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Grace Sachdeva, Nicole Chen, Manya Gupta

What are the economic arguments for and against a one off cost of living payment for all individuals?

A cost-of-living payment isn’t exactly a modern-day invention. Take the UK in the 1970s, during the infamous "Winter of Discontent." Faced with rising inflation and public unrest, the government decided to throw small payouts and cap wages in a desperate bid to keep things under control. The result? Mass strikes, uncollected rubbish piling up for weeks. The streets were resembling a chaotic scene out of a Monty Python skit.

 

A universal cost-of-living payment is a one-off lump-sum amount of money given to all individuals to help relieve the stresses of rising living costs. While today’s cost-of-living payments aren’t dealing with mountains of garbage, the underlying problem remains the same. Prices are up. Wages flat. Inequality intensifies. As we sink deeper into the sea of economic hardship, could a one-off cost-of-living payment be our life-jacket or an anchor pulling us further into financial instability?

 

Over 50 years later, when the UK government introduced a similar scheme in 2023, their intent was clear: to shield the most vulnerable and bolster those on low incomes. The immediate benefits of such payments were tangible. The Trussell Trust, for instance, reported a 15% reduction in the demand for emergency food parcels following the distribution of these payments. (Trussell Trust, 2023).

 

Injecting additional disposable income into the economy tends to increase consumer spending, boosting aggregate demand. This stimulates economic growth, as demonstrated by research from the IFS, whose findings showed that a £326 payment in July 2022 led to a £130 increase in spending the subsequent month. The immediate economic stimulus such payments can provide (IFS, 2023) is substantial; the temporary spike in spending can trigger a multiplier effect, further boosting economic activity with additional rounds of spending.

 

The universal nature of these payments generate distinctive advantages. Targeted benefits require complex eligibility checks and administrative oversight. Universal payments on the other hand reduce bureaucratic costs and ensure no one eligible is left behind. This universality addresses a significant shortcoming of means-tested systems; in 2022, 7 out of 10 working-age households in the bottom 20% missed out on at least one essential due to strict criteria (Joseph Rowntree Foundation, 2022) Universal payments ensure nobody is left drifting out at sea.

 

Universal payments also help mitigate inequality as it gives a greater proportionate increase of income to lower-income households than their wealthier counterparts. In fact, in April 2022, the bottom 10% of the population in terms of income faced an inflation rate of 10.9%, which was 3 percentage points higher than the inflation rate of the richest 10%. Most of this difference comes from the fact that the poorest households spend 11% of their total household budget on gas and electricity, compared to 4% for the richest households. (Institute for Fiscal Studies, 2023) Therefore, the payment counterbalances the disproportionate effects of inflation on the less affluent, creating a temporary relief that prevents some households from slipping into poverty.

 

However, flimsy lifejackets may not last against this relentless economic storm. As aggregate demand increases, upward pressure on prices can erode the purchasing power of the payment itself. Historical precedent exposes this risk. Relief payments provided in the US during the pandemic spiked inflation. The Federal Reserve Bank of San Francisco estimated a 3-percentage-point increase in the inflation rate by the end of 2021, purely due to the one time payment. (Federal Reserve Bank of San Francisco, 2021). Thus, these payments pose the risk of exacerbating the very issues it aims to solve. 

 

A one-size-fits-all approach also provides financial assistance to individuals who may not need it. This results in allocative inefficiency. Wealthier individuals have a lower marginal propensity to consume, and so will likely save the additional income, instead of spending it. The natural question then is whether this would be the most effective use of public funds? Or whether targeted social programs or investment in essential infrastructure may be more effective? These could potentially offer more substantial long-term benefits. 

 

The burden on government finances is another significant concern. Funding a universal payment necessitates cuts to other public services or it could even increase borrowing. This has the added con of escalating national debt and future interest payments. The opportunity cost of such a scheme is non-trivial; it diverts resources from potentially more effective investments and existing benefit payment.

 

A one-off cost-of-living payment acts as a temporary buoy in a sea of economic hardship. It is a lifeboat thrown to those drowning in bills. Without additional measures, we risk floating in temporary safety. We hover inches away from financial hypothermia - cold, immobilised, and slipping further into debt.


Grace Sachdeva, Nicole Chen and Manya Gupta are all students at Sheffield Girls' School, and were one of five finalists of the Young Economist of the Year competition 2024.

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