October 21, 2009 11:43 pm

Tories urged to axe ‘middle-class welfare’

George Osborne, the Conservative shadow chancellor, was wrong to pledge to keep child benefit, winter fuel allowances and free TV licences, and an incoming government should take the axe to “middle-class welfare”, a free-market think-tank said on Wednesday.

Middle-class welfare – which includes the portions of child benefit, tax credits, state pensions, maternity pay, student loans and a clutch of other benefits that go to the better-off – costs the taxpayer £31bn a year, Reform claims. That is the equivalent of 8p on the basic rate of income tax, it says.

Given the hole in the public finances, £14bn worth of such middle-class subsidies should be cut immediately, with the remainder phased out over time.

Andrew Haldenby, director of Reform, said: “The middle classes need to read the small print of the welfare state. They may think that benefits and subsidised higher education are a good deal.” In practice, however, they raise taxes and pay subsidies to middle and high earners, “who could and should be independent of public welfare”, he said.

The report praises Mr Osborne for proposing in his party conference speech to means-test the baby bonds provided by the child trust fund, and abolish tax credits for people on an annual income of £50,000 a year.

Yet those measures would save only £700m a year, Reform said. The pledge to keep winter fuel payments, free TV licences for the over-75s and child benefit for middle-class families would cost far more – with the combined value of those benefits running at £10bn a year.

“Politicians cannot tackle the public finance deficit if they protect nearly all benefits for the better off,” Mr Haldenby said.

The report calculates that £31bn of benefits are spent on “middle class” welfare – defined as households where every adult has an income of at least £15,000 a year and every child £5,000.

According to Reform, using that as a cut-off point for benefits would remove the top 40 per cent of single households and the top 30-40 per cent of households with children.

Immediate action “to abolish middle class welfare and benefit gimmicks” should include scrapping child benefit while making tax credits more generous to the less well off, producing a saving of £7bn.

Removing the winter fuel allowance, free TV licences and concessionary bus passes would save another £4bn.

Baby bonds and a clutch of maternity and pregnancy grants should be scrapped. The increase in state pension age should be brought forward, educational maintenance allowances binned and students charged a market rate of interest on their loans.

That total of £14bn in savings should be followed by a longer-term winding down of entitlements to the basic state pension for the better off, and the withdrawal of other benefits from which the middle class gain.

All this could be done, Reform claims, without harming the drive to reduce child poverty, as benefits become more focused on the less well off.

It notes that countries such as Ireland, New Zealand and Australia have already taken measures on these lines.

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