Child Benefits and Common Sense

Dan Ben David
Dan Ben-David
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Dan Ben David
Dan Ben-David

The brewing political crisis regarding child benefits is not an obligatory gauntlet that we need to periodically weather. It is possible to reach a solution, based on each side's underlying truths - which do exist - that merges national long-term perspectives with normative governmental responsibilities and behavior.

On the one hand, there is the current reality, which affords us a glimpse at the future, should no changes emerge in the offing: The two population segments in which the majority of the working-age population is not employed are ultra-Orthodox Jews and Israeli Arabs. In 2005, 84 percent of ultra-Orthodox men and 47 percent of Arab men were not employed, in contrast to 38 percent non-employment among the remainder of Israel's male population. In addition, 85 percent of Arab women and 57 percent of ultra-Orthodox women were non-employed, compared to 48 percent among the rest of Israel's female population.

Today's adults are yesterday's children: one generation ago, about one-quarter of Israeli primary school students studied in the ultra-Orthodox and Arab educational systems. According to Israel's Central Bureau of Statistics (CBS), the number of elementary school children enrolled in both systems will account for 50 percent of the total in just four years' time.

If the work habits of the parents are indicative of their children's future work habits, then it is difficult to see how the economy will be able to withstand such an immense burden.

The State of Israel does not provide sufficient tools or the necessary conditions that could enable these population segments to successfully engage in a modern and competitive economy. But there is an additional reason for the high rates of non-employment: the country provides benefits at levels that allow people to choose non-employment as a way of life. Child benefits are a crucial element of this aid.

In complete contradiction to any economic logic - after all, the cost of raising the first child is greater than the cost of raising the second child, who, in turn, is more expensive than the third child - large child benefits were provided in the past to families with children born after the fourth child instead of to families with children born before the fourth child. The result was a huge government incentive for substantially increasing fertility rates. Instead of providing child benefits in the form of a reduction in taxable income, which would encourage higher fertility rates among those who can financially support their children, the benefit was provided without any relation to earnings ability - and in large amounts that became particularly attractive among poor populations for whom they reflected a substantial income increase.

Without any relation to religion or to the extent of religious conviction, individuals respond to economic incentives. As Alma Cohen (Tel Aviv University), Dmitri Romanov (CBS) and Rajeev Dehejia (Tufts University) show in a working paper recently published by the National Bureau of Economic Research (NBER), a prestigious and influential research center located in Cambridge, Massachusetts, child benefits have a positive and statistically significant impact on fertility in Israel - particularly among low-income households. In addition, the researchers found that the 2003 reduction in benefits led to a substantial reduction in birth rates among these families.

It is possible to argue about whether or not this is a desired result. But it is difficult to dispute the fact that large child benefits increase fertility within populations where adults tend not to work, populations that, should current birth rates continue, will become the majority in this country in the foreseeable future. Whoever supports the policy of continuing to allocate large benefits which are not provided as part of a program aimed at increasing employment, but within the current configuration, working in exactly the opposite direction must provide an explanation as to how they think the country will be able to exist in the circumstances that will develop.

On the other hand, the ultra-Orthodox, the Israeli Arabs and others were negatively affected some severly so as a result of the route chosen by the country to reduce the benefits. After all, Israeli families made their fertility decisions according to past government laws. Children are not refundable objects that can be returned to the factory if income sources that were counted on suddenly dry up. This kind of retroactive policy implementation reflects the behavior of the country in many other realms as well, for example in the area of pensions. It is both inappropriate and inhumane.

Assuming that greater fertility is still considered a desired policy objective, a new child benefits policy must only apply to those who bear children from the date the law comes into effect. The remaining families must be allowed to remain within the framework of the policies that prevailed when they chose to bring children into the world. As the children grow older, the government expenditures, resulting from past expensive and problematic policies will steadily decrease until they eventually stop entirely.

The child benefits issue has a solution that is both humane and also takes budget constraints and future implications into account. The only requirement is to turn down the volume and vehemence of the debate and to apply some more common sense.

Dan Ben-David teaches economics in the Department of Public Policy at Tel Aviv University.



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