Income supplement: analysis of options

Executive Summary

This paper sets out the analysis undertaken to inform the development of the income supplement policy.

One of the flagship commitments in the Scottish Government's Tackling Child Poverty Delivery Plan for 2018-22 was that the Scottish Government should work towards introducing an income supplement that delivers regular, additional financial help for low income families. The Delivery Plan commitment was that further work on developing this policy should be guided by the following tests:

i. The income supplement is targeted at families who need it most, helping to lift the maximum number of children out of poverty.

ii. There is a robust and viable delivery route to get the additional income to those families.

We followed a systematic approach in developing and assessing policy options to satisfy the first test. The approach taken was also guided by the first two of three objectives that have subsequently been set for this policy. The objectives specify that the income supplement should:

• achieve a reduction in relative child poverty (after housing costs) of 3 percentage points when the income supplement is fully rolled out;

• reduce the depth of poverty and provide support to those who need it most;

• ensure a sustainable and lasting reduction in poverty for families with children.

When developing the options we considered what the target population of the income supplement should be, whether it should be a benefit based on existing qualifying benefits or a benefit with its own means test and finally whether it would be paid automatically or require an application.

As a result, a list of five policy options was generated:

1. Child Benefit based entitlement (£10 a week per child)

2. Universal Credit based entitlement (£10 a week per child)

3. Universal Credit based entitlement with targeted groups (£10 a week per child)

4. Entitlement based on a means test (£10 a week per child)

5. Council Tax Reduction based entitlement (£45 a week per child)

Option 1 is targeted at almost all children, whilst Options 2, 3, 4 and 5 are targeted at children in low-income families. Options 1, 2, 3 and 5 are based on existing qualifying benefits whereas Option 4 is based on a separate means test.

All options have been modelled on the basis of both automation and application (although for Option 4 automation is for comparison purposes only and is better interpreted as an application-based option with full take-up). They have been calibrated to meet the first policy objective, and the required weekly payments, policy cost and distributional impacts have been compared. We expect that given reasonable assumptions about take-up, in line with that of reserved benefits, the impacts on child poverty could be similar for automation and application-based approaches.

Options 2, 3 and 4 were found to have similar costs (between £200 million and £250 million a year) and to strike a balance between how many children in poverty they could reach (coverage) and how many of all children receiving the payment could be expected to be in poverty (targeting).

Option 1 was estimated to require higher policy expenditure (between £420 million and £460 million a year) with better coverage of children in poverty but reduced targeting. Option 5 was estimated to have a policy cost between £290 million and £330 million a year, with the lowest coverage but highest level of targeting.

Finally, all options were compared against additional criteria to ensure that other aspects important for policy success were considered when developing the income supplement. These criteria and a summary of our assessment against each is provided below.

• Simplicity and Transparency – how straightforward and transparent the option is for families

Options 1 and 2 in particular should be relatively easy to understand as they attach eligibility to an existing benefit. Option 3 is slightly more complex, as entitlements differ depending on household characteristics. Option 4 would be the most complex of all, as it introduces a new income-based test rather than being linked to existing support. With Option 5, households may not associate Council Tax Reduction with child-related support which could impact on transparency. For all options, an automatic payment would be more straightforward from the families' perspective, however, could be perceived as being less transparent if not all eligible families are aware of the policy.

• Consistency and Take-up – how likely the option is to ensure a consistent impact across all eligible population and secure high take-up

Option 5 could be problematic in terms of consistency because eligibility would vary across local authorities and Council Tax property bands that could also have an impact on take-up. To achieve consistency, Options 2 and 3 would require either full UC rollout or implementation of a temporary solution to allow families on legacy benefits to be reached. If an application process is adopted, Child Benefit based entitlement could result in higher take-up for Option 1 compared to other options, although take-up is also relatively high for Child Tax Credit (for which eligibility is more comparable to Options 2, 3 and 4), especially for households with the lowest incomes. Automated payments would, by definition, result in full take-up of the income supplement, although non-take-up of the qualifying benefits would remain an issue.

• Employment and Earnings – what is the potential impact of each option on claimants' decision to work and/or increase their earnings.

Estimated at £45 a week, Option 5 is likely to require a much higher payment per child to achieve the desired poverty impacts, compared to £10 a week for all other options. A payment of this level, especially without an appropriate gradual withdrawal mechanism (tapering), could distort work incentives for some households. Although some differences may be expected between Option 1 and Options 2, 3 and 4 because of the income levels at which eligibility would end, it is much less clear that there would be significant impacts for the payment amounts involved.

The analysis presented was used to shape the direction of the income supplement policy, in conjunction with other evidence.