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

Applying economic theory to the Scottish Government’s current Minimum Income Guarantee policy design

The previous chapter provided an overview assessment of some of the potential impacts we would expect to see from economic theory following the introduction of a Minimum Income Guarantee.

In this chapter, we bring together the findings from the economic theory to develop a Theory of Change (Figure 1) that can be applied to understand the potential impacts of a Minimum Income Guarantee in Scotland.

The “Inputs” into the Theory of Change model reflect the market and policy ‘failures’ that a Minimum Income Guarantee is seeking to address, which we outlined in further detail in the previous chapter.

The introduction of a Minimum Income Guarantee as the “Intervention” to address these “Inputs” will combine social security reform, changes to the world of work and tackling the cost and access to essential services.

However, the exact policy design of the Minimum Income Guarantee in terms of targeting and the composition and interaction of the various levers seeking to achieve the Minimum Income Guarantee will determine the exact nature and scale of the impacts. To demonstrate this, we have constructed a Theory of Change that presents one scenario for how the Minimum Income Guarantee could be implemented based upon the current internal thinking of the Minimum Income Guarantee Expert Group. As such, we have made the following assumptions, which are based on the long-term ambition of the Minimum Income Guarantee outlined in the report’s introduction:

Reform to the social security system will impact both the functionality and generosity of welfare payments. While means-testing will remain, the conditionality regime will be loosening with no sanctions and potentially a time-limited conditionality applied to those who are able to work. Payments will be at the individual level, and take-up will be automated if possible. This is captured in our “policy mechanism”, and the impacts are reflected in the “effects” and “demographic effects”.

Major reform in the functioning of Scotland’s economic model and labour market would enable a majority of people to reach the Minimum Income Guarantee through work. This would require a model that brings together employers, employees, and government to establish a social partnership approach to economic development. Overall, we expect the economy would benefit from sectoral agreements, higher minimum wages, minimum hours, skills investment, and a shift away from ‘low-quality work’. This is captured in our “policy mechanism”, and the impacts are reflected in the “effects” and “demographic effects”.

Supporting the increase in incomes through work and social security would be a focus on reducing the cost of essential services – particularly those that enable workplace access such as childcare and transport. It is expected that these services will be free at the point of use, or at least highly subsidised, and would move towards a universal approach modelled on other public services. This is captured in our “policy mechanism” and the impacts are reflected in the “effects” and “demographic effects”.

The “outcomes” within the Theory of Change are those that we are likely to expect from the introduction of a Minimum Income Guarantee. The Theory of Change we outline is just one scenario to help understand the interconnectedness of policy choices and impacts on these outcomes. The shape of the outcomes we expect to see will look different depending on the exact policy design of a Minimum Income Guarantee, and how the various levers interact with each other.

F igure 1: Theory of Change for the introduction of a Minimum Income Guarantee

To further understand the scale and certainty of the impacts of different policy levers and how these may need to be offset, we have put together a RAG rating table (Table 3) to outline how each policy lever on its own terms impacts upon the outcomes presented in the Theory of Change. In addition, we also assess the expected household impacts in terms of targeting and the upfront fiscal cost of each policy level.

The scoring of the RAG rating system is based on the following criteria, as well as being accompanied by a brief explanatory note.

Green: Overall likely positive impact on meeting the outcomes on its own terms.

Amber: Likely – but uncertain – to have a positive impact unless supported by another lever.

Red: Likely negative outcomes that need to be offset by another lever.

Below, we provide further detail on the assumptions underpinning our RAG ratings for each of the expected outcomes.

Improving social security: More generous social security payments, with limited conditionality, will have positive impacts on poverty reduction and, through this, increased consumption and financial certainty of low-income households. However, we expect this will have a significant fiscal cost (paid via increased taxation) and loosening conditionality will act as a disincentive to labour market participation.

A Minimum Income Guarantee ‘top up’: The Minimum Income Guarantee ‘top up’ would be effectively targeted at groups/demographics who fall short of the Minimum Income Guarantee through other levers, and through this ‘top up’ would ensure these groups reach the adequate level. However, there is a concern that knowledge of this payment may act as a disincentive to these groups’ labour market participation. The exact design of how the ‘top up’ is administered and assessed will determine the certainty of this income.

Reducing cost and improving essential services: The services that are focused on in our assumptions are childcare and transport, as these are two of the services that will have the most impact on supporting labour market access. While reducing the costs of these services will have, in theory, a universal benefit, they will have a targeted impact on important groups who are currently facing high costs that act as a barrier to economic participation, for example, women and those living in more rural areas. While improving access to services through cost reduction will increase incomes by decreasing the spending of individuals on these services, it is important that cost-based reforms are coupled with policy reform that is focused on improving the adequacy and stability of incomes. The major challenge is the fiscal cost of reduction of essential costs – both subsidising or universalising will require significant investment from government.

Labour market and work reforms: Improved labour market access will necessarily come with improved work incentives and a positive impact on consumption. The major uncertainties on the other outcomes (represented by Amber) will be determined by whether this labour market access takes the form of, on the whole, ‘good work’ and how well this improved work access is supported by improved services / reduced costs. This would make the overall costs of a Minimum Income Guarantee lower (as greater numbers reach the Minimum Income Guarantee through work) and also counters some of the potentially negative labour market implications of social security reform.

Ultimately, any one lever is unlikely to meet all of the outcomes on its own, and the RAG-rating 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.