The Downing Street policy unit is working with officials from the Department of Social Security on proposals to sell off the entire organisation to the private sector if it does not meet tough new efficiency targets.
The sale would bring in millions of pounds to the Treasury but infuriate Labour left wingers who are already angry over the Government's welfare reforms.
Alistair Darling, the Secretary of State for Social Security, will this week announce a wide-ranging shake up of the much-criticised CSA.
The Government's White Paper will give courts tough new powers to fine or even jail fathers who refuse to pay up, simplify the formula by which payments are calculated and give the CSA access to confidential tax files so it can chase defaulters.
Although no mention is made of privatisation in the policy document, ministers are already examining detailed plans to sell off the agency if its operation does not improve in the public sector. Wholesale privatisation would go much further than ideas which have already been floated to contract out individual parts of the CSA, such as the collection services. Senior staff at the agency have already been consulted about the practical implications of the proposal.
One option is to include the proposal in Labour's manifesto for the next election as a way of demonstrating the party's commitment to being radical on welfare. "It's on the agenda," one senior government source said. "It's been discussed at ministerial level and we wouldn't shy away from it if we could see that it was likely to operate better in the private sector. The White Paper sets out the next stage but privatisation is definitely an option after that."
Whitehall sources privately admit that this week's reforms will make the organisation a far more "attractive proposition" for sale than it has been in the past. The plan follows a wide-ranging review of child support, which found fundamental problems in the workings of the controversial agency.
Even this week's reforms are unlikely to go entirely smoothly - publication of the proposals was delayed for months while officials struggled to install the computer software needed to operate the new system.
Ministers were told that the previous formula was so complicated that staff spend 90 per cent of their time calculating payments and just 10 per cent enforcing them. In future, absent parents will pay 15 per cent of their net income for one child, 20 per cent for two and 25 per cent for three or more. An additional percentage will be imposed as a fine on parents who fail to pay up when first approached by the CSA. At the moment only 40 per cent of absent parents pay what they owe and only 250,000 children are benefiting from the service, a quarter of the number who should.
Mr Darling said the Government was determined to get tough on defaulters. "Both parents have an obligation to their children - it doesn't matter whether they are together or not," he said. "As the party that built the welfare state we have to ensure it endures into the next century but is brought up to date."
The proposals for reform of the CSA, which will be announced to Parliament on Thursday, are part of a concerted government "fightback" this week which will focus on welfare reform. Mr Blair has ordered the drive to emphasise the Government's commitment to its traditional working class supporters, in an attempt to combat disillusionment in Labour heartlands.
Tomorrow, David Blunkett, the Education and Employment Secretary, and Mr Darling will launch pilots of the so-called single gateway for benefit claimants, the system of compulsory personal advisers for the unemployed. There will also be announcements on changes to further education, help for teenagers leaving care, proposals for the implementation of stakeholder pensions and plans for regenerating inner cities.
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