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

Introduction

A wide range of stakeholders – including the Work and Pensions Select Committee and the Poverty Strategy Commission – have raised concerns that the UK social security system provides insufficient adequacy and security for claimants.^[2] The UK’s overall income replacement rates are some of the lowest among OECD countries. In recent times, the need for a £20 per week uplift to the Universal Credit standard allowance during the Covid-19 Pandemic and the increasing pressures the cost-of-living crisis is placing on household budgets – especially low-income households – has highlighted the gaps and limitations of current social security provision.

These concerns with the social security system have led to growing interest in social security reforms that would provide a Minimum Income Guarantee (Minimum Income Guarantee) – an income level under which people could not fall – and ensure that adequacy and security are firmly at the heart of the social security system. In the UK context, the Joseph Rowntree Foundation and Trussell Trust’s ‘Essentials Guarantee’ is an initial attempt to move towards a social security system that has improved security and adequacy at its heart.^[3]

Within Scotland, calls for a Minimum Income Guarantee followed the publication of a 2021 report by the Institute for Public Policy Research Scotland. This report proposed that Scotland should have a Minimum Income Guarantee by 2030 with monthly payments benchmarked to the Minimum Income Standard (MIS) of £792 for a single person and £1,244 for a couple (2022/23), with additional payments for households with extra childcare and disability costs.^[4] The Minimum Income Guarantee Steering Group was established with cross-party support as part of a commitment to begin work on a Minimum Income Guarantee within the Scottish Government’s 2021-22 Programme for Government. The Steering Group is made up of a cross-party Strategy Group and an independent Expert Group with representation from academia, trade unions, poverty and equality organisations. The Expert Group, who are currently responsible for the policy development, has also commissioned an Experts by Experience panel of people who have experienced financial insecurity to help shape the work to consider how a Minimum Income Guarantee could be delivered in Scotland.^[5] 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 first step is determining what this socially acceptable standard of living is. The Minimum Income Guarantee Expert Group’s interim report has suggested any Minimum Income Guarantee should be set between a relative poverty line and the MIS.^[6] It is expected that the interim goal of introducing a Minimum Income Guarantee (i.e. over an initial 10-15 year period) is achieving 75% of the Minimum Income Standard for everyone in Scotland as far as possible. The final goal over longer timescales is 100% of the Minimum Income Standard – 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 to the social security system so that it provides the mechanism needed to provide a Minimum Income Guarantee;
• Improvements to 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 on addressing the services and costs that promote labour market access, e.g. childcare and transport.

In addition, a Minimum Income Guarantee will recognise the distinct needs of certain individual/family circumstances, in particular, those with a disability or those who are unpaid carers and in receipt of means-tested benefits may require premium payments to be made in order to reach the level a Minimum Income Guarantee is set at. The Expert Group’s interim report states that non-means tested disability benefits, such as Adult Disability Payment, Child Disability Payment and Carer’s Allowance, would not be considered as income for the purposes of calculating the Minimum Income Guarantee level for a household.

A key part of making these decisions is to understand the potential scale and scope of the economic and social impacts a Minimum Income Guarantee could deliver in Scotland. In support of this, this report will provide an evidence base to inform and support the ongoing work of the independent Expert Group in determining the appropriate level to set the Minimum Income Guarantee, and how to achieve this through a mixture of work, services and social security, and the specific groups to target.

This report will provide:

• An analysis of the key areas of economic theory relevant to a Minimum Income Guarantee and the mechanisms through which it would expect a Minimum Income Guarantee to impact the economy;
• An application of the findings from economic theory to a scenario based upon the Minimum Income Guarantee Expert Group’s current approach to a Minimum Income Guarantee design to explore the expected economic impacts and outcomes in detail;
• A summary of existing Minimum Income Guarantee-type policies implemented in a selection of other countries with a focus on an analysis and evidence of their social and economic impact and evaluations;
• An overview of key policy lessons that emerge from the case study assessments; and
• A concluding section that provides an overview of the considerations for delivering a Minimum Income Guarantee policy in Scotland, bringing together economic theory and existing policy evidence.