollar if one child, and for 5 cents for every extra dollar if two or more children. Payments thus taper out gradually and cease entirely at about C$75,000 for a one or two child family.

— The second tier, the National Child Benefit Supplement (NCBS), is designed to go to low-income families only. In July 2001 it will be worth about C$1,155 per annum for the first child, C$955 for the second and C$880 for the third. It starts to be phased out once net family income reaches about C$21,600 and disappears when net family income reaches about C$30,500 (at withdrawal rates of 11.1 per cent for one child, 19.9 per cent for two children and 27.8 per cent for three or more).

— The maximum payments of the base and supplementary benefits will amount to about C$2,265 per annum for one child and C$2,065 for each additional child (about £19 to £20 per week). The CCTB is paid monthly by cheque or direct deposit, usually to the woman, by the tax office. It is received by almost all lone-parent families and 80 per cent of families in general (scheduled increases will mean that more than 90 per cent will receive benefits by 2004).

— Most provinces and territories include additional income-tested child benefit and/or employment earnings supplement, most delivered through the federal income tax system, paid in addition to the federal Canada Child Tax Benefit. Most also still pay additional benefits for children in families receiving social assistance, although these are being reduced as the CCTB increases come into effect. Money saved in this way can be re-invested by provinces into other services/benefits for low-income families. So far there is a fully integrated system in British Columbia (since 1996), Saskatchewan and Quebec.

— Level of entitlement is determined automatically through family income as reported to the federal tax office on a yearly basis. Every adult is required to complete a tax return with details of their income, their marital status, the tax number of their spouse/partner, and details of children. The tax return is thus individual, but includes family details, and it is the tax office that works out family income and assesses entitlement to the family payment—the process is automatic. It is based on net family income, which allows for deductions of various employment-related expenses (such as pension contributions, child care costs, union dues), over the previous tax year.

THE AUSTRALIAN SYSTEM

The Australian system of integrated child payments was introduced in 1992 when all benefits relating to children—the family allowance, the family allowance supplement, the child components of sickness allowance, job search allowance and newstart allowance—were brought into a single system of support. Further changes to family assistance have been introduced from July 2000.

— The main family support benefit is now called "Family Tax Benefit Part A" and has a two-part structure: basic and maximum. The basic rate is worth A$974 per annum per child under 18 (around £10 per week). There are supplements for large families (four plus children) and multiple births. This payment is made to families with incomes up to about A$73,000 (plus A$3,000 for each additional child). At that point a 30 cents for each dollar taper is applied until payments cease entirely at about A$76,000 (plus A$6,000 for each additional child).

— Families with incomes below about A$28,000 receive the maximum payment. Above this threshold, the amount is reduced by 30 cents for every extra dollar until the basic rate is reached. The maximum rate is A$2,054 per annum for a child aged under 13 and A$2,834 for a child aged 13 to 15. This gives maximum payments to low-income families of between A$3,000 and A$3,800 per child per annum (or between about £29-£37 per week) with the base rate included. Part A benefits (basic plus maximum) are likely to be received by between 80 and 90 per cent of all families with children.

— Parts A and B are claimed in the same way (the system for the Child Care Benefit is a bit different). Claims are made to the Family Assistance Office, a one-stop shop for family benefits, which operates through call centres. It is part of the Centrelink agency (broadly equivalent to the UK's proposed working age agency, ie combining employment and benefit services, but also covering the elderly, and with links to the Tax Office and Medicare offices). The income on which the assessment is based is the annual gross taxable family income with some small additions (for example, employer-provided benefits foreign income, net rental property loss, tax free pensions, and subtracting 50 per cent of child support paid (100 per cent from 1 July 2001).

— From this year, families are required to estimate their income and, at the end of the financial year, payments will be assessed against actual income and the amounts reconciled (ie overpayments will have to be repaid and underpayments will be made up to what they should have been). Periods in receipt of income support benefits are not included in this annual reconciliation.

— There are a range of payment options available: fortnightly cash payments into bank accounts; periodic payments through the pay packet (in effect through reductions in PAYE payments), lump sum payments through the tax system (which must be claimed at the point when a tax return form is lodged). Families can change their method of payment throughout the year. Families receiving the equivalent of social security benefits are paid in fortnightly cash payments and automatically receive the maximum amount.

— This new system—of estimating future income and having an annual reconciliation—has not yet been through a complete run so it is not known how the system of estimating income and reconciling at end-year will work in practice. It replaced a system where the amount of family payment was based on taxable family income in the previous tax year (with the information taken from tax returns) and where some changes in income and circumstances during the year were taken into account (discussed further below).

Having described the two systems, the next section discusses some issues relevant to the UK, looking first at outcomes and then at the ways in which these child payments are income tested.

THE OUTCOME OF THE CHANGES

There is no evidence about the impact on work incentives (for one or two earners) but in both Canada and Australia take-up of in-work support has increased and child poverty has fallen. The evidence for Canada is only from one province (BC) which introduced an integrated system ahead of the federal scheme. There is no federal evidence yet. But take-up is virtually 100 per cent. More money is being spent on CCTB than was spent under the old system—by 2004 it is forecast to cost C$9 billion, a 58 per cent increase since the reforms started. About two-thirds of that total goes to low-income families.

In Australia it is estimated that child poverty has fallen, from about 15.5 per cent in 1984 to about 10.9 per cent in 1994, with particularly large falls for lone parents (from 80 per cent to about 42 per cent for non-working lone parents). It is difficult to assess how much of this is directly due to the changes to child benefits but a substantial proportion must be, given that the number of unemployed/workless families increased over that period. In the absence of the programme, this would have lead to a rise (rather than a fall) in poverty. The full value of the package is higher than the previous system for all families and enough to take most family types above the poverty line (not true for lone parents with more than one child). Take-up has increased significantly, from about 14 per cent of families in 1986 to as much as 80 per cent in 1997-98.

The anti-poverty effects come from a combination of higher levels of support and more efficient delivery. This is an important point—one without the other is not enough.

INCOME TESTING ISSUES

The proposed ICC is to be an income-tested benefit, as is the case in both Canada and Australia (although unlike Canada and Australia, child benefit remains as a payment for all children). If this is to be a simple and seamless system there must be a simple and straightforward income test. A number of issues therefore must be resolved.

1. Whose income to include?

Both countries base assessment for child benefits on a family income test. There seems to be general agreement that, as a family benefit, entitlement should be on the basis of family income. However, this is not necessarily the case for adult benefits. In Australia income support benefits can be received by people with income from employment as well as people with no income (there is no equivalent to our 16 hours dividing line between Income Support and Working Families Tax Credit).[3] These adult benefits are based on a partially individualised system. Since 1995 in Australia each adult in a family has had to establish their own right to benefit, separately from any claim that their partner might make. This can be done in one of three ways—unemployed and seeking work, full-time care for a child aged under 16, older person with no recent employment experience and the partner of an existing claimant. The income test for these benefits is partly individual and partly family (ie up to a certain level no account is taken of the income of a partner and the income test operates simply on own income). These income tests are based on a fortnightly reporting period for unemployed claimants. Thus while child payments are relatively unresponsive to short-term changes in family income (see below), the adult payments are much more so. These points—the individualisation of adult benefits and their responsiveness—are relevant in thinking about the design of the Employment Tax Credit.

2. How to collect information about income?

Both these countries use information from tax records as the basis for assessing eligibility. In Canada it is all assessed through the tax system, in Australia it is now necessary to make a claim by estimating income for the coming year. Both are able to use revenue data, even with individual taxation, by a system of reconciling tax records. But this does mean that all (or most) families with children need to complete tax returns. Families can also get into the system through income support claims as any family that becomes eligible for income support automatically receives the maximum payment.

3. How is income defined?

Use of revenue data means that the income test can be no more detailed than the information contained within tax records. Australia uses gross income, not including child support in this. Canada uses net income, and also allows various deductions from this.

4. What time period is income measured over?

In both cases income is measured over one year, a relatively long time period compared with the six weeks that we use for WFTC in the UK. This again partly relates to the use of tax records for assessing income but it is also likely to provide a more accurate measure of the family income stream than a shorter time period. However it raises issues about responsiveness to income changes (see below). The use of prospective income in Australia (estimated income over the year ahead) is a new approach.

5. How often are benefits re-assessed?

Both countries have annual reassessments with a limited degree of responsiveness to changes during the period of the award. In Canada families can be receiving benefits that were calculated on the basis of their income up to 18 months ago. Changes in income per se are generally ignored although an in-year re-assessment can be made for changes in family composition (death, divorce, birth, etc). Michael Mendelson and Ken Battle of the independent Caledon Institute note that:

"Interestingly, despite the substantial amount of agonising over the issue of responsiveness in theoretical discussions of social benefits design, the lack of responsiveness of the Canadian child benefits system appears to be a non-issue in practice. So far as we know, there has never been a complaint . . . In a focus group with recipients of the British Columbia Family Bonus . . . the response to the possibility of some form of more regular (eg monthly) income testing was uniformly one of horror, as this was seen as reintroducing the much-reviled social assistance monthly reporting requirements. Recipients were more than willing to give up any potential benefit of improved responsiveness in return for a lack of intrusiveness."

Of course this lack of responsiveness is fine for recipients when income is rising as they continue to receive benefits on the basis of their previous lower incomes but it is not so good if income falls. Two things seem to make this work. The first is that there is a relatively long plateau across which maximum payments are made (up to more than 40 per cent of average family income). So small (and not so small) changes in income are effectively disregarded in the design and most families with low incomes are already getting the maximum benefit anyway. The second is that there is a safety net, in that for any family who comes into receipt of income support benefits (eg if they become unemployed and have no liquid assets as a fallback), the equivalent of maximum family payments come immediately into effect through the provincial income support system.

In Australia, before the recent reforms, small income changes were ignored and claimants were only required to report income increases of more than 10 per cent. Families whose incomes fell could ask for the assessment to be made on the basis of current income if that was lower than previous years' income. Families experiencing certain events—separation or becoming partnered, starting or recommencing work, changing jobs, or becoming self-employed—were required to notify these and any fall in income could be immediately notified and family payment will be adjusted accordingly. There are no recent data on the number of people who advise of a notifiable event and/or an increase in income of more than 10 per cent. But estimates suggest that around 3-4 per cent of the total population were overpaid as a result of not reporting such changes. Typically, around 60 per cent of families in work and receiving more than minimum payments are paid on the basis of current, rather than previous, year's income, suggesting they experienced some change. But, as in Canada, maximum payments were paid over a wide range of income and families receiving income support pensions and allowances would automatically receive the maximum amount (this is still the case).[4]

These plateaus over which the same rate of payment applies can be seen in the attached charts. These show the Canadian and Australian systems, and also how the ICC will look for the UK (if based on current WFTC structure and rates). Australia and the UK have a similar sort of "shape"—essentially two long plateaus with quite a sharp slope between them (note this is a one-earner couple in Australia, so part B payments are included). In Canada there is a plateau, followed by two slopes, the first more steep than the second. There are very different withdrawal rates (long and slow in Canada and short and steep in Australia and the UK) but these differences are probably not very important in practice because the lack of responsiveness means that changes in income do not lead to an immediate reassessment of benefit.

6. Who are the payments made to?

In Canada payments are made to the "primary carer", giving an opportunity for families to elect who should receive these, but with the default going to the mother. Separated couples who share care can split payments. Cohabiting couples are treated in the same way as married couples, but couples must say they are cohabiting on their tax return forms, which some may not do (either for fraud or for privacy reasons).[5] In Australia, as noted above, there are now several different methods of payment.

7. How often are payments made?

In Canada, payments are made monthly by cheque or direct deposit. In Australia there are now various choices that can be made about frequency of payment. The USA experience with the Earned Income Tax Credit suggests that lump sum payments can be popular and it will be interesting to see what happens in Australia, now that families can choose this option.

CONCLUDING COMMENTS

Both the Canadian and Australian systems are examples of broad-based income tests, excluding only those with very high incomes, and providing support to a wide range of families. This is important from the point of view of social integration. They also use relatively simple income tests—infrequent, using a limited amount of information, not responsive to small changes. The ICC provides an opportunity to extend extra financial support to families, and to have a system, which is portable in and out of work. We cannot copy these other systems in all respects but these general points are important to consider when designing the ICC.