Alberto Zanardi, Board Member of the Parliamentary Budget Office (PBO), testified today at a hearing (in Italian) before the Social Affairs Committee of the Chamber of Deputies engaged in the examination of a bill granting enabling authority to the Government for the reorganisation and strengthening of measures to support dependent children through the unified dependent children allowance and the unified childcare services allowance.
Zanardi analysed the objectives of the reform, offering a preliminary assessment of the proposed measures and their redistributive effects for a number of representative family-types and underscoring potential critical issues relating to the reorganisation of existing mechanisms and coordination with other measures.
The following is a summary of the salient elements addressed in the document submitted by the PBO official.
Objectives of the reform. – The purpose of the reform can be summarised into three main objectives:
- strengthen financial support policies for families with children to align the resources invested with those available in countries that spend more in this area and attempt to stem the decline in the birth rate. To this end, plans call for increasing resources to be devoted to this area (€3.2 billion in the first year, €6.4 billion in the second and €9.6 billion thereafter) over the monetary transfers available under current instruments, which will be replaced. The new programmes will be funded with as yet unspecified expenditure savings;
- rationalise existing child support measures by eliminating a fragmented and unbalanced system and introducing a unique dependent children allowance linked to the income of the main wage-earning parent to replace the family allowances for dependent children and other existing measures to support the birth rate;
- financially support families with children with the introduction of a new universal benefit based on the equivalent economic status indicator (ISEE), consisting of a childcare services allowance that can be used to pay for childcare services, partly with a view to encouraging the participation of both parents in the labour market.
The redistributive effects of the reform: selected simulations. – A full assessment of the new dependent children allowance compared with the current system would require additional information above and beyond the principles set out in the enabling bill. Assuming a dependent children allowance that linearly decreases with the income of the main household wage-earner over the entire range of eligibility (0-€100,000), the PBO, using its own tax-benefit microsimulation model, sought to investigate the possible redistributive effects with respect to the current system for representative families. The analysis shows a cost for the single allowance compatible, at first approximation, with the amount of resources implicitly indicated in the enabling bill (€24.9 billion, considering our evaluation of the savings associated with the mechanisms that the bill will repeal), which leaves about €2 billion available for the other instrument envisaged in the enabling bill, namely the childcare services allowance. However, this assessment does not include: the cost for the progressive elimination of social contributions paid by employers, who finance part of the cost of family allowances; the cost of the safeguard clause, under which each household is assured at least the amount of resources provided under the current system; and the cost savings deriving from the integration of the dependent children allowance with the Citizenship Income. The net effect of these items will presumably lead to an increase in the overall cost of the measure.
While the current system of allowances and tax credits is more sharply focused on medium-low income households overall, in the case of a single-income couple (with the wage-earner in payroll employment) with a minor dependent child aged over three, the dependent children allowance would provide around €15,000 of family income an amount substantially similar to that available under current programmes. For lower and higher incomes, however, the new allowance would be more generous.
In the case of a family with three children, the amount of the dependent children allowance would be smaller than the sum of family allowances and tax credits for very high incomes (over €90,000). For almost all larger families, however, the new allowance would be penalising, since both allowances for households and tax credits are now particularly high. This happens because these larger families are eligible for specific increases in their ordinary tax credits for dependent children (€200 per child) and for an additional refundable tax credit of €1,200 rewarded also in case the gross tax liability is smaller than the tax credit (incapienza fiscale).
Focusing on the age of dependent children, it would appear that the dependent children allowance provides relatively larger additional benefits compared with existing programmes for all single-income couples with a dependent child except in the case in which the child is younger than three and for household incomes close to €15,000.
The new system would provide particularly large benefits for self-employed workers, who do not currently receive family allowances. For example, for a single-income couple with a minor child aged over three, the gain would amount to around €1,600. While eliminating the categorisation of beneficiaries serves to support equity, it also raises a number of issues regarding the advisability of using an indicator affected by distortions such as income reported for personal income tax purposes to determine the size of the benefit, also in consideration of the greater propensity of self-employed workers to conceal part of their income.
With regard to the second benefit envisaged by the enabling bill, namely the childcare services allowance, in the simulations a constant benefit is envisaged for families with an ISEE lower than an initial threshold, with the linear reduction of the benefit to zero at a second ISEE threshold that is €4,800 higher than the initial threshold.
Starting from these assumptions and a financial constraint of about €2 billion, the simulations conducted with the PBO model indicate that at the maximum amount of the allowance envisaged in the enabling bill (€400 a month), the allowance could remain constant up to an ISEE threshold of €5,000 euros and then decline linearly to zero at an ISEE of €9,800. In this case the benefit would reach about 545,000 children aged 0-2 (42 per cent of the total) with an average benefit of €301. The allowance would therefore appear to be essentially intended for poor families. It would be advisable to determine whether these are actually the families for which the childcare burden represents the main impediment to participation in the labour market.
Critical issues. – The reform would join existing income support and poverty reduction measures such as the Citizenship Income and the €80 tax credit for lower-income wage earners, with which the new programmes would necessarily have to be coordinated, both in terms of objectives and eligibility requirements and operating criteria.
In particular, the enabling bill provides for the dependent children allowance to be considered in the calculation of income support benefits and that it must be coordinated with the provision of the Citizenship Income requiring balance and integration in the application of the two measures. However, this coordination raises issues.
The Citizenship Income is meant to combat poverty and the level of income guaranteed is based on an equivalence scale that is relatively disadvantageous for larger families compared with the implicit ISEE scale.
Achieving the aim of the enabling bill to improve the condition of poor families with dependent children, i.e. to provide them with more resources than those offered under the current system, would require either making the equivalence scale underlying the Citizenship Income more favourable for these families or only partially integrating this instrument and the dependent children allowance (i.e. providing for the exclusion of part of the latter from the Citizenship Income calculation).
A second critical issue is represented by the two different mechanisms for establishing eligibility for and the amount, respectively, of the dependent children allowance and the childcare services allowance. In both cases, the design of the instruments entails a trade-off between efficiency and equity. Resolving this trade-off also depends on the purposes of the individual programmes. In the case of the dependent children allowance, the reform seems to favour efficiency, encouraging participation of the parent with the lowest income in the labour force. In the case of the childcare services allowance, the choice was completely different, focusing more attention on equity, since eligibility is based on the ISEE, which considers the family unit as a whole and represents the most appropriate measure of its ability to pay.
Finally, there is the need for coordination between policies supporting demand for childcare services – which include the childcare services allowance – and those aimed at expanding the availability of services. The childcare services allowance would give rise to different levels of purchasing power between the various areas of the country due to the current lack of uniformity in the supply of childcare services both in terms of coverage and composition (public versus private), with consequent differences in conditions of access and price. To overcome this distortion, the territorial differences in the level of public services delivered should be reduced, especially in the South, a goal that is envisaged in the policy guidelines indicated in the Update to the 2019 Economic and Financial Document. In a shorter-term perspective, it would be desirable to consider the possibility of diversifying the amount of the allowance to take account of local supply conditions.