Economic Policy Review ISSN 1313 - 0544

It Is Time for a Change in the Guaranteed Minimum Income, not for a Game of Coefficients

08.08.2021
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Only a few weeks ago, IME presented[1] the main challenges in social protection after the pandemic in our country. One of the key messages was that the social policy in the country is unfocused, inefficient and fails to affect poverty and inequality in society.

While the main drivers of prosperity are economic recovery, new jobs and rising wages, the role of social policy should be maximally targeted at those most in need, rather than scattering across broad measures with huge scope and low efficiency.

We now present a proposal for reform in one of the most precisely targeted social assistance programs - the monthly social benefits.

In the last week there have been several events related to social assistance in Bulgaria. First, another version[2] of the National Recovery and Resilience Plan (NRRP) was presented, then the public consultation[3] for a change in monthly social benefits was completed, and finally the budget actualisation[4] proposal was presented, which focuses on a change in social payments. These events, although not obvious at first glance, are in fact directly related.

For years now, the European Commission (EC) has been making recommendations for a change in the scope and adequacy of monthly social benefits, and it seems that this is currently a condition for the adoption of the NRRP. In other words, if we do not change the scope of monthly social benefits, the country's plan may not be adopted. This is exactly what provokes the interim cabinet to hurry with changes in the coefficients that are applied to the guaranteed minimum income (GMI) to determine the differentiated minimum income (DMI).

At the same time, although the latter will come into force in 2022, the proposed update of the budget for this year offers a new social supplement for pensioners - up to the government poverty line of BGN 369, which in practice will have the function of a new GMI, but one that is intended only for pensioners.

All this sounds confusing enough and as expected, the public focus on the topic is very dull. However, this discussion is important and deserves special attention. Currently, the monthly social benefits in the country are granted based on a differentiated minimum income, which is determined by multiplying the individual coefficient of each person or family by the GMI. The latter is currently BGN 75, and the individual coefficients vary depending on the age, marital status, health and property status of the persons. In the most common cases, the coefficients of each person vary from 0.66 - for a person of working age who lives with other people, to 1.65 - for a person over 75 years of age who lives alone.

Over the last more than 10 years, the GMI has hardly been changed. In 2009 the GMI is BGN 65 and after 2018 it is fixed at its current level - BGN 75. While in 2009 the level of the GMI is over 27% of the minimum wage in the country, in 2021 it is already only 11.5%. This low amount of GMI makes the income criterion for granting monthly social benefits very restrictive and, therefore, the program has a very small scope. In practice, the program, which is most targeted at the poorest, covers only 76,000 people in 2020, or about 1% of the country's population. This is on the background of over 23% of the population, which is below the poverty line and about 10% - in deep poverty with an income below 40% of the median income in the country.

In fact, the program is so restrictive that it has a very limited effect on poverty and inequality. However, unlike other large-scale and expensive programs - aimed at families with children, people with disabilities, etc., it is the monthly social benefits that have the greatest potential to reduce poverty. For comparison, from the point of view of the budget, while about BGN 28 million per year are allocated for monthly social benefits, the costs for the monthly benefits for raising a child until the completion of secondary education reach nearly BGN 280 million. The difference is 10 times in favour of supporting children in relation to social benefits.

Against this background, the government is proposing changes to the monthly social benefits, which aim to expand the scope and to some extent are a response to criticism from the EC. The changes proposed by the government affect the percentages for determining the differentiated minimum income, and once again no changes in the basic amount of the GMI are envisioned. A proposal to increase the percentages by a factor of 1.1 in 2022, by 1,365 in 2023 and by 1,224 in 2024 is made. The total proposed increase in the percentages for determining the DMI is by 1.84 to 2024.

However, the calculations show that this proposal is too timid. The increase in the differentiated minimum income in 2022 is only 10%, which means that there will be no significant change in the scope - the beneficiaries would remain within about 100 thousand or less than 1.5% of the population. The postponement of the effect for 2024 is also controversial, as an increase in the level of median income is expected in the coming years, i.e., the new amount of the differentiated minimum income will most likely catch up only partially.

Currently, the BGN 75 monthly GMI in question is about 10% of the median income in the country and about 17% of the poverty line for 2020. This is according to the official National Statistical Institute data - BGN 752 median income and BGN 451 poverty line for 2020. The reasons for the government's proposal state that the EC expects that by 2024 the monthly social benefits will reach a level of about 30% of the poverty line. This is unlikely to happen with the government's proposed coefficient changes. However, even if we leave the European Commission aside from this debate, economic logic shows that social assistance must be targeted at the poorest, as it also has the greatest impact on reducing poverty and inequality.

In the last month, the IME has prepared several scenarios for a change in the GMI, including with specific calculations for the scope and effect of each change. Based on all the options considered, the basic proposal of the IME is to increase the GMI to BGN 150, which will be in force since 2022. This would mean that the GMI is about 20% of the median income in the country or 1/3 of the poverty line.

In this scenario, a range of monthly social benefits of about 280 thousand people is achieved, i.e., over 4% of the country's population, as well as a very strong effect on living conditions - only this change would achieve a reduction in the Gini coefficient by 2.4 points and a decrease in the share of the poor by 3.4 percentage points. We estimate the total estimate for the budget expenditures for monthly social benefits at GMD in the amount of BGN 150 at about BGN 150 million, which remains far from many other programs with much lower efficiency.

The eventual increase in the GMI would also allow for changes in the targeted aid for heating. One of the possibilities is to harmonize the criteria for monthly social benefits and targeted benefits for heating. Raising the GMI to BGN 150 would allow it to be used to determine access to this social program. To this moment, the basic income for heating is BGN 150 or twice the amount of the GMI - precisely in order to achieve a wider scope and more people to receive heating subsidies. The unification of the income criterion for two of the main social benefits in the country is necessary and would make the system logical.

The great effect of such a change on poverty and inequality may seem surprising, but at the same time it is entirely expected. Focusing aid on the lowest area of the income curve is normal to have a serious effect on inequality, incomparable in scale to measures covering all income groups. Postponing such a change would rather provoke constant pressure for undirected social transfers and greater redistribution through the budget, supported with the argumentation of inequality in the country. Social programs aimed at the poorest are key to the effectiveness of social policy and the preservation of the common macro framework in the country.

 

 


[1] IME is working on a long-term project to analyze the causes of poverty and inequality of opportunity, as well as to assess the effectiveness of social benefits and services in Bulgaria. The first results of the IME's work show the low effect of the social protection system on inequalities, the lack of adequate tools to support the most deprived and the challenges facing social services at the local level.  More information can be found here )in Bulgarian only) - https://ime.bg/bg/articles/predizvikatelstvata-pred-socialnata-zashtita-sled-pandemiyata/

[2] https://www.nextgeneration.bg/upload/51/%D0%9D%D0%9F%D0%92%D0%A3_July2021.pdf

[3] https://strategy.bg/PublicConsultations/View.aspx?lang=bg-BG&Id=6181

[4] https://www.minfin.bg/bg/news/11428