IFS

Who benefits from Child Benefit?

Laura Blow

Ian Walker

Yu Zhu

Background

• 1975, Barbara Castle, Secretary of State for Social Services, on the Child Benefit Bill:

– “… the nation's provision for family support is concentrated first and foremost where it is needed most on the poorest families; and that it goes to the person responsible for caring for the children and managing the budget for their food, clothing and other necessities.”

Background

• Gordon Brown, March 1998 Budget:– “Child Benefit remains the fairest, the most

efficient and the most cost-effective way of recognising the extra costs and responsibilities borne by all parents”.

• April 2005 Budget:– CB increased to £17.00 a week for the first child

(£17.55 for lone parents), and to £11.40 a week for subsequent children. “Since 1997, the value of Child Benefit for the first child has been increased by 25 per cent in real terms”.

Our aim

• To learn something about the effectiveness of transfers aimed at children in the UK.

• Previous literature suggests that such labelling can have an effect - Kooreman (2000) finds evidence that CB is spent disproportionately on child related goods in Netherlands.

Our aim

• To infer how CB is spent– i.e. is it spent on child related goods (more than

are other sources of income)?

– or is it spent on adult related goods?

– or is “a pound a pound”?

• So a direct approach to whether “money matters”.

Empirical approach

• CB is– universally paid– up rated (roughly) yearly – sometimes in line with prices,

sometimes more or less than this

• Therefore get monthly exogenous real variation from– inflationary erosion between up ratings– real increases/decreases when updated

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Rea

l ch

ild b

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it (

£ p

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eek)

First Child (Couple) First Child (Lone Parent) Subsequent Children First Child (Lone Parent post 7/98)

Real CB 1979-2001 (£ per week in 2003 prices)

Empirical approach

• CB is– universally paid– up rated (roughly) yearly – sometimes in line with prices,

sometimes more or less than this

• Therefore get monthly exogenous real variation from– inflationary erosion between up ratings– real increases/decreases when updated

• Can think of our approach as treating CB variation as “natural experiment”.

Empirical approach

• Use UK FES data from 1980 to 2000 to estimate Engel curves for different goods– Child specific goods: children’s clothing– Adult specific goods: men and women’s clothing, alcohol, tobacco.

• Include CB and other expenditure (othexp) separately.

• Test whether MPC(CB)=MPC(othexp) for the different goods.

• Do this separately for different household types– since CB varies with number of children, if pool, worry that CB is just

picking up variations in spending patterns across household types.

Data & Methodology

* *othexp CB stuffh h h hi i i i ie a b c

• “stuff” includes year/month/region dummies, controls for children’s age, age of head of household, lone father dummy.

• Household types:– Couples, 1 child – Couples, 2 children – Lone parents, 1 child– Lone parents, 2 children

# obs CB as % of expenditure 9,811 4

14,663 7 2,920 10 2,239 15

Expenditure patterns

couples lone parents couples lone parentsTotal expenditure £ 392 184 414 205Children's clothing % 1.9 3.3 2.7 4.2Women’s clothing % 2.4 3.5 2.1 2.8Men’s clothing % 1.6 0.5 1.4 0.4Food % 16.7 19.3 18.5 21.5Alcohol % 3.6 2.1 3.3 1.7Tobacco % 2.0 3.3 1.7 3.0

1 child 2 children

Test: MPC(CB)=MPC(othexp) ?

Basic results

Child clothing

Women’s clothing

Men’s clothing

Food Alcohol Tobacco

Couples, N=8575 CB 0.015 0.156 0.213* 0.177 0.523** -0.015 Lone Parents, N=744 CB 0.118 0.663** 0.040 -0.047 0.188* -0.019

Test: MPC(CB)=MPC(othexp) ?

Basic results

Child clothing

Women’s clothing

Men’s clothing

Food Alcohol Tobacco

Couples, N=8575 CB 0.015 0.156 0.213* 0.177 0.523** -0.015 othexp 0.017** 0.039** 0.028** 0.075** 0.033** -0.000 Lone Parents, N=744 CB 0.118 0.663** 0.040 -0.047 0.188* -0.019 othexp 0.025** 0.064** 0.006** 0.065** 0.019** 0.000

Test: MPC(CB)=MPC(othexp) ?

Basic results

Child clothing

Women’s clothing

Men’s clothing

Food Alcohol Tobacco

Couples, N=8575 CB 0.015 0.156 0.213* 0.177 0.523** -0.015 othexp 0.017** 0.039** 0.028** 0.075** 0.033** -0.000 F(CB = othexp) 0.00 0.84 2.11 0.38 14.29** 0.04 Overall F, p F(6,8526) = 2.82 p = 0.01 Lone Parents, N=744 CB 0.118 0.663** 0.040 -0.047* 0.188 -0.019 othexp 0.025** 0.064** 0.006** 0.065** 0.019** 0.000 F(CB = othexp) 0.25 5.54** 0.11 0.28 2.43 0.05 Overall F, p F(6,694) = 1.41 p = 0.21

Test: MPC(CB)=MPC(othexp) ?

Basic results

Initial conclusions

• Results suggest CB is spent differently from other income– Spent disproportionately on adult-assignable

goods rather that child-assignable goods

• But this does not have to imply that parents favour themselves over their children.

• It could be that they place so much weight on the welfare of their children that they insure them against income variations.

Results robust to

• Quadratic specification (MPCs calculated at mean).

• Including households on welfare

• Accounting for purchase infrequency – instrumenting expenditure with income

• Tobit specification (zeroes)

• Splitting sample into smokers / non-smokers

• Splitting sample by time (1980s / 1990s)

Anticipated and unanticipated CB effects

• assume households form static expectations of real CB – i.e. will be indexed in line with inflation since the last increase

• decompose CB into anticipated / unanticipated parts

• allow the two components to enter separately in the Engel curves

• find that it is unanticipated CB variation that is reflected in adult assignable good expenditure

Conclusions

• Policy-induced unanticipated variation in CB is spent differently from other income – disproportionately on goods consumed

predominantly by adults

• Consistent with the view that parents place so much weight on the welfare of their children that they fully insure them against any unexpected policy changes.

• Suggests that families would gain from more certainty about their future benefit incomes.