An exceptional instrument for overcoming the poverty trap

Following the introduction of the tapering of social benefits scheme, the number of persons relying on social benefits declined considerably.

A study by the Central Bank of Malta notes that, following the introduction of the tapering of social benefits scheme, the number of persons relying on social benefits declined considerably. In fact, according to the analysis carried out by senior economist Kurt Sant, the scheme doubles the job-finding probability of persons previously on social benefits.

The impact declines with age and has no gender effect. These persons also have a lower probability of experiencing a return to unemployment, with the chance of job termination drops by 11.8 percentage points. Once the scheme eligibility ends after the 36 months, job-terminations of previously eligible individuals do not increase significantly. 

During the tapering period, an average individual receives more than €6,800 in tapered benefits, or about 26% in additional income when compared to a situation without tapering. Beneficiaries who enjoy the largest average payments are aged 36 years and older. 70% of all payments were disbursed towards women.

The study estimates that the tapering scheme enabled the Government to save approximately €46.1 million, equivalent to around 0.3% of GDP, that would have otherwise been disbursed as social benefits. Moreover, the Central Bank economist calculates that, even if one assumes that all individuals who entered employment earned just a minimum wage, between 2014 and 2019 Government earned at least €15.0 million, equivalent to around 0.1% of GDP, in additional revenue.

Kurt Sant also suggests that the tapering of benefits scheme added around 5,600 persons in employment, or a boost to the labour supply by 1.3%. Consequently, Malta’s potential output increased by 0.9%.  

The report concludes that the tapering scheme “has been an exceptional instrument for overcoming the poverty trap”. It also states that the scheme had a strong positive fiscal impact and “holds considerable promise for fiscal sustainability over time”. Moreover, it notes that while the rise in inflation has created new challenges, Government has improved several social benefits and introduced new schemes, notably the additional COLA payment, to help address them.

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