20 ways to make Britain better – 2. Banking on a better benefit system

Over twenty weeks, Nick Pecorelli will be outlining 20 ways to make Britain better.

In last week’s column I set out the case for a more flexible Child Benefit, part of which could be drawn down to pay for childcare in the early years of childhood, matched by central and local government funding. On reading Rachel Reeves’s Clement Atlee memorial lecture, it struck me that a better name for this more flexible payment would be Childcare and Family Allowance. This week’s column looks at another way to increase the potency of Child Benefit.

One of the understated achievements of the last Labour government was its work to give many low income families access to bank accounts for the first time. In 1998 nearly a quarter of those in the lowest fifth of incomes did not have a bank account. By the time Labour left office this was down to 6 per cent. Much of this growth can be attributed to the introduction of the Basic Bank Account and Post Office Card Accounts. These are, of course, second best accounts, and Post Office Card Accounts don’t offer a direct debit or overdraft facility, but they help normalise finances for low income families.

Many of these families struggle with debt and find it almost impossible to develop a savings habit. Some, unable to access the main stream loans market or obtain and overdraft facility, resort to payday loans or other forms of short term credit, sometimes ending up in a cycle of debt.

We could use Child Benefit payments to change this. If the next Labour government agreed that where Child Benefit recipients give permission their annual benefit could be paid in a single lump sum directly into a credit union account, at the beginning of the year, the cost would be minimal (payments would be accelerated within year) but the impact potentially dramatic.

First, a credit union, knowing that it is getting a minimum of over £1000 a year (for a first child) paid into an account at the beginning of the year, might be willing to offer interest, or provide free day to day banking. They might also be more likely to consider a small loan to someone facing short term challenges, thus providing an alternative to payday loans and other forms of costly short term credit.

A credit union could provide a different payment cycle over the year, perhaps introducing flexibility around the date rent goes out, or offering a larger payment at a certain time of year. They might agree a savings plan, with only on a proportion of Child Benefit paid out to the recipient each year.

The model could be extended to include other local mutuals and banks and potentially an improved Post Office Card Account.

As well as making our benefit system more flexible, the balance sheets of local mutuals would be strengthened. Credit unions currently have slightly over a million members and less than £1 billion of assets. If just one in seven families elected to pay their Child Benefit (or new Childcare and Family Allowance) to a credit union, the number of credit union members would double. Credit unions would begin to develop a whole new set of customers and relationships. The greater flows of income into credit union accounts would provide them with the financial means to offer more loans to others.

So one small change to the way the benefit system works could have a powerful magnifying effect and the balance would be tilted a little away from the big banks towards a different kind of banking that puts members first. If the model works other benefits could be added. How about State Pensions?