Are the Cost of Living payments unfair because they create a ‘cliff edge’?November 18, 2022 –
The new Cost of Living payments announced in the Autumn Statement are very welcome, providing an extra £900 next year for people on means-tested benefits. But the way the payments have been structured is far from perfect, as I explain below. The alternative of further increasing benefit rates, or reducing some of the hidden benefit cuts (like the freeze to the Local Housing Allowance), that the Autumn Statement didn’t tackle, would have been a fairer and more efficient approach.
The continuation of Cost of Living payments for a second year mirrors the lifecycle of the income support schemes invented during the Covid pandemic. Clearly, once a template for support has been set the government are reluctant to make changes to the rules for how they operate (as opposed to changes in the level of support, which has varied in line with need).
Nevertheless, the unintended consequences of making such ad-hoc additions to the tax or benefit systems are important to consider. Just as the design of the Covid support schemes was rightly criticised for creating perverse incentive for employers to lay-off staff, the Cost of Living payments create a ‘cliff edge’ issue that is both unfair and inefficient. By opting for a facsimile of the first payment the government has missed the chance to rectify this aspect of the scheme.
The cliff edge issue is that, in order to qualify for a Cost of Living payment you need to be in receipt of certain means-tested benefits. But receiving these benefits can mean getting hundreds of pounds a month or just a few pence – even the smallest entitlement qualifies for the full £900 payment. This create the most obvious source of unfairness: people with earnings just above the level where they would qualify miss out on the full £900 rather than support being withdrawn gradually.
In fact, there is a more severe unfairness that can affect benefit claimants who are paid weekly. Because of the way Universal Credit’s assessment periods work, the amount of earnings taken into account varies from one month to the next depending on how many pay days fall in that month. So even if someone gets the same amount of earnings every week their Universal Credit will be reduced in ‘5 week’ months. For some the difference is enough to mean they get a ‘nil award’ in those months. If by chance their ‘5 week’ month coincides with the assessment date for the Cost of Living payment then they will miss out.
As well as being unfair, the cliff edge problem could also have unintended consequences for the labour market. While numbers affected may be small, there will be some people for who earning £1 more a week could make the difference between qualifying and not qualifying for Universal Credit. Rather than working harder and earning more to help meet increased bills, an individual faced with this choice could not be blamed for opting to maintain their entitlement to Universal Credit and the £900 payment.
A different kind of problem might affect people entering the labour market. Rather than starting a new job straight away they might delay until after they have qualified for their Cost of Living payment. Again, for the individual, it could be their best financial option. In practice the effect is likely to be small, as few people can negotiate their start date. The bigger effect could be the unfairness felt by people starting work who miss out on the payment.
It's for reasons like these that economists favour increasing benefit rates as a way to provide extra support, rather than one-off ‘passported’ payments. Adding £150 a month to Universal Credit (and other benefits) for 6 months would be just as effective and would avoid the cliff edge issue. However, given the furore that followed withdrawal of the £20 weekly Covid increase in November 2021 it’s perhaps understandable the government are wary of this mechanism.
There is also an unusual positive ‘unexpected consequence’ of the current system. When the Cost of Living payments were first announced in May, our blog predicted there would be a positive effect on take-up. And this has now been confirmed by the Treasury’s ‘Policy Costings’ document for the Budget. In its analysis of the £900 Cost of Living payments (and the £300 disability payment) the document comments that their "costing also accounts for behavioural impacts of this policy change, whereby there is some increase in take up of Universal Credit as a result of the policy change”.
We’re pleased the Treasury have recognised this effect, and they will hopefully launch a benefits take-up campaign to accompany the second round of Cost of Living payments. If so, they should also consider a small administrative change. At the moment DWP do not announce in advance the qualifying day for getting a Cost of Living payment, at least for working age people. Instead, they only announce the qualifying day that was used after the event. If they moved to pre-announcing the date then the ‘call to action’ for people checking benefits would be a good deal stronger.
We think pre-announcing the qualification date is a small administrative change with potentially large advantages for take-up. That’s why, all through the summer, we’ve been asking DWP to tell us their dates in advance, unsuccessfully alas. The fact they haven’t made this change yet suggests they’re unlikely to next year, perhaps because of concerns about the effect of the cliff edge on labour market decisions.
Even so, if the government are determined not to pursue the simpler and fairer alternative of temporarily increasing benefit rates, then they should make the most of the current scheme. Letting everyone know qualification dates in advance would be a good way of doing that and would help the take-up campaign that should accompany it.
 Note that households who only qualify for Housing Benefit do not qualify for an automatic £900 Cost of Living payment but instead have to apply to the discretionary Household Support Fund. This reduces the cost of the scheme, and probably the administrative burden on local authorities, but is a further source of unfairness. In terms of their income and needs there is no difference between this group and the other groups who qualify automatically.