The Government has announced a package of cost-of-living support for UK households, and the first instalment will be paid from 14 July 2022.

This Insight examines what can be learnt from the US experience of Economic Impact Payments since 2020 for one-off cash payments for cost-of-living support.

What is the UK’s payment package?

On 26 May 2022, the then Chancellor Rishi Sunak announced a package of cost-of-living support for UK households. It includes one-off payments of £650 for those on means tested benefits, £300 for Pension Age households and £150 for those on non-means-tested disability benefits. They will begin on 14 July and will be paid in instalments.

Economic Impact Payments in the US

The United States introduced one-off cash payments as part of its economic response to the Covid-19 pandemic.

In March 2020, President Donald Trump signed a Coronavirus Aid, Relief and Economic Security (CARES) Act. This introduced the first round of Economic Impact Payments, which amounted to $1,200 per person and up to $500 for each child under 16 years. They tapered off for those on high incomes, with no payments to people earning more than $99,000 a year.

The second round of Economic Impact Payments began on 30 December 2020. These payments provided up to $600 for individuals or $1,200 for married couples and up to $600 for each child.

President Joe Biden ushered in a third round of Economic Impact Payments as part of his $1.9 trillion American Rescue Plan. From March 2021, eligible individuals received $1,400 ($2,800 for married couples) and $1,400 for each qualifying dependent. Both the December 2020 and March 2021 payments also tapered payments to those on higher incomes.

What was the impact of payments in the US?

Academic economists Michael Gelman and Melvyn Stephens Jr. reviewed the evidence on Economic Impact Payments for the Brookings Institution (a nonprofit public policy organisation in Washington D.C.). They found direct cash payments are an effective way of reaching most people very quickly. This is important in the US, as it does not have the national-level social security systems existing in the UK.

The Economic Impact Payments helped to reach groups such as the self-employed or workers in the gig economy who do not always qualify for existing welfare programmes.

Technology meant the payments were received quicker. However, as the US Inland Revenue Service used data on tax returns to reach people, those who had not filed a tax return previously did not receive the payments as quickly as others.

Comparing the US to the UK

It is difficult to directly compare the US Economic Impact Payments to the UK’s cost of living payments as they are set in a different policy contexts. Despite this, it is worthwhile looking at evidence from elsewhere when building an evidence base for the UK policy.

Cost-of-living or stimulus?

One-off cash payments are an obvious way of providing cost-of-living support. The US Economic Impact Payments were used to support household incomes during the pandemic but were also used to stimulate demand within the economy. Economic Impact Payments were often referred to as stimulus payments.

Over 50 years ago, economist Milton Friedman argued there may be situations when the usual tools of monetary policy may have little effect in boosting an economy in a recession. For example, interest rates may already be at very low levels and cutting them to boost consumption may have little effect. Friedman proposed a ‘helicopter money’ idea where government could send $1,000 bills to people to encourage them to spend money.

What about the effect on inflation?

The UK Government’s one-off payments are not intended to be demand stimulus but that could be an indirect effect

The then Chancellor Rishi Sunak was asked by the Treasury  Committee on 6 June 2022 (PDF) if direct payments to individuals would be a stimulus to the economy and the impact this may have on inflation. Sunak said the package is careful and well-constructed which will minimise the risk of inflation.

The Bank of England has done some initial analysis of the support package and estimates it will boost GDP by about 0.3% and increase Consumer Price Index inflation by 0.1 percentage point in the first year.

Gelman and Stephens Jr. have said the effect of three rounds of Economic Impact Payments on inflation in the US is uncertain. Various studies conducted on how Economic Impact Payments have been used show a similar pattern of spending as seen in previous cases of one-off cash payments in US policy. People typically spent between a quarter to two-thirds of any cash payment. Lower income households were more likely to spend the payments and higher income households were more likely to save rather than pay off debts.

Further reading

About the author: Dr Rajiv Prabhakar is a parliamentary academic fellow at the House of Commons Library Business and Transport Section.

Photo by Liviu Florescu on Unsplash

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