Poverty Reduction Effect of the Taxation and Benefit Systems in Finland 1993-2013 – Comparing the 1990s Depression and Post 2008 Recession

The poverty risk rate, measured as 60% of the median income, increased in Finland from 7 to 14 per cent between 1993 and 2008. The poverty risk rate increased especially in the late 1990s, when both benefits and income taxes were cut after the severe depression in early 1990s. The current (post 2008) recession has evoked very different social and fiscal policies compared to the 1990s and the recession has had a little impact on poverty risk rate so far.

We use microsimulation models for evaluating the impact of reforms on the poverty reduction effect of the tax-benefit system. We are especially interested in comparing policies chosen in the 1990s depression and post 2008 recession. We have estimated the counterfactual poverty rates during 1993-2013 by using the SISU microsimulation model of Statistics Finland. Household disposable incomes are simulated for each year by using the same households but varying the taxation and benefit legislation according to the existing enactment.

The benefit cuts during the 1990s depression had a rather modest impact on poverty risk rates and the impact was nullified during 2000s by series of benefit raises. Even after 2008 there has been several increases in the basic benefits that have lowered the poverty risk rate. Changes in taxation had a considerable larger impact on the poverty reduction effect than changes in benefits. The poverty risk rate would be 2.5 percentage points lower if the tax legislation were the same in 2010 as it was in 1993. However, the level of benefits has decreased compared to the average income level. If the level of benefits would have remained at the same level compared to the average earnings in 2010 as in 1993, the poverty risk rate would be four percentage points lower in 2010.