This newly published Working Paper ‘Road Testing Child Benefit and Social Assistance Reforms’, follows up on the Working Paper ‘Eligibility and benefit adequacy for families in the tax-benefit system, micro-simulations using EUROMOD’, which displayed that, in the researched countries, social protection does not always adequately protect families in all situations against poverty. Both deliverables aim to examine tax-benefit systems from a family resilience perspective and roadtest possible policy reforms through tax-benefit simulations.
In this Working Paper, we have examined the potential of policy reform to reduce income poverty among families with children in Belgium, Croatia, Poland, Spain, Sweden and the United Kingdom. Discussions about the potential of tax-benefit systems to reduce income poverty are often met with concerns about (maintaining) financial incentives and about social expenditure: a so-called trilemma or three-way trade-off. In this working paper, we critically analyse if a ‘social trilemma’ occurs between poverty reduction, social expenditure and work incentives. We examine this through a set of simulated policy reforms designed to reduce monetary poverty risks among families with children. More specifically, the European tax-benefit microsimulation models EUROMOD and UKMOD are used to quantify this trilemma and examine the effect of these hypothetical tax-benefit reforms, aiming to assess their distributional impact across the three dimensions of the social trilemma: effectiveness, cost containment and work (dis)incentives. Regarding child benefit reforms, a nominal amount framework and a relative modifier of the existing child benefit system framework were formulated. Secondly, a reform based on modifying the benefits received through social assistance were simulated.
Our findings show that, first of all, regarding effectiveness, the simulated reforms demonstrate that poverty reduction is possible through increasing child benefits and social assistance and that the most vulnerable family types examined (lone parents and large families) saw the largest poverty reduction in association with these reforms.
Second of all, the reforms were typically associated with an increase between 1% and 3-4% of social expenditure. But the details of how the reforms were designed mattered, since low-income targeted reforms were found to be less costly, and so by extension more cost-effective. However, the more targeted policies are, the more complex for both the potential beneficiaries and for the administration that allocates the benefits, which could result in higher stigmatising due to mean-testing and could lead to non-take-up.
Thirdly, regarding changes in work (dis)incentives, most reforms were associated with reduced work incentives and the participation tax rate tended to be higher than increases in marginal tax rates, however, the changes in the participation tax rate remained small. Concerning the child benefit reform, the simulated reforms usually resulted in an increase around a few percent while the social assistance reforms tended to be slightly higher, reaching between 5-10%.
Nevertheless, we state that financial work incentives are not the only factor which determines why people are employed or not. Taken together with the existing evidence and the estimates found in this research, we conclude that labour supply effects will be fairly small overall. At the same time, we critically note that the conditions for benefits to undermine paid work are also not necessarily universally applicable and their relevance might differ under different institutional conditions and policy designs. Moreover, an important caveat to our findings is that these are based on static micro-simulations which do not consider possible behavioural changes in response to the reforms.
Since the emphasis on high employment rates remains a key policy objective across Europe, the question of how to reduce poverty while maintaining work incentives in a context of high levels of welfare spending remains visibly important in both academic and political discourse. We found in this paper that, based on the simulations of reforms and assumptions, social policy reforms that reduce the monetary poverty risks of families with children do not seem to produce work incentive distortions that are unsustainable, apart from perhaps Poland as outlier, which has a relatively unique policy situation. We conclude therefore that effective poverty reduction and maintaining financial work incentives do not need to be mutually exclusive.
You can read the full paper here.