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Mr. David Coady, Samir Jahan, Baoping Shang, and Riki Matsumoto
This paper provides an overview of the design of means-tested Guaranteed Minimum Income schemes, which constitute an important component of social protection systems in European countries. It discusses how key design features differ across countries, including how countries balance the primary objective of poverty alleviation against the desire to both manage the work disincentives inherent in such programs and contain fiscal cost. The analysis finds a clear trade-off between both concerns in practice, with many countries combining low generosity with low benefit withdrawal rates (BWRs) thus prioritizing employment incentives over the primary objective of poverty alleviation. Many countries can reduce this trade off by combining higher generosity with higher BWRs. Countries with very high BWRs should consider reducing these, including through allowing income disregards and time dependent (rather than income-dependent) benefit withdrawal. The work disincentives associated with higher BWRs can also be attenuated through strengthening complementary activation policies that incentivize and support participation in the labor market.
Mr. David Coady, Samir Jahan, Baoping Shang, and Riki Matsumoto

This paper provides an overview of the design of means-tested Guaranteed Minimum Income schemes, which constitute an important component of social protection systems in European countries. It discusses how key design features differ across countries, including how countries balance the primary objective of poverty alleviation against the desire to both manage the work disincentives inherent in such programs and contain fiscal cost. The analysis finds a clear trade-off between both concerns in practice, with many countries combining low generosity with low benefit withdrawal rates (BWRs) thus prioritizing employment incentives over the primary objective of poverty alleviation. Many countries can reduce this trade off by combining higher generosity with higher BWRs. Countries with very high BWRs should consider reducing these, including through allowing income disregards and time dependent (rather than income-dependent) benefit withdrawal. The work disincentives associated with higher BWRs can also be attenuated through strengthening complementary activation policies that incentivize and support participation in the labor market.

Mr. David Coady, Samir Jahan, Baoping Shang, and Riki Matsumoto

Copyright Page © 2021 International Monetary Fund WP/21/179 IMF Working Paper Fiscal Affairs Department Guaranteed Minimum Income Schemes in Europe: Landscape and Design Prepared by David Coady, Samir Jahan, Riki Matsumoto, and Baoping Shang July 2021 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate . The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management

International Monetary Fund. European Dept.

be replaced with targeted support for vulnerable groups. Directors broadly agreed on the need to carefully assess the implications of the plans for permanent cuts in social security contributions and the elimination of the solidarity tax. They emphasized that the recent increase in health spending and public investment should be preserved, while pressures to raise pensions and civil service wages should be resisted. Directors recommended further enhancing the Guaranteed Minimum Income scheme to form the basis for targeted support during adverse shocks. Directors

International Monetary Fund. Independent Evaluation Office

endorsed (targeted) cash transfers as the “preferred approach to compensation” ( IMF, 2013a ). 34 However, it did not go further on what type of these schemes—e.g., conditional versus unconditional cash transfers—might be appropriate in which circumstances, and why. Instead it referred to World Bank studies on the subject. The IMF has not done much analytical work or elucidated a view on guaranteed minimum income schemes (found in many countries, especially in Europe) or universal/basic income schemes (which have been piloted in a few countries) to date. 35 27

International Monetary Fund. European Dept.

emphasis on the long-standing objective of improving the expenditure mix of the budget. In the near term, this entails addressing gaps in the Guaranteed Minimum Income scheme as support should transition from job retention towards targeted income support and worker reactivation, as well as addressing unmet needs in healthcare provision. As these measures have a structural fiscal impact, they should be matched by renewed impetus to create fiscal space over the medium term including through personal income tax base-broadening, tackling VAT compliance gaps, and aiming for

International Monetary Fund

assistance, a guaranteed minimum income scheme, and various family benefits ( Table 1 ). Together they account for roughly two-thirds of overall social spending, with the remainder going to health and long-term care. 3 Table 1. Luxembourg: Social Income Support Schemes Eligibility Financing Benefit Level Benefit Adjustment Minimum guaranteed income Residents (> 25 years old) General revenue pool € 1,070 per month for single person, € 1,606 for a two member household Automatic adjustment for consumer prices (2.5 percent trigger

International Monetary Fund. European Dept.

benefits and the Guaranteed Minimum Income scheme (GMI, included in other programs for socially excluded groups). Figure 7. Greece: Social Assistance Benefits Source: Eurostat; and IMF staff calculations. 12. The coverage and targeting of social protection are relatively poor ( Figure 8 ). On the coverage, about 37.5 percent of the poorest quintile receives social assistance in Greece, lower than the average of 40.1 percent of the 5.1 billion people represented in the World Bank ASPIRE database (WB, 2018) . On the targeting of social assistance, Greece is