Comparing Rishi Sunak’s plan to a single universal payment

“But the scope of these reforms means either policy approach will be successful at reducing poverty and increasing disposable incomes at the low end of the income distribution.”.

Nikhil Woodruff

Today, the Chancellor of the Exchequer followed February’s Energy Bills Support Scheme with a new Cost of Living Support package. The package primarily comprises stackable cash transfers to households of varying types:

  • £650 to those receiving means-tested benefits
  • £150 to those receiving non-means-tested disability benefits
  • £300 to those receiving the Winter Fuel Payment (i.e., those with pensioners)
  • £200 to those receiving energy bills, doubling the previously announced rebate and removing the need to repay it over five years

My PolicyEngine colleague Max Ghenis has described how one can model the poverty, distributional and inequality impacts of the package using the PolicyEngine app. PolicyEngine shows that the £16bn package would be distributionally progressive: the bottom income decile would gain 8% (vs. the top decile’s 0.3% gain), poverty would fall 7%, and the Gini index of income inequality would fall 1.8%.

The relative gain per decile of the announced support measures.

But by tying some of the payments to means-tested benefits, the policy discourages some people from earning. Conditioning eligibility for the £650 payment on receipt of, for example, Universal Credit, effectively punishes any small earnings increase which takes a claimant’s Universal Credit entitlement to zero.

The change to net income by employment income caused by the cost-of-living support payments.

For example, a married couple with two children (and homeownership) receives £850 if they earn under £38,800 per year. Once they earn more than that, they would receive only £200 from this policy (just the increase to the energy bills credit). They would need to earn an additional £1,100 to get back to the net income they had before they lost the £650 means-tested payment.

How could Sunak avoid this work disincentive? One way is to distribute the £16bn fully universally. Such a budget would fund a payment of about £230 per person. Putting the two measures against each other, we find that the Chancellor’s targeted measures are indeed more progressive: replacing Sunak’s proposal with a budget-neutral universal payment would reduce the bottom decile’s net income by about 1% and raise the top decile’s income by about 0.2%.

The distributional impact of exchanging the announced policies for an equivalent universal transfer.

However, the progressivity story is more nuanced. Two-thirds of the population would be better off under a universal payment, including most people in the bottom income decile. Inequality falls under some measures and rises under others. And while switching to the universal payment would increase pensioner poverty, it would cut child poverty.

The outcomes within each decile of exchanging the announced policies for an equivalent universal transfer.

Examining how an individual household (married, two children) would fare under such a universal transfer, we can see that the household is worse off when on benefits, but immediately much better off once they move off their entitlement, given that they avoid the cliff.

How a married household with two children sees their net income change under announced (grey) and universal (blue) policies.

No single criterion captures all the merits of these reforms. Policymakers often must balance equity with efficiency – here, the announced policies are a bit more progressive on the whole, though they also cause the tax-benefit system to respond more harshly to increases in earnings for some households.

But the scope of these reforms means either policy approach will be successful at reducing poverty and increasing disposable incomes at the low end of the income distribution. And between rising energy bills, rising inflation and falling real incomes, the scale of the challenge leaves room, and necessity, for future universalism-inspired interventions.

See the analysis in PolicyEngine UK

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In this article Nikhil Woodruff looks at Rishi Sunak’s plan compared to a single universal payment. Find out what both he and the team at Policy Engine here:

Replacing the measures from Rishi Sunak with a single payment of £230 per person would benefit some groups whilst disadvantaging others. Find out the impacts here:

About the author

Nikhil Woodruff is the co-founder and CTO of PolicyEngine and UK research director of the UBI Center.

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