Social protection statistics - net expenditure on benefits

Data extracted in June 2017

Planned article update: October 2019

Highlights

Net expenditure on social protection benefits in the EU was close to 92 % of gross expenditure in 2014.

Net expenditure on social protection benefits, 2014

This article presents statistics on net social protection expenditure in the EU, EFTA countries, Serbia and Turkey. These statistics are collected through the European system of integrated social protection statistics (ESSPROS).

The income provided by some benefits paid in cash is potentially subject to levies imposed through the fiscal system. The deduction of levies — such as income taxes or social contributions — from the gross amounts received by beneficiaries, means that some of the original expenditure is returned to governments’ budgets; as a result, net expenditure on social protection benefits may therefore be considerably lower than the gross amount disbursed.

Full article

Net expenditure on social protection benefits

Net expenditure on social protection benefits in the EU was close to 92 % of gross expenditure in 2014

In 2014, the EU-28 spent an estimated EUR 4 013 billion on gross social protection benefits (note, this figure includes information pertaining to Poland for 2012); more than a quarter (28.7 %) of the EU’s gross domestic product (GDP). Statistics on the level of gross expenditure can however be misleading, particularly when comparing expenditure in different EU Member States. The way that social protection benefits are influenced by fiscal systems varies: in some Member States, income benefits form part of the base on which income taxes and/or social contributions are calculated, and from which these levies are deducted, whilst in others this is not typically the case. Where individuals or households are liable to pay obligatory levies on benefits received, part of the original expenditure is recouped. This means that gross expenditure may overestimate both the final cost of social support and the real value of benefits to recipients.

In 2014, net expenditure on social protection benefits in the EU-28 was estimated to be 91.8 % of gross expenditure (see Figure 1). This figure varied significantly across the EU Member States as a result of the differences in the treatment of social benefits within national fiscal systems. In most eastern Member States (Bulgaria, Slovakia, the Czech Republic, Hungary, Slovenia, Croatia and Romania), the Baltic Member States, as well as in Ireland, Malta and the United Kingdom, less than 5 % of benefit expenditure was recovered by governments through the fiscal system; this situation was repeated in Turkey and Serbia.

Figure 1: Net expenditure on social protection benefits, 2014
(% of gross expenditure)
Source: Eurostat (spr_net_ben)

By contrast, in the Nordic Member States and several western EU Member States (Germany, Luxembourg, Austria and the Netherlands), as well as in Portugal and Italy, more than 7.5 % of expenditure on social protection benefits was recouped through the fiscal system; this pattern was repeated in Norway, Iceland and Switzerland. Denmark and the Netherlands recorded the lowest ratios of net expenditure to gross expenditure among the Member States, at 84.1 % and 79.6 % respectively.

Fiscal systems reduce the difference in expenditure between countries

Differences in the ways in which tax and benefit systems interact have important implications for the comparability of social protection expenditure among the EU Member States. The difference between gross and net social protection expenditure in 2014 was estimated to be equivalent to 2.2 % of GDP in the EU-28, but there was a significant variation between Member States. The largest differences — as a percentage of GDP — tended to be concentrated in those Member States which generally had higher ratios of gross expenditure to GDP (see Figure 2). As such, a comparison of the ratio of net expenditure to GDP shows less disparity among Member States than an analysis based on gross expenditure.

Figure 2: Gross and net expenditure on social protection benefits, 2014
Source: Eurostat (spr_net_ben) and (nama_10_gdp)

When expenditure on social protection is expressed in relation to GDP, the difference between the highest and lowest spending EU Member States was 18.3 percentage points for gross expenditure (France 32.2 % and Lithuania 14.0 %) compared with 16.6 percentage points for net expenditure (France 30.4 % and Lithuania 13.8 %); see Figure 3. The ranking order of Member States also varied significantly, depending on whether gross or net expenditure was being considered. For example, the Netherlands had the seventh highest level of gross expenditure (relative to GDP) among the Members States but moved to 14th place when the Member States were ranked on net expenditure.

Figure 3: Gross and net expenditure on social protection benefits, 2014
(% of GDP)
Source: Eurostat (spr_net_ben) and (nama_10_gdp)

There are two factors which determine the overall impact of the fiscal system on social protection benefits:

  • the proportion of benefits liable to taxes and social contributions; and
  • the rates at which the different levies are applied.

Liability of benefits to taxes and social contributions

Expenditure on social protection benefits can be separated into three categories:

  • benefits paid in cash and subject to taxes and/or social contributions (54.1 % in the EU-28 in 2012);
  • benefits paid in cash and free of any obligatory levies (11.4 %); and
  • benefits provided in kind (e.g. housing or medical treatment) and normally free of tax (34.5 %).

Within the category of cash benefits subject to levies (taxes and/or social contributions) it is important to understand that a number of recipients of these benefits will have paid no tax or social contributions in practice because their total income is below the threshold at which tax becomes payable; as such they will have retained the full amount of benefits disbursed, despite these being — in theory — subject to levies.

Over half of the total gross value of social protection benefits was subject to levies (taxes and/or social contributions) in the majority of the EU Member States in 2014 (see Figure 4). The exceptions to this rule included the United Kingdom, Cyprus and Ireland, where between one third and one half of cash benefits were subject to levies, and Lithuania, Hungary, Slovakia, the Czech Republic and Bulgaria where less than one tenth of such benefits were subject to levies; the lowest share was 0.4 % in Bulgaria. The proportion of social protection cash benefits subject to levies was highest in Greece (74.1 %) and Poland (71.2 %; 2012 data) and was also above 60 % in Italy, Estonia, Portugal and France. In the EFTA countries shown in Figure 4, cash benefits subject to levies were close to the EU-28 average, peaking at 64.1 % in Switzerland; in contrast, Serbia (5.9 %) and Turkey (0.4 %) recorded much lower shares of cash benefits subject to levies.

Focusing exclusively on these cash benefits, it is possible to analyse in more detail differences in the specific ways that levies are applied (see Figure 4). Overall, 53.9 % of the cash benefits disbursed in the EU-28 in 2012 were subject to taxes and 30.0 % to social contributions, meaning that most of these cash benefits were subject to both types of levies.

With the exception of Bulgaria, at least some cash benefits were subject to taxes in all of the EU Member States in 2014, whereas there were six EU Member States — Denmark, Cyprus, Malta, Romania, Slovenia and Sweden — that did not apply social contributions to any cash benefits [1]. In the vast majority of the EU Member States where cash benefits were subject to both taxes and social contributions, the share of cash benefits subject to taxes was generally higher than the share of cash benefits subject to social contributions: this was particularly the case in Italy, Estonia, Latvia, Spain, the United Kingdom and Ireland. By contrast, the share of cash benefits subject to taxes and the share of cash benefits subject to social contributions was identical in Croatia, Lithuania, the Netherlands, Portugal and Finland.

Figure 4: Share of gross expenditure on social protection benefits subject to taxes and/or social contributions, 2014
(%)
Source: Eurostat (spr_net_ben) and (spr_exp_eur)

Rates of levies deducted from liable benefits

The extent to which social protection benefits are liable to levies does not fully explain the difference between gross and net expenditure, as the rates at which these taxes and contributions are levied also needs to be considered. The overall combined rate — in other words, the taxation and social contribution rate on all social protection benefits — for the EU (excluding Poland) was 8.1 % in 2014, as just over half (53.5 %) of the total value of benefits granted were subject to one or more obligatory levies.

In general, those EU Member States where a relatively large proportion of expenditure on social protection benefits was recouped through the fiscal system also tended to have both a high proportion of their benefits liable to levies and high effective tax rates (see Figure 5). In 2014, the highest shares of benefits being recovered by general government were in the Netherlands (20.4 %) and Denmark (15.9 %), while this share was below 1.0 % in Ireland, the Czech Republic, Slovakia and Bulgaria.

Figure 5: Tax rates applied to social protection benefits, 2014
(%)
Source: Eurostat (spr_net_ben)

The impact of the fiscal system is more extensive for benefits predominantly paid in cash

Both tax and social protection systems play an important role in redistributing income. Different social protection benefits serve different social purposes and are provided to recipients through different conduits (in kind or in cash). Fiscal systems take into account the purposes for which benefits are provided, whilst at the same time the methods by which they are delivered impact the extent to which such systems may recoup (some) expenditure.

Given that means-tested benefits can play a role in the reallocation of income to those most in need, it is not surprising that only a small proportion of EU-28 expenditure on these benefits (an estimated 2.5 %) was recouped by governments through their fiscal systems in 2014 (note this figure includes 2012 data for Poland). By contrast, 8.9 % of EU-28 gross expenditure on non-means-tested benefits was returned to governments through the payment of taxes and social contributions.

In terms of the purposes that social protection benefits serve, old age benefits and survivors’ benefits (those paid to ensure a source of income after the death of a spouse or parent) were most affected by obligatory levies, with gross values reduced by 13.5 % and 12.4 % respectively (see Figure 6). The gross value of unemployment and disability benefits were reduced by 9.5 % and 6.3 % respectively, while sickness, social exclusion n.e.c. and family/children benefits were all reduced by no more than 3.0 %; housing benefits were unaffected (as their tax rate is zero).

Figure 6: Net expenditure on social protection benefits, by type of benefit, EU-28, 2014
(% of gross expenditure)
Source: Eurostat (spr_net_ben)

Liability to taxes and social contributions varies between benefits serving different purposes

The proportion of benefits that are liable to obligatory levies varies with the form of benefit. When benefits are considered by function or use of means-testing, as opposed to by EU Member State, it becomes apparent that, because certain benefits are more often provided in kind, the possible influence of the fiscal system on these is more limited compared with those predominantly paid in cash. Furthermore, among those functions where the majority of benefits are paid in cash, the proportion of the cash benefits which are liable to levies varies significantly.

As might be expected, means-tested benefits are generally exempt from levies. In 2014, only 17.8 % of total EU (excluding Poland) expenditure on means-tested benefits were cash benefits subject to levies (in the form of taxes and/or social contributions) compared with 58.1 % of expenditure for non-means-tested benefits (see Figure 7). This is partly due to the fact that means-tested benefits more often take the form of benefits in kind (44.2 % compared with 33.6 % for non-means-tested benefits) but mainly because, when paid in cash, they are far less often subject to obligatory levies.

Differences in the application of levies can also be observed between benefits serving different functions. Across the EU (again excluding Poland), just over 90 % of old age and survivors’ benefits were subject to taxes and/or social contributions in 2014; in contrast, the corresponding shares for housing, sickness, family/children and social exclusion n.e.c. were all below 30 %. Between these extremes, 40.8 % of disability benefits and 71.5 % of unemployment benefits were subject to some form of levy.

While some of these differences arise as a result of varying proportions of benefits that are provided in kind, others are due to the differing application of levies on cash benefits. For example, within the EU-28 a relatively low share of sickness benefits (12.7 %) and no housing benefits were paid in cash and therefore the scope for applying taxes was limited or non-existent. By contrast, over two thirds of each of the remaining social protection benefit functions were paid in cash, with almost the entirety of unemployment, old age and survivors’ benefits paid in cash. Nonetheless, not all types of benefits predominantly paid in cash were liable to levies to the same extent. For example, some 93.9 % of unemployment benefits in the EU-28 were paid in cash and three quarters (76.2 %) of these cash benefits were liable to levies, while around two thirds of family/children benefits were paid in cash, with less than one third (30.0 %) of these subject to levies.

Figure 7: Gross social protection benefits, by type of benefit, EU-28, 2014
(% of gross expenditure)
Source: Eurostat (spr_net_ben), (spr_exp_eur) and (spr_exp_fto)

Rates of levies deducted from liable benefits vary between benefits serving different purposes

In 2014, average combined taxation and social contribution rates applied to social protection benefits subject to levies in the EU (excluding Poland) varied between functions, exceeding 8.0 % in all cases except for housing (see Figure 8); the range was from a low of 8.6 % for social exclusion n.e.c. up to 25.9 % for sickness benefits. Somewhat higher effective taxation and social contribution rates were applied to non means-tested benefits subject to levies than their means-tested counterparts (15.1 % compared with 14.1 %). Because a larger proportion of non means-tested benefits were subject to such levies (58.1 % compared with 17.8 %) this translated into a much higher proportion of all such benefits (whether liable to levies or not) being returned to government budgets (8.8 % compared with 2.5 %).

In general the benefits for which relatively large proportions of expenditure are recouped through the fiscal system are those where large proportions of benefits are liable to levies and at the same time the effective taxation and social contribution rates applied to liable benefits are high. Although the highest effective rates in the EU (excluding Poland) were applied to liable sickness benefits, they were only applied to a relatively small proportion of total sickness benefits and as a result the overall share recouped from this function was relatively low (3.0 %). Similarly, the effective rates applied across the EU to disability, family/children and social exclusion benefits that were liable to taxes and social contributions were 15.2 %, 8.7 % and 8.6 %, leading to shares of 6.2 %, 1.8 % and 2.3 % respectively being reclaimed by governments on all such benefits. By contrast, the effective combined rates applied to liable old age and survivors’ benefits in the EU were 14.9 % and 13.2 % and, as almost all of these benefits were liable to obligatory levies, relatively high shares of the expenditure on all such benefits was recouped by governments (13.4 % and 12.3 % respectively).

Figure 8: Effective combined taxation and social contribution rates applied to social protection benefits, by type of benefit, EU-28, 2014
(%)
Source: Eurostat (spr_net_ben)

Data sources

All of the data presented in this article are from the European system of integrated social protection statistics (ESSPROS), specifically the core system and the module on net social protection benefits (restricted approach). These data are collected from national statistical institutes and/or ministries of social affairs in each country and are generally compiled from administrative sources, while household surveys are also used in some cases.

Regulation (EC) No 458/2007 of the European Parliament and of the Council provides the legal basis for the collection of ESSPROS data and a series of Commission Regulations provide further specifications for the implementation of this Regulation.

Eurostat has collected data on gross social protection expenditure for many years through the ESSPROS system. The first formal data collection for net social protection expenditure took place in 2012 for the reference year 2010. The collection is undertaken according to the ‘restricted approach’, which means that it is strictly limited to measuring the impact of the fiscal system on the gross cash benefits reported in the ESSPROS core system (benefits in kind are not covered). It does not, therefore, take full account of tax relief for social purposes which reduces the amount of taxes paid on other (non-benefit) income or which may be granted to persons who do not receive any (cash) benefits. Such relief is taken into account only in relation to the extent to which it reduces the amount of taxes normally payable on cash benefits. Similarly, tax relief for social purposes which reduces indirect taxes is not accounted for. The full value of such tax relief would only be addressed by the ‘enlarged’ approach (enlarged because the population of beneficiaries is larger), which is the subject of on-going research within Eurostat.

The ESSPROS module on net social protection benefits (restricted approach) measures net expenditure by collecting information on the average rates of taxes and social contributions paid by recipients of each cash benefit reported in the core system. These rates are then applied to the gross expenditure on each benefit to obtain a net value as follows:

Net social benefits = gross social benefits * (1 – AITR – AISCR)

where AITR/AISCR are the average itemised tax/social contribution rates.

Exceptionally, if some fiscal benefits cannot be taken into account in the assessment of the actual taxes and social contributions paid on social benefits (this happen for few countries), then the value of net benefits should be complemented by the residual value of the fiscal benefit. In this case the formula above becomes:

Net social benefits = gross social benefits * (1 – AITR – AISCR) + residual fiscal benefits

The European System of National and Regional Accounts (ESA 2010) replaced ESA 1995. This change had consequences in relation to ESSPROS results which were indirectly affected by the implementation of ESA 2010. The revision of ESSPROS data to take into account the new national accounts methodology took place for a large majority of EU Member States during the collection of data for the 2013 reference period.

Context

The organisation and financing of social protection systems is the responsibility of each of the EU Member States. The model used in each Member State is therefore somewhat different, while the EU plays a coordinating role to ensure that people who move across borders continue to receive adequate protection. The EU seeks to promote actions among the Member States to combat poverty and social exclusion, and to reform social protection systems on the basis of policy exchanges and mutual learning. This policy is known as the social protection and social inclusion process — it underpins the Europe 2020 strategy and will play an important role as the EU seeks to become a smart, sustainable and inclusive economy. The Europe 2020 strategy sets targets (among others) to lift at least 20 million people out of the risk of poverty and social exclusion and to increase employment of the population aged 20-64 to 75 %. The European Commission provides support to help reach these targets through flagship initiatives, including the European platform against poverty and social exclusion and the New skills agenda for Europe. Furthermore the European Commission provides guidance to Member States to modernise their welfare systems through the social investment package.

The European pillar of social rights sets out a number of key principles and rights to support fair and well-functioning labour markets and welfare systems; it forms part of the policy developments related to a deeper and fairer economic and monetary union (1 of 10 European Commission priorities for the period 2015-2019). The pillar contains three main categories for action, one of which concerns social protection and inclusion.

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Social protection expenditure (spr_expend)
Social protection receipts (spr_receipts)
Pensions beneficiaries (spr_pension)
Net social protection benefits (spr_net_ben)


Notes

  1. Note that in some cases social contributions are ‘payable by the scheme’ from benefits at source and re-routed to other schemes before being paid to recipients, meaning that ‘gross’ expenditure is already net of these social contributions.