The new tax credits

The child tax credit and working tax credit were introduced in April 2003. When fully operational, the child tax credit will represent the majority of government financial support for children. It is designed to simplify the system of financial support for parents, and provides support that is meanstested against family income. The working tax credit is designed to make work more financially attractive. It means that people with or without children in work and on a low income may receive extra help from the State. This Briefing Note looks at: * the changes to tax credits that happened in April 2003; * why the new tax credits have been introduced; * how they work; * the cost and distributional impact; * the impact on work incentives; * what levels of take-up we might expect

What do the child poverty targets mean for the child tax credit? An update

The government has a target for child poverty to fall to 3.1 million by 2004-05, measured by the number of children in households with less than 60% median income after housing costs. The latest data showed that 3.8 million children (30% of children in Britain) were in poverty in 2001-02 on this definition. To help achieve the target, increases to means-tested benefits and tax credits need to take effect in April 2004, and therefore need to be announced in the forthcoming Pre-Budget Report. New calculations suggest that around £1 billion of further spending on the child tax credit might be needed to meet the child poverty target. Increases in other benefits or tax credits could also reduce child poverty, but at greater cost. But if the government chooses not to increase support for families with children in 2004-05, then real spending on child-contingent support in the tax and benefit system will still have increased by over 50% since 1997, and child poverty in 2004-05 should be at its lowest level since 1989. The government is still deciding what definition of child poverty it wishes to target in the longer term. If it wishes to reduce further child poverty measured under its current definition, then this will require the means-tested benefits and tax credits received by poor families with children to rise faster than the rate of inflation in the absence of helpful economic or demographic changes, such as more parents working. However, continuing to target a poverty measure defined exclusively in terms of incomes may skew the policy response excessively towards tax credit and means-tested benefits changes, and away from improving public services for children which might have a greater impact on their well-being over the longer term. By way of example, the extra spending that we think is needed for the government to meet its target for 2004-05 would pay for the current Sure Start programme - which aims to improve the health and well-being of families and children aged under 5 in disadvantaged areas - to be doubled in size

Proportion of families, and of individuals living in families, who have private incomes exceeding their net income from the state

This Briefing Note examines what proportion of families have pre-tax private incomes exceeding net support from the state (see the Annex below for precise definitions of all these terms). The analysis was undertaken using the IFS tax and benefit microsimulation model, TAXBEN, and data from the Family Resources Survey and the Family Expenditure Survey

Will the government hit its child poverty target in 2004-05?

This Briefing Note assesses the likelihood that the government will meet its child poverty target in 2004-05 in the light of decisions made in Pre-Budget Report (PBR) 2003. It updates the analysis presented in What Do the Child Poverty Targets Mean for the Child Tax Credit? An Update, IFS Briefing Note 41, which was written before PBR 2003. We agree with the assessment in PBR 2003 that the government should comfortably meet its target measuring incomes before housing costs (BHC). It also concludes that the government is on course to just hit its target measuring incomes after housing costs (AHC). However, there are uncertainties in making these forecasts, not least because the government uses a survey of around 30,000 households to estimate child poverty in a population roughly a thousand times as large. We should know for sure whether the target has been hit in Spring 2006

Child poverty and tax credit changes: a note for the Work and Pensions Select Committee

Previous IFS work has confirmed the intuition that, for a given level of expenditure, increasing the per-child element of the child tax credit will have a larger direct impact on poverty than increasing the family element or increasing child benefit. In a recent note, we built on this by estimating the number of children that would be taken out of poverty by five hypothetical policy reforms: increases in the per-child element of the child tax credit of £3/week; increasing all adult allowances in income support by £2.50 a week; introducing a new premium into the child tax credit which is paid to families with three or more children. The premium would be worth £845 a year to all families with three or more children with joint annual incomes below £50,000; increasing the working tax credit for all families with children by £11.75 a week

Welfare reform in the UK: 1997 - 2007

This paper presents a tour of welfare reform in the UK since the last change of government, summarising the most important changes in active labour market policies, and in measures intended to strengthen financial incentives to work. It argues that developments in the UK’s active labour market policies occurred in two broad phases: first, the Government sought to strengthen ALMPs for those individuals deemed to be unemployed, through the New Deal programme. Second, the Government has reformed benefits for individuals traditionally viewed as inactive and thus excused job search activity, such as lone parents, and the sick and disabled. Accompanying these have been changes to direct taxes, tax credits and welfare benefits aiming to strengthen financial work incentives. However, financial work incentives have been strengthened by less than might be expected given the early rhetoric: the expansion in family-based tax credits have weakened the financial work incentives of (potential) second earners in families with children, many more workers now face combined marginal tax and tax credit withdrawal rates in excess of 60% than a decade ago, and a desire to achieve broad reductions in relative child poverty has led the Government to increase substantially income available to non-working families with children. We also summarise evaluations of three important UK welfare-to-work reforms (WFTC, NDYP and Pathways to Work), but without comparing their efficacy

The structure of welfare

Election Briefing Notes 7, 8 and 9 analyse the precise distributional impacts of the parties' proposals. This Election Briefing Note looks at whether we can see a difference between the parties in their approach to taxes and benefits and the treatment of the unemployed, and how their proposals relate to what we have seen during the first term of a Labour government. Labour was elected with few specific ideas about welfare. Tax credits did not feature in its 1997 manifesto, and there seemed to be early tensions within government, particularly on the balance between "old Labour" insurance based, universal policies and the "new Labour" policy of "targeted support for those that need it most", as Frank Field's departure showed. But after four years of reforms, it is easier to discern consistent trends in welfare policy. This Election Briefing Note looks at some important principles about the way parties are approaching the tax and benefit system. In particular, it looks at: * the generosity of government transfers; * the use of means testing, and tax and benefit integration; * family - rather than individual - assessment of taxes and benefits; * policies for managing workless benefit claimants

Labour's proposals

Election Briefing Note 5 shows how households have been affected by Labour's tax and benefit reforms. This Election Briefing Note discusses further tax-benefit reform that Labour proposes to introduce if re-elected. The first section discusses three "credits" the government is proposing to introduce - the integrated child credit, the pension credit and the employment tax credit. We analyse their likely effect on household incomes and how much each would cost to introduce. The new credits represent developments of tax-benefit reforms implemented in the last Parliament, but Labour's manifesto also contains proposals for "asset-based" welfare, which would represent more of a new departure. In particular, the party plans to introduce two new policies - the Child Trust Fund and the Saving Gateway. Both are targeted towards low-income households and provide financial assistance in the form of assets. This method of asset-based welfare delivery contrasts with (and is intended to complement) the traditional approach of providing social security benefits as income supplements. Section 2 considers some of the arguments for and against the proposed new approach. Finally, we consider Labour's approach to income tax

Understanding the relativegenerosity of governmentfinancial support to familieswith children

The principal of horizontal equity can be interpreted as requiring that householdswith the same pre-transfer incomes and the same consumption needs should receivethe same post-transfer incomes. We argue the generosity of government financialsupport to families with children should be analysed with respect to such a baseline.Although not without problems, equivalence scales form an important part of such aprocedure. The comparison of financial support to families with children with acorresponding equivalence scale, both over time and between countries, should give amore accurate picture of generosity than comparisons of cash values alone. Wediscuss potential advantages and drawbacks of such comparisons, illustrating withcomparisons of the US and UK systems. The main drawback is that we can onlyevaluate the generosity of support for children relative to that for adults. With thisrestriction, horizontal equity is more likely to be achieved for couples with 1 childthan for those with 2 children. For some groups, the US is more generous to children(relative to adults) than the UK, but this difference is partly generated by the USsystem being less generous to childless households than the UK. The principal of horizontal equity can be interpreted as requiring that householdswith the same pre-transfer incomes and the same consumption needs should receivethe same post-transfer incomes. We argue the generosity of government financialsupport to families with children should be analysed with respect to such a baseline.Although not without problems, equivalence scales form an important part of such aprocedure. The comparison of financial support to families with children with acorresponding equivalence scale, both over time and between countries, should give amore accurate picture of generosity than comparisons of cash values alone. Wediscuss potential advantages and drawbacks of such comparisons, illustrating withcomparisons of the US and UK systems. The main drawback is that we can onlyevaluate the generosity of support for children relative to that for adults. With thisrestriction, horizontal equity is more likely to be achieved for couples with 1 childthan for those with 2 children. For some groups, the US is more generous to children(relative to adults) than the UK, but this difference is partly generated by the USsystem being less generous to childless households than the UK

Newborns and new schools: critical times in women's employment

This report presents the findings of research into how and when differences in work behaviour between men and women develop, focusing on the evolution of the gender gaps immediately after childbirth and during the initial years of family development. The analysis presented focuses on two crucial periods in family development: when a new baby arrives and when a child starts school. The study uses two data sources: the first thirteen waves from the British Household Panel Survey covering the years 1991 to 2003 and the first five waves from the Families and Children Study covering the years 1999 to 2003