Minimum Income Guarantee Level Modelling

Annex 1 – Costs and the Minimum Income Standard

Housing costs

The MIS after housing costs (AHC) is the definition most used by Loughborough University in their MIS reports (it excludes rents, water charges and childcare). The analysis in this paper therefore compares the AHC MIS with AHC incomes.

Using household income AHC means that where households have larger housing costs, they lie further away from the MIS. This is justified to the extent that housing costs reflect housing need, but it is not possible to disentangle this from a discretionary choice to spend more on housing. Ideally, it would therefore be preferrable to deal with housing costs on the MIS side of the calculation and compared against a household’s income before housing costs. However, the housing cost calculations currently used in the MIS are unlikely to be appropriate for Scotland as they are based on an average from a single region of the UK.

Disability costs

Attendance Allowance (soon to be Pension Age Disability Payment), Disability Living Allowance (Child Disability Payment and Scottish Adult DLA) and Personal Independence Payment (Adult Disability Payment) are provided with the purpose of covering the additional costs of having a disability. Disregarding these benefits from income therefore allows for a more like-for-like comparison of living standards between households. The actual costs of disability vary greatly and are unlikely to be exactly equal to the value of disability benefits, but there is no general agreement on how to measure these costs.

Childcare costs

Childcare costs for households with young children or primary schoolers are the largest proportion of a Minimum Income Standard for those households when they are included in the measure. For example, for a household with a child aged 0-2, childcare represents around one-third of the overall MIS, with this proportion rising to over 50% for some household types.

The inclusion of childcare costs in a Minimum Income Guarantee would raise several important issues, not least that it could result in large imbalances in household disposable incomes where some households have other childcare support available to them or choose to look after their own children. There would also be behavioural effects to consider, for example if paying for childcare allowed parents to increase their earnings.

The impact of incorporating childcare costs in the MIS would be to raise the overall cost of a Minimum Income Guarantee by around £3 billion in the 100% scenario, affecting around 60,000 additional households. The overall impact on relative poverty actually reduces in both the 100% and the 75% scenarios, because the additional income increases the relative poverty line (via the UK median) and this effect outweighs the impact on low-income households. On the other hand, the impacts on child poverty increase when childcare costs are included.

Source: Scottish Government analysis using UKMOD. Notes: rounded to nearest £0.1bn, 10,000, or 1 percentage point. 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.

Other poverty measures

Table 12 shows the impacts of bringing incomes up to different levels of the MIS on various measures of poverty. The 100% MIS scenario has particularly pronounced impacts on low-income and relative poverty, which are the less stringent of the measures shown here; the impacts on the more stringent measures, namely absolute and deep poverty, are lower. The opposite is generally true for the 75% scenario for the population as a whole, although the impact on relative child poverty remains largely unchanged. No measurable impacts on any of the poverty indicators are observed in the 50% scenario.

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 is defined as having household income less than 60% of the contemporaneous UK median. Absolute poverty is defined as having household income less than 60% of the 2010-11 UK median, uprated by inflation. Deep poverty is defined as having household income less than 50% of the UK median. For more information how income is measured when measuring poverty, including treatment of housing costs, see Poverty and Income Inequality in Scotland 2020-23.