Estimating the Economic Effect of Child PovertyPossible economic loss of roughly ¥2.9 trillion, with ¥1.1 trillion increase in fiscal burden, for one school year of children
To understand the increasingly severe problem of child poverty from an economic perspective, The Nippon Foundation has compiled a report on the economic effect of child poverty if left unaddressed. A press conference to announce the findings was held at The Nippon Foundation headquarters on December 3. The research found that of the approximately 1.2 million Japanese children 15 years old, roughly 180,000 live with families receiving public assistance, in children’s homes, or in single-parent households. This situation corresponds to an economic loss of approximately ¥2.9 trillion, and a cost to the government of roughly ¥1.1 trillion, making it clear that child poverty has a major economic impact.
The poverty rate among children in Japan has been consistently rising, and in 2012 stood at 16.3%, or roughly one out of every six children. This is a very high level relative to other OECD countries, highlighting the severity of the problem. As the problem becomes increasingly severe, a “chain of poverty” can be seen, in which poverty today leads to poverty for the next generation, making child poverty an issue that needs to be urgently addressed. The problem of child poverty is also an important issue from an economic perspective. The Japanese economy is highly dependent on domestic demand, and it is therefore important to sustain domestic demand as the country enters a period of population decline. If child poverty is left unaddressed, national incomes and consumption will decline, and this could further accelerate the contraction of domestic markets. This is why it is important that measures to address child poverty should be viewed as economic measures.
Given this situation, The Nippon Foundation and Mitsubishi UFJ Research and Consulting Co., Ltd. conducted research from July to November 2015 to estimate the economic impact of child poverty if left unaddressed.
At the December 3 press conference, 13 members of the media representing 11 television stations and newspapers were briefed on the research findings. First, Mitsuaki Aoyagi, Senior Program Director of The Nippon Foundation’s Social Innovation Team, explained the purpose of the research.
“One in six of Japan’s children live in poverty, but this problem has not been examined from an economic perspective. This is not a problem of personal responsibility or simply a tax issue. We conducted this research to produce concrete numbers that will encourage private-sector activities in addition to the government’s activities.”
Analysts from Mitsubishi UFJ Research and Consulting then explained the research results. According to the analysis, economic gaps among children lead to disparities in education, which in turn result in disparities in future incomes. They compared two scenarios – the current situation left unaddressed, and another with the implementation of measures to reduce educational disparities among children.
- Current scenario: No measures to address child poverty are implemented and current disparities in education and income continue → Dropout rates and the percentage of children living in poverty who go on to the next level of education remain at current levels
- Improved scenario: Measures to address child poverty are implemented and disparities in education and income are reduced → Through measures including educational support, primarily for preschoolers, the rates of children going on to high school and dropping out of high school are brought to the same levels as those of children not living in poverty, and the percentage of children currently living in poverty who go on to college rises to 22% (figure based on overseas research samples)
Next, the income earned and net tax and social security payments (taxes and social security premiums paid minus social security benefits received) for today’s 15-year-old children until they reach the age of 64 was estimated under each scenario. The calculation was based on Japan’s. 1.2 million 15-year-olds, of whom roughly 22,000 live in households receiving public assistance, 2,000 live in children’s homes, and 155,000 live in single-parent households, for a total of approximately 180,000 children living in poverty.
The resulting estimates were that for these 180,000 children, income earned by the age of 64 would be approximately ¥22.6 trillion under the “current scenario” and approximately ¥25.5 trillion under the “improved scenario,” for a difference of roughly ¥2.9 trillion. This means that if poverty is not addressed, the economic loss from markets contracting in the future will be roughly ¥2.9 trillion per school year. Considering that the government’s budget for child care allowances in 2015 is ¥1.2 trillion, this is a significant amount.
This income disparity translates to a difference in the amount of net tax and social security payments made by these children over their lifetimes. The resulting estimate was that net tax and social security payments would be approximately ¥5.7 trillion under the current scenario and ¥6.8 trillion under the improved scenario, for a difference of roughly ¥1.1 trillion. This means that if child poverty is not addressed, the government’s future fiscal burden will increase by approximately ¥1.1 trillion.
In other words, comparing the two scenarios illustrates that total lifetime earnings for just one year’s worth of children is reduced by ¥2.9 trillion (the economic loss) and that tax and net social security payments to the government are reduced by ¥1.1billion (the increase in the burden on public finances).
This estimate only covers today’s 15-year-old children, but if it is applied to all ages and children yet to be born, the impact on the economy is enormous. Furthermore, this does not include the effect of crime – both the financial losses to victims and the cost of keeping criminals in prison – and if this is included the actual amount can be expected to be significantly larger.
Therefore, child poverty should be addressed as an economic matter rather than as philanthropy, and measures with a high return on investment are needed to reduce education and income gaps effectively.
During the question and answer session that followed the briefing, many questions dealt with the relative importance of education-related measures versus employment-related measures in reducing the income gap that emerges from differing educational backgrounds and types of employment. A representative of The Nippon Foundation replied that the Foundation and the Mitsubishi UFJ Research and Consulting analysts did not consider policy measures, and that the purpose of the estimates was to provide basic data for formulating policy proposals. He added, as a personal opinion, that the high school dropout rate appeared to be key, and the important thing is to find a way to ensure that children graduate from high school. Graduating from high school increases the chances of being hired as a regular employee (i.e. full time with full benefits), so support needs to be provided in terms of both education and employment.
Commenting on the research results, Michiko Miyamoto, vice president of the Open University of Japan and head of the Cabinet Office Council for Combating Childhood Poverty, noted, “Having become a rich country, sensitivity to poverty in Japan has waned. To address child poverty, the people of Japan need to realize that this relates to them individually, and is not someone else’s problem. This is why we need figures to demonstrate the problem, and why this research is very important.”
The Nippon Foundation