Welfare reform - impact on households with children: report

Appendix C: Methodology

In order to assess the impact of reversing each reform, we have used UKMOD, an open-access microsimulation model developed by the Institute for Social and Economic Research (ISER) at the University of Essex. The model applies tax and benefit rules to a set of individual and household-level data, allowing the user to simulate and compare alternative scenarios.

The input data in UKMOD is derived from DWP's Family Resources Survey (FRS). The analysis in this report uses FRS data from 2017-18, 2018-19, and 2019-20. To pool the data, the grossing weights used to scale the FRS sample to the whole population are divided by the number of data years, in this case three, and a set of adjustments are applied in order to uprate them to 2023-24.

The baseline in the model is equivalent to 2023/24 'policy' scenario in the Cumulative Impact Assessment which was published alongside the 2022 Tackling Child Poverty Delivery Plan.^[32] All impacts outlined in this report are relative to that projection.

Behavioural response

A significant caveat is that UKMOD is a static model; that is, it does not model changes in behaviour resulting from changes in policy. Previous analysis by the Scottish Government has found that increases in tax are likely to have behavioural effects, so we can assume that changes to the Universal Credit earnings taper rate, for example, could have a similar impact.

By modelling the reversal of these reforms in the future (2023-24), the behavioural response to their implication has been captured in the underlying input data. Therefore our results illustrate only the short-run impact of any change.

The implications of any future behavioural effect on the reversal of these reforms is uncertain. We found that changes to the earnings taper rate are marginal for working families who pay Income tax and National Insurance, but more significant for those whose earnings are above the Universal Credit work allowance but below the income tax or national insurance thresholds.

Universal Credit roll out

Some of the reforms detailed in this report only impact on Universal Credit. UKMOD assumes that only 68% of households to have migrated across to Universal Credit from legacy benefits by 2023-24, and thus the impact of such reforms will be limited to these households.

Disposable income

Income is defined as equivalised disposable household income after housing costs. This comprises total income from all sources across the household, minus income tax, national insurance contributions, pension contributions, and some others transfers such as child maintenance payments. Housing costs are also subtracted from income; these include rent, water rates, mortgage interest payments, structural insurance premiums, ground rent, and service charges. Income is then adjusted to take into account variations in the size and age composition of different household in a process known as equivalisation.

This equivalisation process does not take place for the illustrative households detailed in the report; the disposable incomes presented there are not adjusted for household composition.

Floating UK relative poverty line

The relative poverty line is calculated as 60% of median UK equivalised household disposable income after housing costs. Previous welfare reform reports held the poverty line constant when comparing scenarios.

However, the welfare reforms described here impacted households across the UK and reversing them will, in some cases, have a material impact on UK median incomes, particularly when they relate to earnings. This has a subsequent impact on the UK poverty line and thus poverty rates in Scotland.

We therefore recalculate the UK poverty line in each scenario and apply this line to our calculations. The difference this change in methodology has on poverty rates is detailed Appendix B, table 4., which illustrates how the number of people brought out of poverty is smaller compared with an analysis that uses a fixed poverty line.

Household example: The Ladder household is not on benefits and their income is not affected by any of the welfare reforms detailed in this report. Their household income is just above the poverty line.

Following the reversal of a reform, the median UK income has increased, and the floating UK poverty line shifts upwards. Despite seeing no change in their income, the Ladder household is now in relative poverty having dropped below the poverty line.

The Cromdale household, however, was affected by the reform and lifted out of poverty. The net impact on poverty across these households is zero.

Fixed UK absolute poverty line

This line is based on the 2010-11 relative poverty line and adjusts for inflation only.