Foresight Centre analyses impact of need-based benefits on poverty and inequality

According to Kaupo Koppel, an expert at the Foresight Centre, giving need-based benefits to those who need assistance the most would ensure the more efficient use of state funds. “A large part of the state budget of Estonia is made up of social benefits. They could be paid according to need, considering the person’s or household’s income,” said Kaupo Koppel. “Linking benefits to people’s wealth would provide even greater efficiency, but currently there is not enough data to implement this in Estonia.”

According to the Foresight Centre’s analysis, linking child allowances to household income would have a significant impact on the state budget. Last year, 275,000 households received child allowances in the total amount of 274 million euros. “For example, if we start gradually reducing child allowances for those households whose income is at least two Estonian average salaries, the state would be able to save nearly 60 million euros a year,” said Koppel. “It would not have a significant impact on inequality and poverty, though.” On the other hand, if the saved money were directed to increasing child allowances for families with lower than average income, poverty and inequality would decrease significantly, but the state’s expenses in total would increase by nearly 100 million euros.

Another possibility is to establish an upper income limit for the allowances for the families with many children and stop paying the allowances to those households whose income exceeds three times the average salary, i.e. more than 5,850 euros per month. The calculations of the Foresight Centre show that as a result, the number of beneficiaries would be reduced by 2,195 households, or 8%. State expenses would decrease by 12 million euros and revenues by 1.9 million euros. “This change would have a negative impact on households with higher incomes; however, the changes in inequality and poverty would be small,” said Koppel.

The Foresight Centre noted that such changes in the family allowances should not be made hastily, as there is no reliable data on households in Estonia. At the same time, family allowances would be better targeted based on the income level of the household, not the individual.

Last year, 42,400 people received unemployment benefits in the total amount of 45.4 million euros, and unemployment insurance benefits were given in the total amount of 118.6 million euros. The short report reveals that stopping uniform unemployment benefits and directing people at risk of poverty to apply for subsistence benefits would save the state 56 million euros. However, if, alongside this change, the payments of subsistence benefits were automated, by determining eligibility for the benefit based on the data, all the saved money would be spent and there would be additional expenses in the amount of nearly 49 million euros. This shows that the current subsistence benefit only reaches about a third of its target group, as the application process is complicated and people do not know what the subsistence level is or whether or in what amount they would be eligible.

The short report ‘The impact of means-tested social benefits on the state budget, poverty and inequality’ (in Estonian) analyses family allowances, poverty alleviation benefits and health-related benefits, which appeared from the previous analysis. The short report presents different options for linking benefits to income and revealing their financial impact on people’s incomes and the state budget, based on a study by Civitta and Praxis. The study and short report are part of the Foresight Centre’s research stream ‘The Future of the Personalised State’, which aims to find out the possibilities of data-based personalisation in services and benefits in the social and educational sector and to create alternative scenarios.