Towards a European union child basic income?: Within and between country effects

The idea of an EU-wide child basic income scheme, the subject of this paper, has a long pedigree and some recent relevance. In response to the charge that a basic income scheme would be unworkable and/or infeasible, its advocates have often pointed out that something resembling a basic income does already exist in several countries, in Europe and beyond, albeit only available to persons of non-working age: the elderly (in the form of a universal basic pension), and children (in the form of a universal child benefit).

In fact, as the latest version of MISSOC (2012) informs us, universal child benefits seem to be the rule in Europe. In mid-2012, family allowances did not vary with income in 18 out of 27 EU countries (Austria, Belgium, Bulgaria, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Latvia, Luxembourg, Poland, Romania, Slovakia, Sweden, The Netherlands, United Kingdom), and in 3 out of 4 EFTA member states (Liechtenstein, Norway, Switzerland). Child benefits were income tested only in Southern Europe (Cyprus, Greece, Italy, Malta, Portugal, Spain), in 3 Eastern European countries (Czech Republic, Lithuania, Slovenia), and in Iceland (an EFTA member state).

Of course, as the case of the UK indicates, where from 2013 about 1.2 million out of 7.9 million families with children had their entitlement reduced or terminated, universal child benefits are not always popular with governments. But elsewhere in Europe, the direction of policy change was the opposite (Bradshaw & Finch 2002). In Germany, for instance, not only were child benefits not made subject to a means test, but their value was significantly increased in the mid-1990s (Tamm 2010), while current policy debates are about whether they should considerably increase again.

The reason universal child benefits have on the whole been resistant to policy change is that the standard arguments in their favour remain strong. In terms of horizontal equity, if one accepts that children can to some extent be viewed as a public good, then shifting some of the costs involved from families with children to society at large must enhance social welfare. In terms of vertical equity, where existing policies leave coverage gaps, universal child benefits will also improve the position of families at the bottom of the income scale (often failing to take up or ineligible for assistance under current policies).

In view of the above, extending universal child benefits to the entire EU can be seen as a rather modest proposal. But what is the case for a child basic income at EU level, funded (at least partly) out of the EU budget? Can such an idea be taken seriously as a reasonable candidate for an ambitious EU policy initiative in an area traditionally ruled by the principle of subsidiarity (dictating that the EU should not undertake action unless that action is more effective than that taken at national, regional or local level)?

The question is obviously legitimate, but the best answer to it comes in a recent European Commission publication cautiously floating the idea. A child basic income scheme “could be a demonstration of the EU’s commitment to children, to the future, and could contribute to the reduction of child poverty. It would also document the solidarity existing between people without and with children.” Furthermore, it might be useful in the current economic crisis: “While not as effective a stabilizer as unemployment insurance per se (because of little cyclical increase on the expenditure side), an EMU-wide child basic income scheme, if jointly financed, would ease the situation of countries that face massive shocks.” (European Commission 2012a: 62).

As the report went on to note, “such schemes have been advocated by prominent academics including Atkinson and Marlier (2010).” In fact, the latter have come out strongly in favour of a “concrete proposal” that “the EU introduce a Basic Income for Children”. In their version of such as scheme, “each Member State would be required to guarantee unconditionally to every child a basic income, defined as a percentage of the Member State median equivalised income (and possibly age-related). Implementation would be left to Member States, who could employ different instruments. The minimum could be provided via child benefit, via tax allowances, via tax credits, via benefits in kind, or via employer-mandated benefits. The only restriction is that the set of instruments selected must be capable of reaching the entire population.” (Atkinson & Marlier 2010: 34).

As Atkinson and Marlier argued (2010: 34), “the paramount reason for proposing an EU basic income for children is concern about child poverty. But a second reason for proposing an EU basic income for children is that it would contribute positively to other EU headline objectives. The risks of poverty and social exclusion among children are important in their own right, but they also have implications for the future.”

With respect to the latter point, the accumulated evidence on the lifetime costs of child poverty and the benefits of early intervention is more than sufficient; for a review see Esping-Andersen (2002) and Kamerman et al. (2003). On the other hand, the economic crisis has made the former point even more pressing. As a recent report explains (European Commission 2012: 41), “child poverty has risen in 18 Member States since 2008, sometimes in a significant manner”, chiefly as a result of the adverse effects of the recession on the working age population.

Atkinson and Marlier (2010) acknowledged that their concrete proposal for an EU Basic Income for Children was explicitly modelled in a study by Levy, Lietz and Sutherland (2007), using the EU tax-benefit model EUROMOD. As the authors of that study had explained (Levy et al., 2006; 2007):

“A pure child basic income would consist of a generous unconditional child payment that would replace all existing child contingent tax concessions and cash transfers. A variation of this form of CBI could involve the setting of a universal level of child minimum income that would be unconditionally guaranteed to every child. Under the principle of subsidiarity, each Member State could choose its own preferred method to deliver this basic income.”

In general, there are three broad ways to think about the introduction of an EU-wide Child Basic Income (CBI) scheme in practical terms. Two were just mentioned above: the first would be a “replacement” scheme introduced at EU level at the same time as all provision for children currently existing at national level is abolished; the second would be a “top-up” scheme, with the EU supplementing national provision in cases where it falls below the universal level guaranteed.

Our paper updates the study of Levy et al. (2007) and extends it to cover the EU27 and by assessing the effects of a third variant: an “additional” scheme that would pay the same amount for all eligible children in the EU, either in absolute or in relative (i.e. purchasing power) terms.

Obviously, an “additional” scheme would be vulnerable to the familiar charge that it looks like a free lunch, and a very expensive free lunch at that. To address that charge, we have limited eligibility for the EU Child Basic Income to children aged under 6. In addition to fiscal concerns, the narrow age focus might also be justified by the innovative character of the policy, which requires some caution. Moreover, as is standard practice with child benefits in Britain and elsewhere, the EU Child Basic Income simulated here is paid to the mother. Also, crucially, it is assumed to be taxed as income – again, as is standard practice with universal benefits, e.g. in Scandinavia. Since it is paid to the mother it is assumed to be taxed as her income. While national taxation would “claw back” some of the fiscal spending on the scheme, its net cost would remain considerable. In view of that, and in line with Atkinson (1995), we have assumed that the scheme would be funded out of a flat tax on all incomes, at a common rate set exactly to offset its net cost at EU level. Finally, as explained above, the benefit would be universal, i.e. paid irrespective of parents’ income.

More specifically, for illustrative purposes the benefit rate is set at €50 per month per child,² first in absolute terms (i.e. at the same benefit rate in all member states) and then in purchasing power parity terms (i.e. adjusting the benefit rate so as to reflect price differences between member states) respectively. The first of these naturally distributes more resources to children in lower-income countries than does the price-adjusted scheme.

This paper estimates the cost of each version (in each member state and in the EU as a whole), its impact on poverty among the children targeted by the scheme (also in each member state and in the EU as a whole), and fiscal flows between member states (resulting from the fact that the flat tax is set at a common rate, which is set to offset the net cost of CBI at EU – not national – level).

This paper assesses the likely effects of an EU Child Basic Income for young children in terms of poverty reduction and fiscal costs, including flows between member states. In doing so it demonstrates how EUROMOD can be used to analyse the between-country effects of EU-level policies, as well as to compare the within-country consequences.

According to our simulations, the gross cost of such a scheme set at €50 per month per child aged under 6 would be around 0.15% of EU GDP. National taxation could be used to claw back one-seventh of that cost on average and the remainder could be financed by a flat tax on all gross household income of about 0.20%.

The anti-poverty impact of such a scheme would be quite significant, reducing the risk of poverty among young children by 14% (800 thousand children) and closing the poverty gap of those remaining below the threshold by 6%.

Within countries, the scheme would distribute income to households with young children from households without them. Between countries, the scheme would redistribute income away from richer member states with fewer children towards poorer ones with more children. Most member states and virtually all children aged under 6 would be net gainers. In general, fiscal flows between member states, and also poverty reduction, would be greater under the EU CBI set in absolute terms rather than PPP-adjusted. On the whole, no member state would have to pay in flat tax more than 0.1% of its GDP in excess of what it would receive in CBI.

The implications of the particular scheme that we have analysed (additional to the existing system, financed by an EU flat tax) can be generalised or extrapolated to other CBI schemes with the same basic characteristics. For example, Levy et al. (2012) also explored a €20 scheme, and suggested a rule of thumb that an additional EU flat tax rate of 0.004% would be needed for each additional euro of CBI per month. Extending the CBI to cover all children under 16 would cost about three times as much in gross terms and might require an EU tax of somewhat less than three times that considered here (to the extent that the national tax collected from the mothers of older children might be greater). Generally, the between country redistribution seen here would have a similar pattern under more ambitious CBI schemes, on a larger scale.

This exercise has also suggested ways in which a European CBI scheme might be improved. Taxing the CBI as the mother’s income has attractions on vertical equity grounds and as a way of minimising the EU tax needed. But our results show that countries with already high taxes also tend to be net contributors. To the extent that these are also countries already with substantial provision for children (Belgium, the Netherlands, Denmark) this might erode support for an EU CBI. Therefore, in high tax countries, relying fully on an EU flat tax to finance a European CBI scheme might be more attractive.

The version of an EU Child Basic Income for young children discussed in this paper is put forward mainly for illustrative purposes. We do not wish necessarily to recommend “our” version over alternative ones. For instance, the more flexible blueprint of Atkinson and Marlier (2010) for an EU-mandated (but nationally-funded) EU Basic Income for Children, and the proposal of Levy et al. (2007) for a “top-up” scheme (under which the EU CBI would supplement national provision when it falls below the guaranteed level), briefly discussed earlier, both deserve greater attention than they have received so far.

Having said that, we need to recognise the main advantage of an “additional” scheme discussed here relative to a “top-up” one is that the former would be less vulnerable to moral hazard. Under the latter version, national governments would have a perverse incentive to reduce national provision so as to maximise the amount of the transfer from the EU.

Nevertheless, it should be noted that the potential for strategic manipulation may also be present in a milder form under the version analysed here. With an “additional” scheme, governments might decide that the amount of benefit paid to families with young children through national arrangements is already “sufficient”, and hence reduce it by the amount of the additional CBI. In this case, moral hazard would obviously have an impact on the total amount of income support to families with young children, but at least would not affect the level of transfers between countries.

On the whole, a considerable amount of jostling for position between the various tiers of policy-making (the EU, national governments and even local governments, where applicable) seems inevitable. In view of that, setting a modest EU-wide floor, funded out of the EU budget, then allowing member states (or regional administrations) wishing to aim higher to pay for the extra cost out of their own budgets, can be seen as a rather sensible solution.

As shown in our paper, the cost of an EU CBI need not be prohibitive. But can such a scheme ever be feasible politically? The idea that relatively low-income households in rich countries should contribute to supporting young children in relatively high-income households in poorer countries might seem far-fetched, particularly given that one of the side effects of the current crisis has been a reduction in feelings of solidarity across member states among EU citizens.¹⁰

By the same token, European statesmen and women willing to embark on the long trek towards (re)building a shared European identity, cannot hope to find a better starting point than a scheme supporting the incomes of families with young children, wherever in the EU they might reside. As the European Commission document cited earlier put it, such a scheme “could be a demonstration of the EU’s commitment to children, to the future” (European Commission 2012a: 62).

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Author details

1. Horacio Levy

   OECD, France

   For correspondence

   horacio.levy@oecd.org

2. Manos Matsaganis

   Athens University of Economics and Business, Greece

   For correspondence

   matsaganis@aueb.gr

3. Holly Sutherland

   Institute for Social and Economic Research, University of Essex, United Kingdom

   For correspondence

   hollys@essex.ac.uk