The integrated child credit: issues of policy and delivery
The new integrated child credit represents 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. It is a policy which has much to commend it, but which also raises some difficult delivery issues. Jane Millar examines what we can learn from similar systems in Canada and Australia.

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 jobseeker's allowance. These vary with the number and ages of children and are paid as part of the weekly family benefit payment. For children with employed parents, support comes through the tax system. The children's tax credit reduces the overall tax liability for families with children and the working families' tax credit (WFTC) gives additional support to low-paid working families. The amount paid varies according to the number of children in the family and is reduced as earnings rise. In general, families receive their tax credits through the pay packet.

It is these two separate systems that the new integrated child credit (ICC) seeks to bring together. Children of unemployed parents will receive support in the same way as children whose parents are working in low-paid jobs. There will be no need to shift from one system to another when people move in and out of work, no need to keep on filling in long and complicated forms. As the Treasury put it, the new system will be both 'seamless and transparent' and 'portable and secure'.

This has clear attractions from the policy side. It will be an important element in meeting the promise to eliminate child poverty. It will help to improve work incentives by making the financial transition to work much simpler. It will promote social inclusion by treating all families alike and as part of one system. It will be paid to the main carer, just like child benefit, and so get directly into the family budget.

But, despite the simplicity, it presents some major operational challenges. In particular there are problems in designing a means test that is simple and straightforward but also responsive to changes in family income. If families receiving ICC have to make fresh claims every time income rises or falls then many of the advantages will be lost. Some details of the ICC have been set out by the Treasury. [footnote 1] It will 'bring together the different strands of support for children in WFTC, in income support and in the children's tax credit'. At current benefit rates this would produce a maximum ICC of about £35.50 (with child benefit, £50.00) per week for the first child and £26 (with child benefit, £36.35) for second and subsequent children. The ICC would be introduced from April 2003, and be administered and delivered by the Inland Revenue. Families claiming income support/jobseeker's allowance will provide information to the new merged Benefits Agency/Employment Service agency, which will pass on the necessary information to the Inland Revenue. However, much is missing from this account:

• The nature of the means test: whether it will be family or individual, or some compromise between the two; what definition of income will be used; how information on incomes will be collected and verified.
  
  
• Responsiveness: the time period over which an award will last; what types and levels of change in circumstances will have to be notified for re-assessment purposes.
  
  
• Child care credits and ICC: whether these will be integrated into the ICC or become a separate payment.
  
  
• Housing costs and ICC: how housing benefit will be treated.
  
  
• Employment credits and ICC: a new employment credit is proposed which will provide an 'adult' credit for families with children and working people without children. It is not clear how these will relate to each other but this is potentially a significant and difficult complication.

Other countries have been introducing similar system and examining the way in which integrated child credits have been introduced in Canada and Australia can help us think about some of the policy and delivery issues involved in making this radical change.

In Canada, the integrated system (child tax benefit – CTB) was introduced in 1998, replacing the existing child tax allowance (Canada's equivalent to working families' tax credit) and the child-related components of income support. Level of entitlement is determined automatically through family income as reported to the tax office on a yearly basis. Every adult is required to give details of their income, and their marital status (with the tax number of their 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 and does not require a separate claim. Poor working families and poor non-working families receive the same amount, with benefit reduced by 2.5 or 5 cents in the dollar after a certain level of income. The CTB is paid monthly by cheque, usually to the woman, by the tax office.

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 (the latter two being unemployment-related benefits), and the child components of rent assistance payments – were brought into a single system of support. Eligibility is assessed by the equivalent of the DSS. The income on which the assessment is based is the annual taxable family income and information on income, and verification of that data is provided through the tax system. When family payments are claimed it is necessary to either provide a copy of the Tax Notice of Assessment or to give the tax file numbers of both parents. Family income is then calculated on this basis. Thus, as in Canada, there is a family means test, but one which is based on information on individual taxable income. Not everyone is required to complete an annual tax return, but in practice it seems most people do. There is an annual review of payments in which review forms are sent out to all receiving more than the minimum payment. Those receiving the minimum payment get a letter giving details of the new income ceiling and if they are no longer eligible they must inform the DSS. If there is no response then minimum rate payments continue. The payment is made to the main child carer, usually the mother, for most people as a fortnightly cash payment (or electronic cash transfer).

Various points are relevant to the UK.

• The outcome of the changes
  In both Canada and Australia, it is suggested that take-up of in-work support has increased and child poverty reduced. This is due to a combination of higher levels of support and more efficient delivery. This is an important point – one without the other is not enough.
  
  
• Neither system is universal
  Both systems cut out payments at the top end of income – in Canada about the top 15 per cent and in Australia the top 20 per cent. In Canada, it has been argued that the system is nevertheless integrative in connecting those on middle and lower incomes and not separating the 'deserving' working poor from the 'undeserving' non-working poor. If wished, universality of receipt could be retained by allowing the high-income families to retain a minimum payment. However, universality in the sense that all families get the same level of support must inevitably disappear in an system that is providing subsistence for some and supplementary income for others.
  
  
• The way in which entitlement is assessed
  Both Canada and Australia use the tax system as the basis for assessing eligibility. In Canada it is all assessed through the tax system, in Australia it is still necessary to make a claim, but the evidence on income is obtained through tax records. Both are able to do this, even with individual taxation, but it does mean that all families with children need to complete tax returns.
  
  
• The responsiveness of the systems
  It is essential to have a simple and relatively flat structure, so that there is no need to re-assess for relatively small changes in income. In general, payments continue at the same rate for one year, regardless of changes in circumstances. Families with large income falls, or who become unemployed, or who separate, can apply for reassessments.
  
  
• The method of payment
  In both countries payments are usually made to the 'primary carer', giving an opportunity for families to elect who should receive these, but with the default going to the mother. In Australia the primary carer receives the payment as fortnightly bank transfers. From July they can opt for a PAYE tax deduction. In Canada payments are made monthly. Thus, both Canada and Australia use the tax system primarily as part of the assessment, but generally pay the money in cash benefits.

The ICC and ECT proposals involve an extension of means-testing, but perhaps in a new way – tax-based and much simpler, with much less focus on immediate needs. And hence, perhaps, less intrusive. Integrated benefits can work and can be effective but much will depend on how exactly these proposals are put into practice.

Footnotes
1. HM Treasury (2000), 'Tackling Poverty and Making Work Pay: tax credits for the 21st century', The Modernisation of Britain's Tax and Benefit System No. 6 [back to text]

Jane Millar is Professor of Social Policy at the Centre for the Analysis of Social Policy at the University of Bath.
Poverty 106, Summer 2000