Simulation of an introduction of a basic security for children in Austria 2022

Simulation der Einf├╝hrung einer Kindergrundsicherung in ├ľsterreich 2022

KGS2022

PROJECT TEAM AT THE EUROPEAN CENTRE

Michael Fuchs, Felix Wohlgemuth

BACKGROUND

This project analysed the effects of an introduction of a basic security for children in Austria. The rationale behind it is that monetary benefits for children should be stronger related to the material situation of the household and the (lacking) financial resources for children. While maintaining the hitherto existing level of financial support for all children almost entirely, families with low incomes and with social disadvantages would particularly benefit from the reform.

The design of the basic security for children is as follows:

All children below 18 years residing in Austria are entitled to the basic security. Based on reference budgets, the total benefit amounts up to EUR  872.- per child and month. It is paid twelve times a year. There is a universal component of EUR 285.- (corresponding to family allowance plus child tax credit for a 10-year old child uprated from 2000 with CPI) and a means-tested component of up to EUR 587.-. Below a taxable yearly family income of EUR 25,000.- the maximum amount of the means-tested component is paid; above a taxable yearly family income of EUR 40,000.- only the universal component is granted. In case of a taxable yearly family income between EUR 25,000.- and EUR 40,000.- the means-tested component is continuously phased-out between EUR 587.- and EUR 0.

The following monetary benefits would be replaced by the basic security:

  • familiy allowance,
  • child tax credit,
  • standard rates for children within social assistance.

Note: Monetary benefits for children above 18 years remain the same.

METHODS

For the analysis, the tax-/benefit microsimulation model EUROMOD/SORESI for the year 2022 is used based on EU-SILC 2021 data provided by Statistics Austria. The direct (monetary) consequences of the introduction of the basic security for children are analysed on three levels:

  • Fiscal consequences (simulated budgetary costs of the basic security taking into account the offsetting amount of monetary benefits to be abolished);
  • Number of children concerned, average amount of the means-tested component, share of children with maximum means-tested component, share of children without means-tested component;
  • Income distribution and risk-of-povery (household level).

FINDINGS

As a result, the income-tested component of the basic security for children would cause additional budgetary expenditures of around EUR 3.4 billion. Compared with the family allowance and the child tax credit, the universal component would result in additional budgetary expenditures of around EUR 1.2 billion. The net cost of the basic security for children would thus amount to around EUR 4.6 billion.

If the basic child allowance were introduced, the at-risk-of-poverty rate of the total population would decrease by about 5 percentage points (from about 13% to about 9%), and that of persons under 18 by as much as about 14 percentage points (from about 16% to about 3%). Looking at the change in household income (household level) or weighted equivalized income (individual level), the introduction of the basic child allowance would favor households or persons in the lower income deciles, especially in the lowest three deciles.

If the income-tested component of the basic security for children were to be paid only to children (under 18 years of age) who are currently (according to EU-SILC 2021) at risk of poverty (while maintaining the loop-in rule for annual taxable family income between EUR 25,000 and EUR 40,000), the income-tested component would incur budgetary costs of around EUR 1.9 billion. This would be 55% of the corresponding costs without restriction to children at risk of poverty (around EUR 3.4 billion).

In addition to the significant poverty-preventing effect, another argument in favor of the basic security for children is that the loop-in rule applied to the income-tested component (linear reduction of the transfer amount between the lower and upper limit of the taxable family income) is relatively easy to administer (similar to the current administrative handling of the multiple-child supplement under the family allowance) and should continue to ensure work incentives, especially for women: The loop-in rule prevents a fixed income threshold, above which the transfer would immediately and drastically decrease.

Compared with the basic security for children, the family bonus tax credit  (including the additional negative tax component), which benefits high-income parents in particular and has only a minor poverty-preventing effect, caused budgetary costs of around EUR 1.6 billion in 2019. The increase in the family bonus including the additional negative tax in 2022 will add around EUR 0.5-0.6 billion to annual costs in the medium term, resulting in total annual costs of around EUR 2.2 billion.

The (additional) costs of a basic security for children must also be set against the economic costs of child poverty and the subsequent costs of poverty and disadvantage in adulthood. Children who grow up in poverty begin their lives with numerous disadvantages that may negatively affect their entire life course. Structural factors often prevent affected individuals from escaping this situation. In fact, social and economic disadvantages often manifest themselves in a vicious circle that "inherits" poverty from one generation to the next. On average, it takes five generations for a family living in poverty to rise to the middle class (OECD, 2018).

In addition, due to the high poverty risk rate and the neediness of the recipient households, the budgetary resources spent on the income-related component of the basic security for children should flow directly into consumption to a large extent.