Income supplement: analysis of options

4. Policy Objectives and Options

This section provides evidence that underpins the rationale for introducing the income supplement policy and sets out our approach to developing options. Developing a clear rationale for intervention and a set of objectives before creating and analysing policy options is imperative for robust and evidence-led decision-making and is in line with the approach recommended by the HM Treasury's Green Book guidance.^[18]

4.1 Rationale for Intervention

Improving children's outcomes As identified by the TCPDP, there is a strong rationale for intervention on child poverty in terms of improving children's outcomes. Children in low income households tend to experience a range of disadvantages including lower educational attainment and poorer health which will shape their future life. Poverty can have lasting impacts long into adulthood such as increased risk of homelessness, lower earning potential and greater likelihood of limiting illness.

It is difficult to disentangle the effect of poverty from other factors associated with low income that may affect children's outcomes. However, the growing evidence in developed economies suggests that gaining additional income has causal effects on health, behaviour, educational attainment and other outcomes for children in households at the lower end of the income distribution.^[19] These studies isolate the effect of income changes from household characteristics and other factors that may affect children's outcomes.^[20] Box 6 discusses evidence of how a means-tested in-work benefit has affected children outcomes in the United States.

Box 6: Earned Income Tax Credits and children outcomes

A number of studies examine the effect of increased level of support provided by Earned Income Tax Credits (EITC) – a US means-tested in-work benefit. These studies find significant effects from EITC expansions on a range of child outcomes. For example, one recent study found that EITC expansion reduces incidence of low birth weights.^[21] Another study found that increasing EITC has raised math and reading test scores.^[22] Similarly a further study suggests that this policy change has generated improvements in subjective well-being of mothers which is an important indirect determinant of child outcomes.^[23]

While there is evidence that additional income can create better outcomes, the evidence base is still being developed in this area, for example around the strength of the relationship. Although, the effects of income changes on outcomes are found to be larger for children growing up in poorer households, there is no clear cut-off point in terms of income beyond which further increases stop affecting outcomes of children. Finally, further evidence is being developed around whether income increases are likely to have stronger effects at particular stages of childhood. Whilst the picture is mixed, there is evidence of positive impacts on cognitive outcomes in the early years.^[24]

Economic cost of child poverty The detrimental impacts of poverty on outcomes for children can also be viewed through a lens of the resulting increased economic costs associated with increased spending on various public services. Many children will grow up in poverty but still achieve good long term outcomes. For others, the structural disadvantages surrounding growing up in poverty may result in children turning to paths that are damaging both to them as individuals and to wider society.

For example, evidence suggests that growing up in poverty may prevent individuals from realising their potential and fully participating in economic activity later in their life. Low income may limit opportunities for children to participate in school activities which may prevent them from accumulating soft and technical skills that could be useful later in their working life.^[25]

Growing up in poverty can also have an impact on children's health. Evidence shows that children growing up in poverty tend to have poorer health outcomes which could again prevent the accumulation of skills through diverse experiences.

As a result, children who grew up in poverty often tend to end up in lower paid employment and miss opportunities to accumulate different skills through diverse experiences. The economic consequences of child poverty therefore manifest themselves through lower skills and decreased productivity.

Finally, investing in services to help alleviate the actual or potential undesirable outcomes or to promote better opportunities can increase spending on various public services. The key areas of additional public spending are discussed in Box 7.

Box 7: Additional public spending associated with child poverty

Social Services A large share of spending on social services is attributed to child poverty. This reflects the targeted nature of these services: children who grow up in poverty tend to face specific problems. The focus of these services is to improve outcomes for children.^[26]

Education Children growing up in low income households tend to do less well in school. This effect gets stronger the longer children spend in poverty.^[27] These children may require additional support from school staff and schools in deprived areas tend to have higher spend per pupil.^[28] Poor performance in school, however, may also be related to parental education and lack of environment where education aspirations can develop. Both factors are correlated with low income and poverty.

Health Children who are born in poor households are more likely to experience health issues from birth. They are also more likely to be exposed to specific health issues later in life which may stem from inherited and accrued health risks when living in poverty. This does not only concern physical heath since children growing up in poverty are also more likely to have poor mental health later in life.^[29]

Crime There is a strong association between living in poverty and rates of offending and anti-social behaviour.^[30] The costs of crime and anti-social behaviour to society mainly occur through the youth justice system as a result of early offending and higher likelihood of re-offending in later life.^[31]

4.2 Policy Objectives

Setting clear and measurable policy objectives is imperative for the development and assessment of appropriate options.

The income supplement policy will ensure that social security provides a substantial role in helping achieve a tangible reduction in child poverty, while at the same time recognising that it cannot be the only solution. Therefore, the main objective for the income supplement has been set to:

• Achieve a reduction in child poverty (relative, AHC) of 3 percentage points when the income supplement is fully rolled out.

The second objective has been set so that the income supplement supports people in the lower deciles of the income distribution. As such, the second objective of the income supplement is to:

• Reduce the depth of poverty and provide support to those who need it most.

Social security is the most immediate route to boost family incomes, however, the TCPDP recognises that it should not be the only way to tackle child poverty. To improve prospects for children and families it is vital that people are able to easily access the wider services and support that is available. The income supplement should "passport" people to this support, for example through fast tracked access to a financial health check, or employment advice, should people want and require it. Therefore, a longer term objective of the income supplement is to:

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

An assessment of this objective does not form part of this analytical report but this, and how the income supplement interacts with wider public services in Scotland, will be considered as part of the implementation and design of the new benefit.

4.3 Option Generation

The first stage in the process of generating options for the income supplement involved considering the policy objectives as set out in the previous sections.

Legislative considerations have also been taken into account. The Scotland Act 2016^[32] provided the power for the Scottish Parliament to:

(a) Create new benefits (Section 28): Provides competence to the Scottish Parliament to create new benefits in any area of devolved competence.

(b) Top-up reserved benefits (Section 24): Provides competence for the Scottish Parliament to create top-up payments to people who are entitled to a reserved benefit and appear to require additional financial assistance for the purpose, or one of the purposes, for which the reserved benefit is provided (e.g. child benefit could not be topped-up to provide support for someone out of work, only for child related costs).

Different aspects of policy solutions were systematically considered to help ensure that a potentially viable policy option was not missed out. We have therefore followed a three step approach as presented in Box 8 below.

Box 8: Options building blocks

What is the target population?	1. All (or most) children 2. Children in low income families (as defined by the existing benefit system) 3. Children in low income families (as defined by the income supplement policy) 4. Children in low income families – targeted groups
How would the income supplement be paid?	1. A new benefit based on qualifying benefits and/or a means test 2. A top-up of an existing reserved benefit
How would the target population be identified?	1. Automatic /passported entitlement 2. Application process

The first two policy objectives set out that the income supplement should achieve a 3 percentage point reduction in relative child poverty when it is fully rolled out and that it is also paid to families with children who need it most. Guided by these, we have considered options that would try to capture all or nearly all children in poverty and options that target children in poverty more specifically.

We have also considered options that are targeted at children in specific family groups who are found to be most at risk of poverty, such as families with young children, lone parents, large families, or families with a disabled adult or child. We have considered options that target both out of work and working families and have excluded options that target working families only. In designing the options, we were driven by pragmatism and have focussed on simplicity, which is key to good benefit design. The five options we arrived at were as follows:

1. An income supplement that would reach most children in Scotland, with Child Benefit as a qualifying benefit.

2. An income supplement that would reach children in low income households via an additional payment to families receiving Universal Credit (UC).

3. An income supplement targeted at specific family groups, for example large families. This could be based on UC eligibility with higher payments for households with certain characteristics who are identified as being most at risk of poverty.

4. An income supplement targeted at children in low income families could also be introduced by creating a new benefit that is not linked to the existing benefit system and instead uses a bespoke means test.

5. An income supplement targeted at low income families as defined by the Council Tax Reduction (CTR) scheme.

Table 4 below sets out how the payments could be made to reach different population targets.

Table 4: Options for the income supplement

Policy Option	Target population	Delivery mechanism
1. Child Benefit based entitlement	Most children – near universal	Automation Application
2. Universal Credit based entitlement	Children in low income families – as defined by benefit system	Automation Application
3. Universal Credit based entitlement – targeted groups	Children in low income families – as defined by benefit system, plus poverty risk factors	Automation Application
4. Entitlement based on a means test	Children in low income families – as defined by policy	Application
5. Council Tax Reduction based entitlement	Children in low income families – as defined by benefit system	Automation Application

A final key stage in the options generation was to test the developed options with key stakeholders, following the commitment in the TCPDP to work with stakeholders to develop options. Therefore two workshops were held with representatives from local government, academia, think tanks, third sector and anti-poverty organisations. More detail on the stakeholder workshops is provided in Annex II.