Cost of (no) basic child allowance: long-term costs of child poverty

One in five German households with children lives below the at-risk-of-poverty threshold. Germany’s current coalition agreement aims to strengthen families and lift children out of poverty. Against this background, the basic child allowance is currently under discussion. In the public debate, however, the long-term societal costs of child poverty are hardly ever compared with the costs of measures against child poverty. Yet, the costs are significant and occur in the areas such as health, education and social participation. Scenario analyses confirm that policy measures can be effective in reducing child poverty. Investing in children can therefore lead to substantial fiscal savings in the long run.

The results of the briefing commissioned by Diakonie Deutschland show that children living in poverty have a higher risk of health problems, which lead, inter alia, to direct costs in the healthcare system and to indirect costs through reduced working hours. Their poorer access to education results in lower income taxes and social security contributions in the future, but higher government spending. The lack of social participation caused by child poverty has also a negative impact on their social network. This in turn has a long-term negative impact on educational and labor market opportunities, among other things.

Against this background, DIW Econ uses data from the German Socio-Economic Panel (SOEP) to investigate whether targeted policy measures are effective in combating child poverty. Each of the three scenarios analyzed – a reduction in bureaucracy leading to full take-up of child allowance, a child-related transfer of 50 euros for children in poverty and a corresponding transfer of 100 euros – can reduce the number of households with children in poverty. The latter would be particularly effective in lifting single-parent households and households with three or more children out of poverty – and thus the households with children most affected by poverty.

The associated expenditure at 2019 price levels would amount to around €630 million (reduced bureaucracy), €2,130 million (€50 transfer) and €4,260 million (€100 transfer) per year. Given that the costs of child poverty is more than €100 billion per year according to an OECD study, a substantial investment in reducing child poverty would seem to be money well spent.

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