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The new integrated child credit is, in our opinion, a radical reform of the tax and benefit system that will affect nearly all of the 7 million families with children in the UK. Given the gradual evolution of the mechanisms that direct financial support to families with children, this represents an ideal time to re-examine the principles on which the current system is based and to remove any anomalies or undesirable features. We have both discussed the economics behind directing financial support to families with children and analysed the objectives for an integrated child credit and some options for achieving those.

Governments all over the world direct extra resources to families, and they do so generally to achieve equity – both horizontal and vertical – and efficiency goals. The horizontal equity argument is not exclusively about children – it is about directing resources towards poor households, taking account of their composition. But if governments do pursue horizontal equity goals, then families with children tend to benefit both because their consumption needs increase compared with those of families without children and because adults’ ability to do paid work falls as they become parents. The vertical equity and efficiency arguments, though, both give rationales for directing extra support specifically to families with children, doing more than just reducing the inequality in living standards controlling for the composition of the household.

Equivalence scales help governments make comparisons of living standards in their pursuit of horizontal equity, and should therefore have implications for structuring financial support for children. But we showed that the McClements equivalence scale used by the government when calculating income distribution statistics bears little resemblance to the current structure of financial support for children. This suggests either that the government does not believe the McClements equivalence scale or that it is using the efficiency and vertical equity arguments to go beyond simple redistribution to poor households, particularly in the case of young children.

The government has said that an integrated child credit will provide:

i. a more transparent system of support for children, helping parents understand what they can expect to receive, and facilitating public debate about the appropriate level of support;

ii. a portable and secure income bridge spanning welfare and work;

iii. a common framework for assessment and payment, where all families will be part of the same system;

iv. a system where support for children is paid to the main carer;

v. efficiency gains for Government, and reduced hassle for parents, from moving away from a system where support for children is delivered through four different mechanisms.

Not surprisingly, these are objectives that the current system of financial support for children fails to meet well. But we argued that there are other goals that are met well at

present, and the integrated child credit should be assessed against these broader objectives too.

To help analyse options for the new integrated child credit, we separated decisions on the credit into those to do with its structure – how the integrated child credit relates to family structure and family income – and those to do with its administration – how entitlement is assessed, the frequency of payments and the period of award.

Ignoring the basic credit of WFTC, weekly financial support for the first child will vary from £15.50 for the richest families to £45.95 for the poorest from April 2001. But because the children’s tax credit is worth nothing to those who do not pay tax, some families on WFTC will receive £50 – more than the poorest families. Removing this feature to achieve a seamless system of support for out-of-work and low-paid families means either creating losers in the bottom deciles or spending around £950 million a year. The move to joint assessment in an integrated child credit could also create losers amongst better-off families: an integrated child credit where no family lost through the introduction of full joint assessment could cost a further £650 million a year. Depending on the exact parameters, the integrated child credit would represent £9–10 billion a year of financial support to families, and around 6 million families could be entitled to payments.

As the integrated child credit is replacing three very different systems of financial support for children, some administrative parameters will have to change, such as whether the system is cumulative or non-cumulative, the period of assessment for entitlement, the length of award, the frequency of payments and the method of payment. It is therefore unlikely that the government will be able to meet fully the objectives it has set for an integrated child credit without compromising on some of the welcome features of the current system of financial support for children. We presented four possible options for designing an integrated child credit, none of which is perfect – indeed, some of which are far from perfect – but all of which help to expose the trade-offs inherent in designing the integrated child credit. The government will need to decide on which of the many objectives for the integrated child credit it places the most weight, and perhaps accept a system with some rough edges in its design or its effects.

The introduction of the integrated child credit has been seen by some as a significant extension of joint assessment. In fact, it may not represent a substantial change for many parents from the system of financial support for children that will exist in April 2001. Those who will be affected the most are likely to be better-off families. In contrast, the decision to pay the integrated child credit to the main carer – in a couple, usually the mother – may affect the distribution of income between partners in a couple in a large number of families. Evidence suggests that this switch may increase children’s well-being too.

There are many issues that we have not discussed in this Commentary, such as how to reform payments for disabled parents or adults with disabled children, what to do with the childcare tax credit and housing benefit and whether to pay the integrated child credit for dependent children over 16. Nor do we pretend to have given full answers. But we hope we have set out a useful framework with which to analyse the integrated child credit and provided information to help promote the debate on its future form.