Who Benefits from Child Benefit?

By Blow, Laura; Walker, Ian et al. | Economic Inquiry, January 2012 | Go to article overview

Who Benefits from Child Benefit?


Blow, Laura, Walker, Ian, Zhu, Yu, Economic Inquiry


I. INTRODUCTION

Over most of the developed world large financial transfers are made to parents by virtue of their parenthood. For example, in the United States the recently introduced Child Tax Credit (CTC), which goes to the vast majority of children, (1) costs almost $1 billion each week, or about 0.4% of GNP. The United Kingdom government spends on average about $25 (at present exchange rates) each week on each child in the form of a lump sum transfer called Child Benefit (CB) which goes to all children, and in addition, the United Kingdom has its own version of CTC which goes to almost all families with children--and together CB and CTC account for approximately 1% of GNP. (2) In the United Kingdom, CB and CTC represent a sizeable contribution to family net incomes, especially for the single parent households considered in this paper.

The typical rationale for these payments that are ostensibly earmarked for children is that they are good for our children. Such transfers are usually motivated by concern for the welfare of children and implicitly presume that there is some market failure that prevents parents from investing in the desired quality and/or quantity of children throughout their lives. This might arise, for example, through child quality being a household public good implying parental free-riding in quality investments, or through imperfections in fertility control, or credit market constraints that prevent households from smoothing the costs of children. A further motivation is that this is a form of intra-household redistribution so that, in households where resources are not pooled, a transfer payment via the mother may have different effects on spending than other forms of income. Moreover, particular concern arises for children in poor households, and the United States and the United Kingdom are distinctive in having child poverty rates that are considerably higher than that in most other developed countries. (3) Thus, there may be credit market constraints that prevent households, especially poor ones, from spreading the costs associated with children across their lifetimes that CB can help mitigate.

This paper is concerned with the impact on household spending patterns of exogenous changes in a lump sum cash transfer that is made to all parents. The United Kingdom is an excellent laboratory to address this issue because CB has been a simple lump sum universal transfer for a period of more than 20 years from 1980 up to the introduction of CTC, which is a means-tested supplementary transfer, in 2001. Since that reform in the late 1970's, the level of payments has varied dramatically over time.

Rather than consider intra-household distribution issues, our aim here is to try to complement existing research on the relationship between child outcomes and household income by trying to infer how CB is spent--in particular, we are interested in how CB affects spending on adult and child specific goods. That is, we investigate the impact of CB on household spending patterns with a view to estimating its impact on goods that are "assignable" to either children or adults. Thus, this paper takes a direct approach as to whether "money matters" by investigating the effect of variations in transfer households with children on household spending decisions. We provide separate estimates for lone mothers, where intra-household distributional issues do not arise, from mothers with partners present, where it may. Thus, for lone mothers our results indicate the pure effect of the fact that CB is "labeled," while for couples any such effect is confounded with any intra-household distributional effect. We are particularly concerned with spending on "child goods" and use spending on children's clothing to reflect this. In contrast, we also look at how transfers to parents affect spending on "adult goods" and use alcohol, tobacco, and adult clothing as examples of these. (4)

Our headline finding is that CB is spent differently from regular income--but, paradoxically, it is spent disproportionately on adult-assignable goods. …

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