The paper is an attempt to look at the recent increases of social benefits in Ukraine from broader international perspective. The paper describes current situation and development of Social Safety Net (SSN) in Ukraine, and compares it with development in countries of Eastern Europe and CIS. The paper explores if an increase in social security benefits is an effective policy to combat poverty in countries of transition and in Ukraine in particular. The paper also provides simple economic framework to analyze the issue of increase in social benefits.
According to the author neither experience of countries surrounding Ukraine nor economic theory support the statement that increase in social benefits will be financially feasible in long-term perspective. The increased level of social benefits requires additional financing which would require increase in taxation or budget deficit. The concern is that increased budget pressure will slow economic growth and reduce real income of large proportion of population while failing to provide sufficient protection to the population living below poverty line.
The economic models developed in the paper suggest that increase in social transfers in slow-growing transition economies like Ukraine might trigger behavioral response of potential beneficiaries. As the result, after social benefits reach certain level, large proportion of population will decide to become officially unemployed and apply for the benefits. It will lead to the shrinkage of official economy, shrinkage of tax base for any tax on enterprise or individual incomes, and simultaneously to the sharp increase in social expenditures.
Based on theoretical suggestions and international experience, the author concludes that:
policies of increasing social benefits are the least optimal policy
policies that keep social benefits on the current level in real terms are better from both short and long-run perspectives
available SSN financial resources are more effective in reducing poverty if current SSN programs are substituted by budget-neutral income guarantee program
economic growth in the transition countries has stronger long-term poverty-reduction effect than theSSN
minimization of the social transfer should help increasing targeting of the benefits