Improving poverty reduction in Europe: what works (best) where?

In this paper we provide evidence of the relative cost-effectiveness of different types of policy instrument in reducing the risk of poverty (or limiting its increase). We do that by measuring the implications of increasing or reducing the size of the instrument within its national context, comparing across 7 diverse EU countries: Belgium, Bulgaria, Estonia, Greece, Hungary, Italy and the UK. We consider four types of commonly-applied policy instrument that have a direct effect on household income and hence potentially on the risk of income poverty: child benefits, minimum income components of social assistance, income tax lower thresholds and minimum wages; and one general aspect of policymaking, the regular indexation of benefit levels and tax thresholds. We focus on changing the scale of the instrument rather than its structure. Hence, in each case we take the existing policy instrument and calculate the direct effects on household income of inflating/deflating the relevant thresholds and payment levels by common proportions (5%, 20% and 90%), taking account of interactions with the rest of the tax-benefit system. To do this we make use of EUROMOD, the taxbenefit microsimulation model for the European Union, based on microdata from the European Union Statistics on Income and Living Conditions (EU-SILC). The effect on income poverty (FGT0 and FGT1) is calculated and compared across instruments and countries and is assessed relative to the budgetary effect of the policy change. The aim of this paper is not necessarily to present realistic or politically feasible policy reform scenarios but rather to compare the cost-effectiveness of some common “building blocks” of policy making, drawing on analysis of seven national policy systems and contexts.