How Well is Social Expenditure Targeted to the Poor?

Abstract

Some countries are more effective in poverty reduction than others. What can explain these variations in effectiveness? This paper analyzes the effectiveness of social transfers in alleviating poverty. We focus especially on EU countries, but also include other OECD countries into our analysis. We compare poverty rates at the levels of market and disposable incomes, that is before and after transfers, in order to analyze the effect of tax and transfer policies in reducing poverty, i.e. to determine the target efficiency of social transfers. We perform several tests with the most recent data.

In case pensions are treated as transfers, we find a strong relationship between levels of social spending and antipoverty effects of social transfers and taxes. Social spending seems to be an important determinant of a country’s poverty outcome. Our analysis highlights some cross-country differences in targeting of social expenditures on poverty alleviation in EU15 and non-EU15 countries around 2005. We introduce an indicator of Public Policy Effectiveness on Poverty Alleviation across countries. Each percentage point of social expenditure alleviates poverty in both EU15 and non-EU15 countries by .7 percentage points on average. Relatively high scores in EU15 countries are found for Ireland and the Scandinavian countries, while Italy, Greece and Spain score lowest. Outside Europe the poorest scores are reported for Korea and the United States. Country ranking appears to be rather stable over time when outcomes for 1995 and 2005 are compared, although some of our results may be sensitive to cyclical factors.

Keywords: poverty, welfare states, social expenditure

JEL Classification: H53, H55, I32