Who benefits from Child Benefit?

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

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 • “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

Expenditure patterns

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

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.

Who benefits from Child Benefit?