Policy Analysis investigates what effect the financial benefits for families with children had on alleviating poverty in Estonia during 2000-2007 and which support measure has reduced poverty most cost-efficiently, i.e. with minimal cost for reducing child poverty by one percentage point. The study examines benefits that are paid in accordance with the State Family Benefits Act and the Parental Benefit Act and the additional income tax exemption for raising children according to the Income Tax Act. The cost of the benefits and tax incentives was estimated 2.8 billion kroons (180 million euros) in 2006.
The report uses microsimulation method i.e. the values of financial benefits and taxes are simulated according to the policy rules given to the households. This allows assessing real and hypothetical effect on distribution of incomes, poverty and costs of policy measures. Initial information about the structure, income and expenses of households is taken from the Statistics Estonia report on the household budget survey for the period 2000-2005.
Analysis showed that family benefits, parental benefits and income tax exemption together reduced the number of children living below the relative poverty threshold almost by third (about 20 000 children). It cost almost 300 million kroons (19.2 million euros) to reduce the relative poverty of children by one percentage point. The effect of reducing poverty is higher on families with many children and smaller on single parent families.
Out of all policy measures valid until 2006, the support for families with three and more children reached poor families the most. Single parent benefit reached the poor families also relatively well. Poor families received least from the additional income tax exemptions, especially if it is applied from the second child. The most cost effective measures to reduce child poverty are the benefits for families with many children. The least cost effective measures were the parental benefits and the income tax exemption from the second child.