No. 15




The Effect of Cash Support to Families on Alleviating Poverty in Estonia

14 June 2007


RiTo No. 15, 2007

The article analyzes the role of cash benefits and tax concessions for families with children in reducing poverty in Estonia.

The PRAXIS Center for Policy Studies tax-benefit microsimulation model was used. This allows the effect of actual and hypothetical policies on income distribution and poverty to be evaluated. It also enables a more detailed examination of policy instruments than is possible with survey information only. The model examined benefits paid on the basis of the State Family Benefits Act and the Parental Benefit Act, as well as the additional tax allowance related to the number of dependant children prescribed by the Income Tax Act.

To sum up, the analysis showed that from 2000-2005, state family benefits, parental benefit and additional tax allowance reduced the number of children living below the relative poverty line by almost one-third (about 20,000 children) – a drop of 10 percentage points. Benefits have resulted in the greatest reduction in poverty among families with three or more children. The benefits targeted to these families are also the ones which reach the poor to the greatest extent and are the most cost-effective in reducing poverty.

The static microsimulation method applied proves its value in comparing policy measures especially if we are interested in their first-order effect on poverty and redistribution of wealth. This should assist policy planners in taking socio-political decisions aimed at families.

In order to obtain a more comprehensive analysis, the next step should be to evaluate the effect of family benefits on job market behaviour and birth rates. In the last few years, the parental benefit and additional income tax allowance have increased as a percentage of the cash benefits aimed at families, and under the coalition agreement signed in early 2007 it should increase even further. The analysis reveals that the parental benefit and the additional tax-free income on the second child and especially on the first child are relatively costly measures when it comes to reducing poverty among families with children. Thus, in order to evaluate whether larger expenditures on these measures are expedient, it is necessary to analyze additionally the expected positive influence of these measures on the behaviour of parents on the job market and the birth rate, compared to non means-tested universal family benefits.

Full article in Estonian