Income supplement: analysis of options

Annex IV: Modelling Assumptions

PSM version: The version of PSM used for the analysis is based on 2016/17 FRS data. It incorporates the tax and benefit rules from the UK Governments 2018 Spring Statement with the addition of the policy announcements shown in the following paragraph.

Policy Announcements: We are factoring in the following recent UK policy announcements and Scottish Government policies:

• Following the 2018 UK Autumn Budget, we have increased the UC work allowances by £1,000 per year in 2019/20. To forecast the work allowances in future years, we applied Spring Statement 2018 CPI.
• We increased the minimum wage and national living wage to the values announced in the 2018 UK Autumn Budget. To forecast the minimum wage and national living wage for future years, we applied Spring Statement 2018 CPI. We then checked that the values for the minimum wage for 21-24 year olds and the national living wage matched the most recent OBR forecasts.^[72]
• The Scottish Government has introduced a supplement to Carer's Allowance, paid twice per year. This has been incorporated into future years using Scottish Government forecasts of the value of the supplement, modelled as a weekly payment.
• In April 2017 the Scottish Government increased the applicable amount for Council Tax Reduction depending on the number of dependent children in a household. This additional amount is assumed to remain static in cash terms in forecasting years.

Policy Comparison Year: The analysis of the impact of the proposed income supplement polices in 2023/24 is using PSM functionality to project forward from the 2016/17 FRS year.

Two Child Limit: UC is planned to be fully rolled out in 2023/24, however the two child limit will not be implemented in full, since some families will still have children born before April 2017. Therefore we have applied the two child limit only to those children estimated to have been born after April 2017 in 2023/24.

Scottish Income Tax Rates: The model incorporates the changes to the income tax bands made by the Scottish Government from 2018/19, which replaced three income tax bands with five. To estimate the bands for years beyond 2019/20, inflation forecasts (Spring Statement 2018 CPI forecast was used) were applied to the two Scottish-specific bands (the Scottish Basic Rate and the Intermediate Rate) and the Scottish Higher Rate threshold. The Personal Allowance, which is set by the UK Government, is also assumed to be uprated with CPI from 2021/22 onwards as per UK Government announced plans.^[76] The Additional Rate threshold is kept constant at £150,000 across all years.

Median Income: Poverty in Scotland is measured using the 60% of the median equivalised income of households in the UK. Because of the PSM calibration processes that constrain it to the administrative sources of outturn caseload, there is not an equivalent to this measure produced by the PSM. To ensure that the estimated poverty impacts are as close to the reported Scottish poverty statistics as possible, we use our off-model estimate of the UK median income in 2023/24 which is based on 2016/17 published HBAI statistics.^[77] The UK median income is kept the same for the calculation of poverty rates before and after we apply the income supplement as it is assumed that a change to incomes in Scotland will not have a meaningful effect on the median income of the UK as a whole.

Application Process Take-Up Assumption: For options that involve an application process, an assumption for the potential take-up of the income supplement was made. This allows us to make a more realistic assumption on options requiring application as opposed to automatic payments. Considering that Option 1b is nearly universal, targeted at most children, we made an assumption about take-up of this option based on Child Benefit take-up in 2016/17, estimated at 93%.^[78] As Options 2b, 3b, 4b and 5b are targeted at low income families, we made an assumption about the take-up of these options based on Child Tax Credit take-up by income in 2016/17, estimated at 93% for those with income less than £10,000; 82% for those with income between £10,000 and £20,000; 71% for those with income between £20,000 and £30,000; 58% for those with income above £30,000. This averages out to 83% take-up overall.^[79] For option 5b (CTR-based entitlement with application required) the average take-up is higher, at 89%, because most of the families eligible for this option are in the lower income bands. In all cases we assume that there is an element of randomness in whether a household takes up its entitlement.

Rounding of Figures: To allow for meaningful comparisons across the options, policy cost figures have been rounded to the nearest £10 million, the number of children and households affected have been rounded to the nearest 10,000 and the impacts on the rates of poverty have been rounded to the nearest percentage point.