Lump-sum cost of living payments poorly designed to alleviate deprivation

The government has introduced a series of ‘cost of living payments’. The largest of these are five instalments totalling £1,550 for households on means-tested benefits, with each instalment going to at least 7 million households. There are additional payments to people on disability benefits and pensioners. The total cost of these is nearly £19 billion over two years.

New IFS research, funded by the Joseph Rowntree Foundation, finds that whilst the payments facilitated higher spending for low-income households, they were not targeted at those most in need – and their occasional, lump-sum nature created additional difficulties.

This research confirms that it would have been preferable simply to increase benefit levels – for example, by uprating them to ensure that they actually maintained their real value. 

This sticking-plaster solution has proved expensive and ineffective by comparison, offering much bigger proportionate increases to some – notably those without children and those in work
 – than to others.

The research focuses on the first instalment of these payments in July 2022, and finds that:

-        The payment of £326 in July 2022 substantially boosted spending. In the month after receiving the payment, total spending among recipient households was, on average, £130 higher than in the month before.

-        The jump in spending immediately after receiving the payment suggests that many households were significantly constraining their spending in the weeks leading up to the payment. Many may have been experiencing hardship whilst waiting for the payment to come through.

-        Spending fell sharply after the immediate spike. Large one-off payments, rather than smaller regular payments, are less useful for long-term budgeting.

-        Spending increased on items like groceries (£20 higher in the month after payment) and items like entertainment (including eating out, TV and streaming services, and other leisure activities; £35 higher), suggesting that levels of need varied significantly among households receiving the payment. This is not surprising given that the same payment was made to all 7 million households receiving means-tested benefits, regardless of their other circumstances, and therefore was not targeted at those in the greatest need.

The report, which examines wider trends in poverty since the pandemic, also highlights the importance of benefit levels and design to poverty rates more generally. Analysis pre-released to the Guardian earlier in the week shows that:

-        In the first year of the pandemic, despite wider turmoil, absolute poverty fell from 17.9% to 16.8% due to rising benefit receipt, in particular from the temporary £20 a week uplift to universal credit (UC).

-        In 2021–22, absolute poverty was still 0.7 percentage points (479,000 people) below its pre-pandemic level, to a significant extent because of the £20 uplift (which was in place for the first six months of 2021–22) and subsequent changes to the UC work allowances and taper rate (which reduced the speed at which UC is withdrawn as earnings rise).

-        The changes to the UC work allowances and taper rate have a much smaller effect on poverty than the £20 uplift they replaced. Per pound of government spending, the uplift had a 40% larger impact on reducing poverty. This is because the work allowance and taper changes mainly benefit somewhat higher-earning households a little further up the income distribution, and do not benefit out-of-work households at all, who tend to be the poorest.

Sam Ray-Chaudhuri, a Research Economist at IFS and an author of the report, said:

‘The cost of living payments supported low-income households’ spending in the face of rising prices, and no doubt have helped alleviate significant deprivation. But, by giving the same amount to all households on benefits regardless of their circumstances, the payments were not targeted at those in the greatest need, limiting their effectiveness in poverty reduction. The government spent £8.3 billion on lump-sum payments in 2022–23 and will spend an estimated £10.5 billion in 2023–24 – a better-targeted policy could have offered higher amounts of support to those in greatest need, with no additional cost to the taxpayer.’

JRF Chief Analyst Peter Matejic said:

‘This research shows that policymakers ignored the obvious answer to the cost-of-living crisis facing low-income households of increasing benefit levels in favour of a solution that didn’t focus on helping the families left agonising about how they would afford to feed and clothe their children. 

‘We know that around nine in ten low-income households on universal credit are going without the essentials like food, soap and clothing. That is because the gap between what they receive in UC and the price of everyday goods is at least £35 a week, even before any deductions are taken at unaffordable rates. Even with one-off emergency payments, no amount of budgeting covers this gap over a sustained period.

‘The sure-fire way to make sure the people most at risk of poverty aren’t left in jeopardy in the wake of economic shocks is to adopt the Essentials Guarantee which would mean the basic rate of universal credit at least covers the cost of life’s essentials, with support never being pulled below that level.’