Targeting the poor: It's dangerous. But do it, because it's right

Even if the social security budget were to be increased by 10 per cent - a less likely event under the new government than it was under the old - the present pattern of payment would fail to meet the needs of the very poor. And should the total welfare bill be reduced, equity requires that low income families be protected from the cuts. The price will have to be paid by the richer recipients. Targeting benefits on those who need them most is politically dangerous and administratively difficult. But it is right and necessary and one "tough choice" which will help, rather than penalise the disadvantaged and dispossessed.

That is not an argument in favour of Harriet Harman's "affluence test" - which, as she described it, would totally exclude the highest earners from maternity benefit. An arbitrary division between the haves and have- nots would produce, at best, a two-tier welfare system and, at worst, a safety net which was designed to catch only paupers. Putting aside the humiliation of receiving a modern version of outdoor relief - which would certainly reduce the take-up rate - limiting payment to the poor is a certain prescription for more cuts in the social security budget. If the affluent middle classes - who also happen to be target voters - do not qualify for any benefit, the pressure to reduce their contribution to the cost of welfare will become irresistible.

In the past, the dilemma was resolved - at least in part - by the taxation system. The rich appropriated a disproportionate share of all public spending - education, health and housing as well as social security. But what they received was kept in crude balance by what they contributed. With the top rate of income tax held at 40 per cent, the excuse of compensating contributions is more difficult to sustain. When New Labour lists the new circumstances that require fresh thought, the reduced level of direct taxation has to be put side by side with the increase in private pensions plans. The problem, caused by the changes in taxation levels, has to be solved by their revision.

It is easy enough to argue that, for example, child benefit is paid to many families which, on the calculation of purchasing power, do not need it. Were it to be designated as "taxable" income, the poorest families would receive payment in full, while the richest received only 60 per cent. Income tax is the means test about which we all feel least resentment. So, whilst some families would complain about the denial of benefit to the rich, no-one would denounce the affront it caused to the poor.

Taxing child benefit, at its present rate, would raise an extra pounds 675m - enough for an average increase in the weekly payment of pounds 1.70 per child.. For a three-child family living below the poverty line, an extra pounds 5 would provide necessities that they are now denied. Unfortunately, those families would only be better off if income support were to be increased by a corresponding amount, for under the present system the improvement in child benefit would be matched by an equivalent reduction. Were we to tax child benefit, use the revenue to increase the basic rate and leave income support at its present level, only 5 per cent of lone parents would gain. Twenty five per cent would actually lose, leaving 70 per cent with their position unchanged.

The moral is clear enough. If limiting benefits to "those who really need them" is just a way of cutting public expenditure, the object can, in part, be achieved by simple adjustments to the tax system. If, on the other hand, the real hope is to concentrate limited resources on the most necessitous families, two initiatives have to go hand in hand. Money can certainly be saved by reducing, or eliminating altogether, the payments made to the rich. But that, in itself, cannot finance the improvement in benefit levels which are essential to the poor. Without an increase in income support they would gain nothing. The increases could only be financed by higher rates of tax.

The arguments about taxing child benefit are complicated by philosophical doubts as well as its fiscal consequences. The scheme was introduced with the overt intention of subsidising families with children - irrespective of their income - rather than alleviating poverty. It replaced a tax allowance which related the level of help to the size of earnings and, in the jargon of the time, transferred the payment "from wallet to purse". Child benefit was paid to mothers. Even in the age of working women - a habit which the Government is determined to encourage - including it within the tax calculation would, in many cases, divert it back into the wallet. A rational discussion about the future of child benefit requires us to begin from a clear understanding of what it is intended to do.

The myriad difficulties of performing what seems the simple task of helping those in greatest need illustrates the basic flaw in our social security system. Since its inception, in very different social circumstances, no overriding principle had guided the constant changes in levels and types of benefit. Some payments are received "by right" - a popular fiction encouraged by the belief that National Insurance contribution "funds" the retirement pensions. Others, like child benefit itself, are intended to help with the cost of desirable activities. Conversely the Government's decision to abandon the lone parent supplement must be influenced, if only subconsciously, by its disapproval of single mothers. Most allowances are made in response to what should be the overwhelming obligation of a civilised society - the alleviation of poverty.

A genuinely radical review of welfare policies has to begin with a new declaration of basic principles - the creation of a comprehensive benefits system in which entitlement is primarily determined by need. That requires more to be paid to recipients at the bottom of the income scale than those at the top. But to make the system acceptable to the middle classes - and to maintain their grudging willingness to meet its costs - they must receive something. Targeting is barely less expensive than universal payment and certainly requires extra resources to be allocated to the social security budget. But it is right and, if we are to help the poor, it is essential.