Should families bear the brunt of government cuts?

19 August 2010

As well as the government's plans to scrap child trust funds, the coalition has unveiled further measures that will affect families since taking office. In George Osborne's emergency Budget he announced child benefit will be frozen for three years and tax credit thresholds will be reduced.

Kate Moore from Family Investments believes families will unfairly bear the brunt of the government cuts, but Justin Modray from argues the actions are a necessary evil.

YES, says Justin Modray, director of

I'm not a fan of the forthcoming child tax credit cuts. Families on average incomes are likely to be up to £545 a year worse off when the threshold for the family element is reduced next year. But, given the state of our country's finances, it's a necessary evil.

Over the last few years the government has been racking up total debts in excess of £900 billion. Just like us, the government must pay interest on its debt, estimated at £43 billion for the current tax year and equivalent to £1,600 a household.

If left unchecked, the deficit and resulting interest bill could spiral to extremely uncomfortable levels. The previous government's predictions suggested an annual interest rate bill alone of £70 billion by 2014/15, about half the amount currently raised by income tax.

Pretty drastic measures are required to get the deficit back under control, which is why I believe the cuts to child tax credits, child benefit and child trust funds are warranted. The combined cuts should save around £885 million next year, rising to £2.76 billion by 2014/15.

This might look like chicken feed compared with this year's expected £110 billion deficit, but the cuts are nevertheless an important contributor towards the government's target of balancing its annual accounts by 2015/16 and reducing the overall deficit thereafter.

There's no doubt we have a tough few years ahead. The government is gambling on private sector business growth offsetting the pain of tax rises and spending cuts.

If the gamble backfires we'll almost certainly head back into recession and spending cuts will simply rub salt into the wounds of a shrinking economy.

But despite this risk, I think simply doing nothing and avoiding cuts to child tax credits or child benefit, for example, would be a far bigger gamble.

NO, says Kate Moore, Head of Savings and Investments at Family Investments

There is one clear loser from the governments planned cuts – the young. Despite making the family an important tenet of the election campaign, the government has shown a lack of commitment to young families and savers.

The chancellor says the pain of his austerity measures will be spread fairly, but it is the next generation – our children – on whom most of the burden will fall.
The list of cuts makes for grim reading. Child trust fund (CTF) vouchers and the health in pregnancy grant have been scrapped, child benefit has been frozen and child tax credits have been reduced.

The net impact of these cuts will have severe implications for families all over the UK and increase pressure on family finances and on the ability of parents to save on their children's behalf.

Scrapping the savings gateway is yet another blow to low-income savers. While all politicians seem agreed on the need to establish a savings culture, these cuts will only serve to disincentivise saving.

The government needs to take steps to support family finances if it wants to prevent future generations being saddled with debt. A first step would be to retain the tax-free savings structure of the CTFs.

They were easy to understand and gave parents an incentive to start saving for their children's futures. The current alternatives, however, are far more complicated and often require specialist financial advice.

A generation of young people will now enter adulthood without a strong savings base and ill-equipped to meet the costs of increasingly expensive higher education and housing.

We're in danger of creating real generational inequality by taking money from the young to pay for our past mistakes.  

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