Minimum Income Guarantee Level Modelling

Minimum Income Guarantee Level Modelling

This paper was developed by the independent Minimum Income Guarantee Expert Group to support discussions at their meeting in December 2023.^[1]

The Scottish Government appointed an independent Expert Group^[2] to define what a Minimum Income Guarantee for Scotland should look like. The work outlined in this paper supported their considerations.

Scottish Government analysts carried out the modelling work that was agreed by the Expert Group members in September 2023. This included the costs and impacts of bringing households up to 50%, 75% and 100% of the Minimum Income Standard (MIS).^[3] This paper sets out an update to the modelling that incorporates the latest data, including the 2024 Minimum Income Standard (MIS), with results now given for the 2024-25 financial year.

The modelling is based on a static comparison in which household incomes are brought up to the MIS. It does not take into account any potential reductions through access to services, nor does it account for any behavioural effects. The analysis is also distinct from modelling an actual policy, since no mechanisms currently exist to mandate a precise level of income across the population, nor would it necessarily be desirable to do so. Effectively, any such policy would require a taper rate of 100%, so that there would be no reward for increasing earnings below the MIS. The costs presented here therefore represent absolute minimums.

All modelling in this paper was undertaken using UKMOD, a tax-benefit microsimulation model which is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The model inputs 2021-22 and 2022-23 data from the Family Resources Survey (FRS) and projects this forward to 2024-25, the year on which all analysis in this paper is based.

The modelling assumes that childcare and housing costs are excluded from the MIS, and that disability benefits and housing costs are excluded from income. These assumptions are explored more fully in Annex 1. In addition, the model assumes full take-up of benefits. This allows us to take into account all of the income to which households are already entitled, so that we are not duplicating these entitlements when modelling the Minimum Income Guarantee.

Separately to this modelling work, the Expert Group explored how a Minimum Income Guarantee could impact different groups and if any group would not be included in a Minimum Income Guarantee. These groups were: pensioners; students; young people leaving care and anyone who is care experienced; 16 and 17 year olds; refugees; people seeking asylum and those subject to no recourse to public funds. The Expert Group concluded that all should be included in a Minimum Income Guarantee as soon as possible, this might be dependent on powers available to the Scottish Government. They concluded that appropriate impact assessments should be carried out to identify how a Minimum Income Guarantee interacts with the likes of pensions, care leaver grant and student support available through SAAS.

Overall costs and impacts

One way to understand what the level of the MIS might mean for households is to estimate the impacts on relative poverty. However, we should bear in mind that the MIS and the relative poverty measure have different purposes and are constructed along different lines: the first measures adequacy of income based on a household’s needs, whereas the second is an indicator of inequality at the lower end of the income distribution. Note also that modelling results are not directly comparable to the official poverty statistics.

Table 1 illustrates the total gap between modelled 2024-25 incomes and the proposed Minimum Income Guarantee level; the number of households impacted if incomes were raised to that level; and the estimated impacts on relative poverty. Annex 1 sets out the impacts across a wider suite of poverty measures, along with an illustration if childcare costs were to be included in the MIS. Note that increasing the incomes of households in Scotland to the extent modelled here would impact the UK median, thus raising the poverty line and moderating the impacts on poverty. The results presented below take this effect into account.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn, 10,000, or 1 percentage point. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed. Figures not comparable with official poverty statistics. * Relative poverty impact is the reduction of relative poverty after housing costs (AHC) in percentage points (pp), with disability benefits excluded from income. A household is in relative poverty according to this definition if its disposable income is below 60% of the UK median, with income measured after subtracting housing costs and disability benefits and after adjusting for household composition (‘equivalisation’). For more information how income is measured when measuring poverty, including treatment of housing costs, see Poverty and Income Inequality in Scotland 2020-23.

Moving all households up to 100% of the Minimum Income Standard from their current levels of income, including unclaimed benefit entitlements, would reduce relative child poverty by an estimated 13 percentage points at a cost of £6.9bn in 2024-25. This would effectively amount to eliminating relative child poverty, albeit starting from a position of full take up of benefits. Overall relative poverty would reduce by 12 percentage points with a small minority of households remaining in poverty. On the other hand, a 50% level would have no measurable impact on relative child poverty or overall poverty.

Raising incomes to 75% of the MIS would generate an intermediate impact, with the MIS level lying above the poverty line for some household types but not others. These results are likely to be particularly sensitive to modelling uncertainty as well as future changes given the proximity of the two thresholds. The subsequent section provides further analysis on the impacts for different groups, although it is clear from Table 1 that 75% of the MIS is more likely to be above the poverty line for households with children, since the impact on child poverty is similar to the impact under the 100% MIS scenario. Both the 75% and 100% scenarios would represent unprecedented reductions in poverty by international standards.

Household types

Tables 2, 3 and 4 show the mean and median gaps (distances) to the MIS, along with the total gap and the number of households affected, for 100%, 75% and 50% of the MIS across different household types.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn cost, or 1,000 households, or £100 average gap. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn cost, or 1,000 households, or £100 average gap. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed. ‘..’ indicates that sample size is too small to disclose; ‘-‘ indicates zero.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn cost, or 1,000 households, or £100 average gap. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed. ‘..’ indicates that sample size is too small to disclose; ‘-‘ indicates zero.

Under the 100% MIS scenario, single adults without children make up the largest affected group, though single and couple households make up similar proportions if we include households both with and without children. However, households with children, particularly couple households, tend to lie furthest from the MIS and would therefore benefit the most on a per-household basis from a Minimum Income Guarantee designed along these lines.

Couple households with and without children make up a decreasing share of affected households as we move to the 75% and 50% scenarios. In addition, households without children show the widest gaps to the MIS threshold under these scenarios.

In all scenarios, pensioner households make up a small proportion of affected households, with no pensioner couples affected under the 75% and 50% scenarios. Under the 100% scenario, pensioner households that are affected tend to lie relatively near to the MIS.

Households with children

Table 5 shows the equivalent information for households with different numbers of children under the 100% MIS scenario. Households with three or more children tend to have the highest gaps to the MIS, although households with one child are the most prevalent among households with children.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn cost, or 1,000 households, or £100 average gap. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed.

Table 6 shows the gap to the MIS for households with one child by the age of the child. Those with an older child are likely to be further from the MIS on average, reflecting the higher MIS for these households.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £100. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed.

Unpaid carers

Table 7 presents results for unpaid carers providing either 20+ or 35+ hours of care per week. We have additionally estimated the impacts on relative poverty among those caring for at least 20 hours per week if incomes were brought up to different MIS levels – this is shown in Table 8.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn cost, or 1,000 households, or £100 average gap. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest percentage point. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed. * Relative poverty impact is the reduction of relative poverty after housing costs (AHC) in percentage points (pp), with disability benefits excluded from income. A household is in relative poverty according to this definition if its disposable income is below 60% of the UK median, with income measured after subtracting housing costs and disability benefits and after adjusting for household composition (‘equivalisation’). For more information how income is measured when measuring poverty, including treatment of housing costs, see Poverty and Income Inequality in Scotland 2020-23.

Mean and median gaps for unpaid carers are among the largest for any groups, in part reflecting the exclusion of disability benefits from household income as many carers will be living with someone who is receiving one of these benefits. The poverty impacts of raising incomes to the MIS are proportionately greater for unpaid carers than for the population as a whole under the 100% MIS scenario, reducing relative poverty by 17 percentage points as opposed to 12.

Child poverty priority groups

Table 9 provides results for each of the child poverty priority groups. Unlike the household types shown earlier, these groups are not mutually exclusive as households with children can (and often do) belong to more than one of the priority groups. We have additionally shown results for households that belong to only one of the groups where sample sizes allow.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn cost, or 1,000 households, or £100 average gap. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed. * Ethnic minority: definition used here from the Tackling Child Poverty Delivery Plan priority families which includes everyone who is not White Scottish/British.

Out of the priority groups, households with a disabled person make up the largest group among those affected, followed by lone parent households. This reflects both the prevalence of disability among the population as a whole and the exclusion of disability benefits from income, along with differences between groups that affect income such as employment rates. However, affected households with 3+ children tend to be furthest away from the MIS on average, followed by ethnic minority households and households with young mothers. As noted, these groups overlap; for example, ethnic minority households tend to have more children.

We can also estimate the impacts on child poverty among the priority groups if incomes were brought up to different levels of the MIS. Due to sample size limitations, these impacts cannot be broken down into individual groups. However, we can see that the priority groups as a whole would benefit disproportionately, since the percentage-point impacts on relative child poverty are higher among the priority groups than among the population of children as a whole.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest percentage point. Childcare and housing costs are excluded from the MIS, and disability benefits and housing costs are excluded from income. Full take up of benefit entitlements is assumed. * Relative poverty impact is the reduction of relative poverty after housing costs (AHC) in percentage points (pp), with disability benefits excluded from income. A household is in relative poverty according to this definition if its disposable income is below 60% of the UK median, with income measured after subtracting housing costs and disability benefits and after adjusting for household composition (‘equivalisation’). For more information on how income is measured when measuring poverty, including treatment of housing costs, see Poverty and Income Inequality in Scotland 2020-23.