Ms Ita Mangan:

I thank the committee for this opportunity to address it on the matter of the report of the advisory group on tax and social welfare. The colleagues with me today are Dr. John Sweeney and Mr. John Bohan, both members of the advisory group. Also with me is Ms Teresa Leonard, assistant secretary in the Department of Social Protection, who has responsibility for the administration of the particular payments we are discussing today.

I will provide a brief description of the content of the report and we will then be happy to answer any questions. The report is concerned with a policy area that has been the subject of a number of reports over the years. Child income support covers the area of child benefit, the major child income support payment, but also the areas of qualified child increases, the payments paid with weekly social welfare payments to various families, and family income support. Some €2.8 billion will be spent in 2013 on these payments by the Department of Social Protection. This accounts for approximately 14% of total social welfare expenditure of approximately €20 billion. Of this almost €3 billion in child income support payments, child benefit accounts for two-thirds of the expenditure and it is paid to 609,000 families in respect of some 1.16 million children. It is a universal payment, while the other payments, the qualified child increase and the family income support payment, are related to families' income situation.

The advisory group recognises that family income supports have two main objectives. First, they assist all families with the costs of raising children and second, they play a role in reducing poverty in households with children. These objectives remain valid and are particularly significant during a time of recession and high unemployment. However, the effectiveness of these payments in addressing these objectives has been examined in various reports. The evidence suggests that while we spend significantly higher amounts on cash benefits on families than other OECD countries, other countries get better outcomes. The reasons for this are complex, but the main reason is that direct income support for children is not the only consideration when child poverty is an issue. The other major considerations are parental income and the supports available for parents to go out to work and the services available for children. Nevertheless, direct income support for children is a major factor, but it is not the only factor in addressing child poverty.

The advisory group was established as a result of one of the commitments in the programme for Government and was asked to examine a number of specific issues on a cost-reducing or cost neutral basis. It is important to emphasise this was the case, because if one was to examine child and family income supports without these constraints, one might recommend a different design of income supports. The group started its work programme by prioritising this area of family and child income supports.

The conclusions reached by the group were as follows. The primary conclusion reached by the group in its entirety, which is composed of outside experts and representatives of Departments, was that child benefit should remain as a universal benefit. I am well aware that is not necessarily the view held by all participants in this debate, but the group was very clear it wanted child benefit to remain as a universal payment for all children. At the same time, we recognised that the system could be changed so as to better target children in low income families. We looked at a number of options for changes to the child income support system and decided there were two main options. One was the taxation of child benefit and the other was the two-tier payment, which is the option we recommend. We recognised there were arguments in favour of taxing child benefit, but the main reason we did not consider this the better option was that it only deals with child benefit and not with the other payments made to children. Therefore, it would not bring about any significant reform of the child income support system.

There are other problems with the taxation of child benefits, not least the question of the legal issues surrounding cohabiting couples and married couples. I would like to emphasise, however, that it is possible to tax child benefit. Reports on this issue go back to the 1970s. In the past, there was emphasis on how difficult it would be to tax child benefit, for technical reasons. However, it seems to the advisory group from the information made available to it by the Revenue Commissioners that the technical problems of taxing child benefit no longer exist and this is now possible. The reasons we did not prefer that option were not because it could not be done, but for the other reasons I have outlined.

While recognising there is no one perfect solution, the group favoured the two-tier approach. This means there would be a universal first-tier payment in respect of all children, although at a lower level than that paid currently. Then there would be a second-tier or supplementary payment which would be paid to low-income families and which would replace the current qualified child increases and family income supplements.

We concluded that this second-tier system would have advantages in terms of incentives to work in particular. As the committee is aware, a person on jobseeker's allowance who gets a job will lose not just his or her weekly jobseeker's allowance but also the child income support payments that go with it. If this second-tier system was in place that person would be able to move into a job and if the income from the job was low, would be able to retain some of the second tier payment. Therefore, there would not be the same disincentive to take up work as is the case currently, for jobseekers who have a number of children.

When we were examining the two-tier payment approach, we looked in detail at the design and the financial implications of the system. I wish to clearly emphasise that we took a particular example of how the two-tier system would work. We are not saying that this is the best possible system; we simply took an example to analyse what the consequences would be and to show how it would work in practice.

It is a matter for Government to decide exactly what limits should apply to the application of a second-tier payment, the amount of the universal payment, what limits should apply to the second-tier payment and what the withdrawal or tapering rate should be for that second-tier payment. All of those factors are inter-related but a number of different packages can be looked at to see which one would yield the best possible results.

We picked a particular package to analyse in detail and these are set out in the report. This report was completed in March 2012. The particular example we used involved taking the then current rate of child benefit which was €140 a month plus the increase for a qualified child which was approximately €30 a month. At the time, that combined rate was roughly €63 a week. We operated on the presumption that €63 a week would be the top rate between the basic rate of child benefit and the second-tier amount. The proportion universal to the two-tier is €52.48 at present. We proposed that instead the universal element would be 40% to 60% selective. This would mean that a family with one child would receive a second-tier payment up to about €35,000. We would start at a figure of €25,000. We chose that figure because that is the at-risk-of-poverty figure for a family with two children at present. There is nothing particularly sacrosanct about the figure but it is the reason we started there. If the scheme proposed in our package was to be applied, then any family with an income of under €25,000 would get the full €63 a week. A family with one child could have an income of up to about €35,000 and get some part of the second-tier payment. A family with two children could have an income of up to €45,000 and get some of the second-tier payment.

About 60% of all families would get a second-tier payment under the package we have set out. There would be a 20% withdrawal rate of the second-tier payment as payment increased. I emphasise again that this is just one possible package to illustrate how this payment system would work.

It is a matter for Government to decide what the particular limits should be. One of the major advantages of the second-tier system is the degree of flexibility it allows in that different levels of basic payment and selective payment can be made, different tapering amounts and income limits can be decided.

I wish to emphasise that we did not suggest that this would ever be done in one fell swoop; it could be implemented over a number of years. It is a matter now for Government to decide whether it should go ahead and if so, to analyse different packages to see which ones would best meet the requirements for improving child poverty outcomes and reducing disincentives to work. We are happy to take any questions from members.