Calculating Impact of Child Allowance

◆The child allowance act passed on 26 March stipulates that a monthly allowance of Y13,000 will be paid to households for every child in junior high school or younger (no means test) in FY10 (ending Mar 2011). The Democratic Party of Japan’s (DPJ) manifesto calls for the payment to rise to Y26,000 in FY11.

◆Financing the full Y26,000 allowance will pose a significant challenge. Even the half payment in FY10 will effectively require (together with waiving of high school tuition fees) the issue of Y1.52 trillion in new government bonds. Payment of the full allowance in FY11, together with the high school tuition fee waiver, would require the issue of Y4.07 trillion in government bonds.

◆Keeping the monthly allowance at Y13,000 in FY11 and beyond would reduce the FY11 funding shortfall to Y1.42 trillion, but would also reduce the boost to household disposable income to 20% of the level that would be generated by the full payment (also taking into account tax amendments). At this level, the government would almost entirely surrender its initial objective of strongly supporting households raising children.

◆The administration needs to choose whether to pay the full allowance-reducing other expenditure and increasing taxation as necessary on the basis that society as a whole is responsible for raising children-or to prioritize fiscal discipline and abandon the full allowance.

1. Outline of child allowance, high school tuition fee waiver, and tax reforms
2. Reforms by age bracket
3. Calculating impact on household budgets of full and half allowances
4. Financing full child allowance
5. Pros and cons of full child allowance