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

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. 

The 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.

Its design is as follows:

All children below 18 years residing in Austria are entitled. Based on reference budgets, the total benefit amounts up to EUR  872.- per child and month 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 between, the means-tested component is continuously phased-out.

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

  • family 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 with 2022 policies was used based on EU-SILC 2021 data provided by Statistics Austria. The direct (monetary) consequences were analysed on three levels:

  • Fiscal consequences (simulated budgetary costs offsetting benefits to be abolished);
  • Number of children concerned, average amount of the means-tested component, share of children with maximum as well as without means-tested component;
  • Income distribution and risk-of-poverty.

FINDINGS

The income-tested component of the basic security for children would cause additional budgetary expenditures of around EUR 3.4 billion (offsetting standard rates for children within social assistance). 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.

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 would favor households or persons in the lower income deciles, especially in the lowest three deciles.

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 (relative to 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: It 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 higher-income parents in particular and has only a minor poverty-preventing effect, caused budgetary costs of around EUR 1.6 billion in 2019. Its increase 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.