Economic Impact of a Minimum Income Guarantee: Analysis of economic theory and policy evidence

Executive summary

The Scottish Government is ambitious in looking at innovative ways to tackle poverty and inequality and so has established an independent Expert Group to consider how a Minimum Income Guarantee – an income level under which people could not fall – could be delivered in Scotland.

The overarching policy aim of a Minimum Income Guarantee is to tackle poverty, inequality and financial insecurity and ensure a socially acceptable standard of living that promotes dignity and a decent quality of life. The independent Expert Group have been tasked with defining a Minimum Income Guarantee and producing a final report in 2024 with a series of recommendations to the Scottish Government. On that basis, we have worked closely with them on this project to understand their current policy understanding as their recommendations develop. The Expert Group expect that the implementation of a Minimum Income Guarantee in Scotland will be a longer term change with an initial goal (i.e. over an initial 10-15 year period) of achieving, as far as possible, 75% of the Minimum Income Standard (MIS) for everyone in Scotland.^[1] The final goal over the longer term is 100% of the MIS – dependent upon further devolved powers and financial constraints.

There are three mutually supportive areas under consideration that would form the basis of an approach to creating a Minimum Income Guarantee in Scotland:

• Reform of the social security system so that it provides a guarantee of a dignified quality of life;
• Improving the fairness of the labour market, in particular to boost quality and security of work and promote labour market access; and
• An expansion of free and/or affordable services and the potential regulation of costs of essentials, with a prioritisation of addressing the services and costs that promote labour market access, e.g. childcare and transport.

This report provides an overview of the expected economic and social impacts of a Minimum Income Guarantee, based upon both theoretical literature and also existing policy implementation of Minimum Income Guarantee-type policies across Europe. The evidence provided in the report supports ongoing work of the Scottish Government and the Minimum Income Guarantee Expert Group in designing the most effective Minimum Income Guarantee for Scotland.

Findings from economic theory

Our review of the economic literature focused on six areas:

• Market and policy ‘failures’ a Minimum Income Guarantee could address: Poverty in Scotland (and the UK) has been stubbornly high for the last two decades. Despite some progress in reductions in child and pensioner poverty, working-age poverty has increased over the period. This rise in working-age poverty is linked to a range of economic circumstances and policy choices. These include reductions and freezes applied to core working-age benefits since 2010, the increasing insecurity and precarity of jobs at the lower end of the labour market, and an approach to employment support and requirements placed on jobseekers that prioritises ‘any job’ over tailoring job search and placements to an individual’s existing skills and circumstances. Moreover, there has been a sharp increase in the cost of essential goods and services in the wake of the ongoing cost-of-living crisis that already insufficient incomes are unable to meet.
• Groups who would most benefit: Low-income households who are currently below the Minimum Income Guarantee level would be most likely to benefit from a Minimum Income Guarantee. Within this, specific demographic groups that are most likely to benefit would depend on the policy design – but are likely to include long-term unemployed people, lone parents, disabled people, retirees, and minority ethnic groups with lower labour market outcomes (especially those with Pakistani and Bangladeshi ethnicity).
• Microeconomic impacts: A Minimum Income Guarantee will affect labour supply through its impact on the incentive to work, and there is concern that a Minimum Income Guarantee set too high may create a poverty or benefit ‘trap’. However, the precise impact of a Minimum Income Guarantee on this is dependent upon policy design and associated policy responses and business choices. For example, an increase in out-of-work incomes could incentivise employers to raise wages and improve the fairness of the labour market in order to secure necessary labour. Conditionality of the Minimum Income Guarantee may also influence its effect on work incentives, but empirical evidence suggests its impact is generally small and varies among different groups. More generally, there is also some evidence that more generous welfare systems may improve job matching quality and reduce the likelihood of people withdrawing from the labour market in the long term. This can potentially enhance productivity, especially in countries with flexible labour markets.
• Macroeconomic impacts: Expected economic benefits include lower unemployment and higher tax revenue in the long term. Initial fiscal burden may be higher due to increased social security spending and investment in employment support as the system beds in, but this could reverse over time as more people find and retain employment. Impacts might also be expected on the demand side, with overall effects driven by the extent to which tax increases are needed to support higher transfer payments and the positive effect on lower-income households' consumption. On the supply side, a Minimum Income Guarantee funded through increased taxation may lead to a reduction in employment due to higher tax rates.
• Wellbeing impacts: A Minimum Income Guarantee may improve household income levels and stability, leading to better health outcomes and reduced spending on healthcare and social care. Improved educational outcomes for children in recipient households may enhance the occupational outcomes of households across generations, improving earnings, reducing inequality, and boosting social mobility.
• Impacts on a Just Transition: A Minimum Income Guarantee could help mitigate the distributional effects of transitioning to a low-carbon economy by providing an income buffer for affected workers and linking a Minimum Income Guarantee to broader skills retraining efforts. Limited economic literature exists on the distributional consequences of a Just Transition, with most focusing on employment level shifts, which show a small but positive impact.

These findings from the economic theory can be brought together into an economic framework, showing the interconnection of various policy mechanisms and expected effects that should lead to the following outcomes:

• Reduced poverty;
• Improved labour market participation & work incentivisation;
• Higher & more certain incomes for low-income households;
• Improvements to health and wellbeing; and
• Increased consumption.

However, as our framework shows, the shape of the outcomes we expect to see and the certainty of seeing these outcomes will depend upon the exact policy design of a Minimum Income Guarantee and how the various levers interact with each other. Moreover, the framework shows that attempting to achieve the Minimum Income Guarantee through one of the policy levers is unlikely to have the desired outcomes – and could lead to considerable unforeseen consequences. These could be offset by taking a mixed approach to achieving a Minimum Income Guarantee, and our assessment highlights the importance of ensuring that a more generous social security offering is underpinned by robust work incentives and labour market improvements and targeted by sustained action on important household costs and services.

Findings from policy evaluations

Many EU countries have some form of ‘Minimum Income Guarantee-type’ scheme in place, but these differ in terms of generosity, eligibility, conditionality, coverage, and purpose. These differences can be grouped together into four broad categories:

• Restrictive Minimum Income Guarantee-type schemes: Restrictive Minimum Income Guarantee-type schemes are focused almost exclusively on tackling deep or extreme poverty. The focus on deep poverty means that these schemes typically have relatively low generosity and coverage and, as a result, they miss a large proportion of people who are in – or at risk of – being in poverty. Restrictive schemes often have a strict time limit for how long someone can receive the support, with an accompanying focus on labour market reintegration.
• Protective Minimum Income Guarantee-type schemes: Protective Minimum Income Guarantee-type schemes set a ‘socially acceptable’ income level that all citizens should be entitled to. A specified subsistence payment is then administered to plug the gap between current income and the set income level. Additional payments are usually made depending on the household composition, ensuring a high level of coverage across different groups. There is often job search conditionality, either informally or formally, within a protective Minimum Income Guarantee-type scheme.
• Enabling Minimum Income Guarantee-type schemes: Enabling Minimum Income Guarantee-type schemes usually couple a generous income replacement rate with a broad range of active labour market and inclusion services. While labour market reintegration is the primary and long-term ambition of enabling Minimum Income Guarantee-type schemes, there is also a clear focus on enabling broader social participation and addressing other social/economic issues alongside labour market activation.
• Targeted Minimum Income Guarantee-type schemes: Targeted Minimum Income Guarantee-type schemes are policies directed at specific population groups, often because they have been identified as having high ‘at risk of poverty rates’. These targeted schemes often combine cash transfers with wider support services and unique conditions that are not widely applied. It is often the case that targeted elements are more generous than the wider social security offering.
• Within these typologies, we assess eight case study countries in detail – Spain, the Netherlands, Italy, France, Belgium, Sweden, Malta, and Poland – and from these assessments draw together the common policy lessons that emerge:
• Effectiveness in tackling poverty: Minimum Income Guarantee schemes have successfully reduced extreme or deep poverty, but they face challenges in addressing more shallow forms of poverty. This is largely a result of design challenges, including setting appropriate payment levels, applying conditionality regimes, and supporting access to the labour market.
• Work incentives: Lack of sufficient work incentives can limit the impact of Minimum Income Guarantee schemes on overall poverty reduction. Inadequate work incentives may lead to benefits traps or distortions in the labour market, which fail to cater to the needs of those who should be the primary beneficiaries of a Minimum Income Guarantee.
• Activation and social inclusion: Activation within Minimum Income Guarantee schemes should not only focus on labour market integration but also on broader social inclusion. Some countries emphasise social integration as a vital policy goal alongside labour market activation.
• Role of local institutions: While national governments set policy direction, local institutions play a significant role in delivering and administering Minimum Income Guarantee schemes. Localised delivery allows for tailored support and fosters trust between individuals and support services. Underdeveloped local networks administered by an overly centralised system can lead to policy failure – even in theoretically well-designed systems like France.
• Targeting and effectiveness: Effective targeting of Minimum Income Guarantee programs is crucial for success. Even if a Minimum Income Guarantee is intended as a more universal policy open to most people, it is still imperative that specific at-risk populations are kept in mind as the policy is designed. Pre-implementation assessments can help identify at-risk populations and optimise the rollout.
• Take-up rates: The impact of Minimum Income Guarantee schemes depends upon the rate of take-up. While strict eligibility and conditionality criteria can play a role in lowering take-up, it was also evident that a lack of strict requirements to individuals accessing support is also not a guarantee of high levels of take-up. Administrative barriers can affect take-up rates, requiring continual reform and adjustment to address these.
• Economic climate: The wider economic conditions influence the effectiveness of Minimum Income Guarantee schemes. Favourable economic conditions can reinforce the work-incentivising effects of Minimum Income Guarantees, while weak economic conditions may hinder their impact. Implementing a Minimum Income Guarantee should factor in how it can respond to the economic climate around implementation.

Recommendations

Bringing together the findings from economic theory with the policy lessons from evaluations of Minimum Income Guarantee-type policies, there are several overarching areas for the design of a Minimum Income Guarantee in Scotland to consider:

• Implementing a Minimum Income Guarantee should align with the objectives of the Child Poverty Act. However, there should be a consideration that while a Minimum Income Guarantee can help alleviate poverty, the impact on overall poverty rates may be limited. Existing Minimum Income Guarantee-type policies have had the most pronounced impact on reducing levels of deep poverty. Monitoring the impact of a Minimum Income Guarantee should involve targets aligned with the Child Poverty Act and additional objectives focusing on deep poverty and broader improvements in people's lived experiences, even if they remain in poverty.
• Implementing a Minimum Income Guarantee should bring together multiple policy reforms, not just social security. This approach helps avoid unintended consequences and ensures the policy's sustainability. A multifaceted approach can provide greater policy certainty and reduce the risk of politicisation, ensuring the Minimum Income Guarantee's long-term viability. A multifaceted approach also allows policymakers to monitor and evaluate which policy areas significantly impact meeting the Minimum Income Guarantee level. It can signal where future reforms and adaptations are necessary in a more focused manner.
• A degree of conditionality focused on labour market (re)integration for those who can work should be present in the Minimum Income Guarantee's design, but strict conditionality may have negative consequences. A flexible approach is necessary, where the initial focus of the conditionality regime should be to understand and address an individual's wider social circumstances by providing non-labour market-related support in the first instance. Work search conditions should be applied only if wider social circumstances are deemed sufficiently well-supported. This ensures that individuals are supported in their job search activities while also fostering social inclusion as an initial and important step on an individual’s activation journey.
• The Minimum Income Guarantee should provide better financial support to individuals undertaking roles that provide social and public good, such as unpaid care and single parenting. These roles are mostly carried out by women, and the economic value of these works has frequently been undervalued – for example, not being captured in key economic indicators such as GDP. The introduction of a Minimum Income Guarantee would, therefore, recognise the economic value of these roles with adequate financial remunerations. In addition, these target groups may benefit from no conditionality to acknowledge the demands of these roles and ensure that the purpose of the Minimum Income Guarantee is to provide more adequate and secure financial support for individuals undertaking these roles.
• A Minimum Income Guarantee can play a key role in acting as a corrective to existing fragilities within the labour market, but at the same time, it should recognise the limiting potential fragile labour markets may have on a Minimum Income Guarantee’s success. In addition, while favourable macroeconomic conditions can accelerate the impact of Minimum Income Guarantee-type policies, this is by no means a guarantee of success if macroeconomic conditions mask underlying issues such as limited growth in high-quality or sustainable jobs.