Benefit cuts: The how and the who
What do we cut - and who would it hit? When the comprehensive spending review starts in earnest in a few weeks' time, those two questions are going to be right at the centre of public debate.
The Budget on 22 June will set the scale of the challenge: the amount by which spending needs to be cut. The review has to decide the what - and the who.
Ministers have already made it pretty clear that benefits and tax credits are in the frame for cuts. As they keep reminding us - every penny saved from these is a penny that does not have to taken away from front-line services. It seems clear to me that child benefit for the middle and upper classes is not long for this world.
The Conservatives' promise to protect it was always shaky: yes, David Cameron promised to protect it in one speech, at the party conference last year. But - as I pointed out at the time - it was not in the party's manifesto. By and large, he and other ministers would "forget" to mention it in the litany of benefits that they would keep. It was left to advisers to assure us, off camera and "on background" that the benefit would indeed be kept.
What better time, then, to have some basic facts about what our £200bn benefit system actually does - and who actually receives the cash. The ONS has just released a treasure trove of data on this, in a report showing how taxes and benefits affect household income.
The facts show that income inequality, after tax, was roughly the same in 2008-9 as it was 10 years earlier. You might see this as an indictment of Labour policy - but inequality would have risen without Labour's increases in benefits and tax credits. The system as it stands is profoundly progressive: before taxes and benefits, the top fifth of household earned £73,800 a year in 2008-9, fifteen times more than the poorest fifth, who earned, on average just £5,000. After taxes and benefits, the richest earn only four times more than the poorest, on average: net earnings at the top fall to £53,900, whereas the income of the bottom fifth goes up to £13,600.
Interestingly, the system is even more redistributive when it comes to retired people, and has become more so in recent years. For those households, income in the top fifth starts off 16 times higher than the bottom fifth. After taxes and benefits, the ratio falls to just three to one.
If that was all you knew about the benefit system, you'd think that cutting benefits would be a disaster for the poor. But here's the really interesting fact from the ONS document: the poorest 40% of the population only receive just over half - 56% - of the cash benefits paid out in a given year. Put it another way, nearly half of all cash benefits go to households that are not poor in income terms.
Though they may not believe it, the "middle classes" do pretty well: for households in the middle fifth of the income distribution, 20% of their net income came from cash benefits in 2008-9. Even for families in the quintile just above them - that is, in between the middle and the top fifth of households - nearly 10% of net income came from benefits.
On the basis of ONS figures, the think tank Reform has previously calculated that the government spends more than £30bn a year on benefits for middle-class households. They define middle class as an income of more than £15,000 a year for every adult, and £5000 per child - or £40,000 for a couple with two kids, in 2007-8 money.
Now those benefits include state pensions: indeed, that's one reason why the system has a bigger effect on retired people. But, as the Social Market Foundation points out in a timely report out tomorrow, they also include other universal benefits which, in the context of a "fundamental" review of government's priorities, stick out like a sore thumb.
The Conservatives and the Liberal Democrats have already stuck their toes in the water when it comes to taking away tax credits from the better off. But you have to assume that the spending review will prod them to go much further.
There are nine questions which any public spending programme will supposedly have to answer; for those who want to read the list it's on page eight of the Spending Review Framework released by the Treasury on Tuesday. The key ones are "Is this activity essential to meet government priorities?; "does the activity provide substantial economic value?"; and "can the activity be targeted to those most in need".
When it comes to child benefit, the SMF and many other think tanks say that the answers are, respectively: "no", "no", and "yes." Means-testing child benefits and removing the family element of the child tax credit from all households in the upper half of the income distribution would save just over £6bn a year - the same amount that departments are laboriously finding in cuts this year.
The SMF also wants to make only the basic winter fuel payment to over-60s - now £200 a year - universal, and means-test the higher payment of £300, which now goes to everyone over 80. That would save £1.3bn a year. To further stick the boot in for pensioners, they also want to freeze their - higher - personal income tax allowance for five years. That would save £1bn. It would not be popular, but it's worth noting that their allowance is already very close to the coalition's professed goal, for everyone, of £10,000 a year.
The think tank also wants the government to remove the VAT exemption from magazines, books and newspapers, which now costs the Treasury £1.5bn a year - on the grounds that the vast majority of the money goes to families in the top half of households. But, as a share of their income, poorer households spend more than richer ones on these products. And newspapers are already having a hard time competing with the web. I'm sure Mr Osborne is thinking about doing this, but he may well decide that the extra £1.5bn in revenues is not worth aggravating all of Fleet Street.
I'll have more to say about VAT in a few days. All I would say now is that I think it's inconceivable - both from a political standpoint and an economic one - that the government would raise the standard rate of VAT substantially but leave child benefit and other pillars of "middle-class welfare" untouched.