The government is struggling to keep a united front on plans to save £2.5bn by withdrawing child benefit from higher rate taxpayers, in one of the first major policy clashes in the coalition government between No 10 and the Treasury.
George Osborne is making clear in Whitehall that his proposal is a popular way of showing that all income earners will share in the pain of deficit reduction. The chancellor is also saying that the public finances are so tight it would be difficult to fund a watering down of the change, which is due to be introduced in January 2013.
David Cameron, nervous about unsettling Middle Britain, is keen to deal with the "cliff edge" problem of removing child benefit the moment at least one parent's income reaches the 40% tax threshold of £42,745 a year. No 10 is alarmed that a family with one earner, whose income is just short of £43,000, loses the benefit while a family in which both parents have a joint income of just over £80,000 will be unaffected if neither is taxed at 40%.
Kenneth Clarke, the former chancellor, waded into the row on Monday when he said Osborne had been right to tell the Conservative party conference in 2010 that higher rate taxpayers should not enjoy such a generous benefit in such a bleak economic climate. "It is quite wrong that some people are paying the higher rate of income tax on the basis that they're above average earners and at the same time receiving a social benefit to help them pay for their children," Clarke, the justice secretary, told ITV News. "It's an anomaly which, at a time of acute financial crisis, was bound to be addressed."
Clarke indicated that some minor changes might be announced by the chancellor in his budget on 21 March or in his autumn statement in November, but said there would be no U-turn. "I am sure the details can be looked at but the idea the government's going to do a U-turn on that is ridiculous," Clarke said. "We are in the middle of an acute financial crisis. It's very hard on the families but they are higher rate taxpayers. We've all got, I'm afraid, to find that we're tightening our belt a bit to get ourselves out of the mess we're in to get the economy recovering again."
Clarke spoke out after Nick Clegg indicated the government was looking to amend its plans. Speaking on Sky News, the deputy prime minister said: "We have been very open as a government that it is right that people at the top who earn much more than people with average incomes should be asked to make an extra sacrifice and that it is justifiable to say that people at the top don't receive child benefit in the way people do on ordinary incomes.
"But we're also equally accepting that there's an issue about how you do that so you make sure you don't create unintended consequences where, say, a family with one earner gets child benefit removal when there's another family with income earners who actually collectively earn more but keep the benefit."
The intervention by the Liberal Democrat leader prompted speculation that he was adding child benefit to a list of demands his party is tabling ahead of the budget. But it is understood Clegg simply thought he was helping out the prime minister, who has spoken publicly of the need for a rethink on child benefit.
Clegg's main priority is still to take low income earners out of tax by raising the income tax allowance to £10,000, to be funded by a tax on wealth.
The nerves in Downing Street come as Tory MPs vowed to oppose the change. Stewart Jackson, who resigned as a ministerial aide last year over Europe, dismissed the policy as "barmy, tokenistic and unfair". He said: "We understand that tough decisions have to be made and that there has to be burden-sharing across all groups. What's a problem for the government is seeming to clobber hard-working people, including single parents, while at the same time uprating benefits by over 5%.
"The Rolls Royce minds at the Treasury need to find a way out of the mire. If not, they need to drop the whole policy. It holds against basic tenets of fairness and equity."
The prime minister voiced his concerns about the child benefit changes in January when he said he would examine the way in which the withdrawal of child benefit kicks in so quickly. He told the House Magazine: "Some people say that's the unfairness of it, that you lose the child benefit if you have a higher rate taxpayer in the family. Two people below the level keep the benefit. So there's a threshold, a cliff-edge issue.
"We always said we would look at the steepness of the curve. We always said we would look at the way it's implemented and that remains the case, but again I don't want to impinge on the chancellor's budget."
Osborne is making clear that he has little room for manoeuvre after the slower than expected economic recovery forced him to delay by a year his initial pledge to eliminate the structural deficit within the lifetime of this parliament. The chancellor had thought in 2010 there was a strong chance he would never have to introduce the change.
But he is now saying that the proposal, which will only affect 15% of taxpayers, is popular even among those who pay tax at 40% or more. He is also saying that introducing major changes would be difficult.
Changes to his original plan could include: raising the cap so that child benefit is only withdrawn from those earning more than £50,000; allowing parents with children under the age of five to keep the benefit; or lessening the impact on families with one earner who pays tax at 40%.
Ed Balls, the shadow chancellor, said: "The government's policy on child benefit is now in total disarray. These unfair changes are due to hit hundreds of thousands of families on middle incomes in just 10 months time. The chancellor must now put implementation of these plans on hold and announce an urgent review.
"It cannot be right that a two-earner family each earning £42,000, a total of £84,000, would keep all their child benefit, but a single-earner family on £43,000 would lose it all at a stroke. And if ministers can look again at cutting child benefit for families on £43,000 they should also reconsider perverse and unfair cuts to tax credits for parents on the minimum wage which will leave thousands not only worse off, but better off if they quit work."
