Rethinking Child Allowance

Hidetaka Yoneyama, Senior Research Fellow

September 29, 2011 (Thursday)

Faced with strong resistance by the opposition party, the Democratic Party of Japan has withdrawn a proposal to raise Child Allowance starting from 2011 (a raise of ¥7000/month for infants under 2 years old) and instead passed a “stopgap bill” to extend the current system for another 6 months, from April to October. It seems that the DPJ wants to gain the opposition party’s cooperation by fundamentally rethinking childcare during this grace period.

Throughout the discussions of whether or not to continue Child Allowance, which the opposition has determinedly used as ammunition to shake the DPJ, there is a strong sense that the issue of exactly what kind of system the former wants has been left by the wayside. On top of that, after the Great Tohoku Earthquake, Child Allowance became a candidate for the chopping block in order to raise rebuilding funds. Regardless of the fact that it would obviously be very difficult to raise Child Allowance substantially under such circumstances, it is still necessary to analyze the effectiveness of the structure that was introduced in its first year and find the most effective way to pay out the allowance. Only after that has been accomplished should a new and better system be designed during the half-year grace period.

In August-September 2010, the Ministry of Health, Labor, and Welfare conducted a Survey on Child Allowance Spending over the internet. The results were published in December, but the media barely mustered enough interest to report that 41.6% of parents put the allowance into savings for their child’s future (Table 1), and the topic received no more attention than that. However, looking at the results of the survey in more detail reveals several interesting facts.

Effects of Child Allowance

Since its inception, Child Allowance has been strongly criticized for not having clear policy intent: is it meant to stimulate the economy; encourage families to raise more kids; or redistribute income to the parents raising children? While it is true that most parents put the Child Allowance they receive directly into their savings, and therefore there is not much of a stimulating effect on the economy, in fact there were never any such expectations of Child Allowance in the first place.

What of income redistribution effects, then? When compared with its predecessor, Child Benefits, because Child Allowance was introduced at the same time that tax breaks for families with children under 16 were nixed, it is as though Child Benefits and said tax breaks were combined and the payment amount and age range increased. Tax breaks for children less than 16 years old were originally income subsidies, not tax exemptions, and so high-income earners in higher tax brackets received greater benefit. Furthermore, for those who do not pay taxes, no benefit would be gained from such deductions. If we move from this system to one in which a set amount is paid out, then the benefit would reach those who don’t pay taxes, and furthermore, the problem of regressivity, by which the more one earns the more one benefits, would also be solved. With respect to these points, Child Allowance is far more effective at distributing income than systems of the past.

In recent years, especially in rural areas, there have been many cases where even the main bread-winner of a family has had difficulty finding a steady job due to the long economic slump. Providing Child Allowance to such families would greatly help them in their daily lives. According to the survey, parents do not use Child Allowance only for their children directly; 13.8% (Figure 1) of respondents said they use it to pay daily living expenses for the entire household (food, utilities, etc.). In households with an annual income of less than ¥3 million, the percentage increases to 24.4%. The reason such households can’t limit the use of Child Allowance to their children is “there is no room in the budget” according to 87.1% of respondents. Among households with children, 14.3% have incomes of less than ¥3 million (2009 Citizen Life Basic Survey). Child Allowance can thus be a top-up for the livelihoods of households with children that are struggling with their budgets, and therefore it effectively supports child-raising.

What of Child Allowance’s effectiveness in increasing the birthrate? Regarding whether receiving Child Allowance caused parents to plan to have more children, 2.0% answered “Strongly agree” and 6.5% answered “Somewhat agree”: only 8.5% of respondents answered positively. However, 3.3% and 10.6% of households with a firstborn between 0-3 years of age answered “Strongly agree” and “Somewhat agree”, respectively, for a total of 13.9%, a relatively high percentage compared to the overall. Other characteristics of households that answered positively are: young parents; one child; and income between ¥3-6 million. For such households—young parents, 1 child under 3, and a middle level income—we see that it is possible to give a push toward having another child. However, only a small portion of the population gave positive answers, and even those that did will not necessarily have more children in reality. Therefore, it is difficult to say that Child Allowance is actually effective at increasing birthrate.

Direction of Child Allowance Improvements

In light of the above, how should we improve Child Allowance in the future? One of the most common criticisms of Child Allowance is that instead of giving out money, the government should build daycares. Such outcries are especially compelling in urban areas where there are many children on waiting lists to get into daycares. It goes without saying that building daycares is necessary, but for the many families who have taken pay cuts due to the economic slump or who don’t have steady jobs, more than being able to put their kids in daycare, cash is an effective form of support.

Conversely, given the current situation, it is difficult to consider Child Allowance to be an effective method for arresting the falling birthrate. However, the results of the survey show that Child Allowance can raise the possibility of families having more children depending on the type of family. In the future, therefore, we should change Child Allowance’s system to try to raise that likelihood even more. One often cited system is that of France’s Family Allowance, whereby families with one child receive no benefits, families with two children receive a regular allowance, and families three or more children receive additional benefits. Not giving an allowance to families with one child means that the goal of France’s policy is not to support the livelihoods of families with children. If Japan too is to emphasize raising the birthrate, it would be feasible to apply modulation to Child Allowance, i.e. reduce the amount received for the first child and increase it for the second.

When income-level restrictions are compared with the two policy goals of income redistribution and increasing the birthrate, we see that high income earners do not need financial support and that increased birthrate effects will be much smaller among high income earners than middle income earners, and therefore such restrictions are unnecessary. While France has not adopted any income-level restrictions, Japan has a much more severe financial reality and will likely be forced to do so.

When we look at the current proposals from each party, as in Table 2, the DPJ’s 2011 initial proposal to raise Child Allowance increases the amount paid for children between 0-2 by ¥7000. Its 2009 manifesto, which paid out ¥26000 per child across the board, was deemed too financially difficult to carry out, but it seems to be trying to increase payouts wherever it can, even if they are small increases. The Komeito’s proposal would increase the amounts specified in the coalition government era’s Child Benefits, providing ¥10,000 per child regardless of age (with income-level restrictions). This is less than the standard set by the 2010 Child Allowance but more than the original Child Benefits. Also, the Liberal Democratic Party insists on a return to Child Benefits.

The above parties’ proposals are all more concerned with their own prestige (DPJ with realizing its 2009 manifesto, LDP and Komeito with their fixation on Child Benefits) than with producing an effective policy. During this half-year grace period, the government must intensify discussions on what is the most effective structure by looking hard at policy goals and funding.