Welfare Benefits and the Scottish Referendum

by Ken Gibb

This morning the Institute of Fiscal Studies published an ESRC-funded study on the level and implications of Scottish welfare benefit spending, as well as the Coalition welfare reforms and the issues that would confront an independent Scotland (Phillips, 2013).  It is an excellent report and raises many important points in a studiously neutral way. Not surprisingly, both campaigns spun it their way. Interestingly, I have also been reading the new book on the economics of the referendum by Gavin McCrone. His lean text is a clearly argued and balanced assessment of the major issues, including welfare benefits. There is considerable common ground between the two authors, even if the campaigns appear to have been reading completely different IFS documents.

What are the main points? First, benefits account for about 30% of all government spend in Scotland and a little over 11% of GDP. State pensions are the biggest contributor followed by child and working tax credits and then disability living allowance/attendance allowance (i.e. in Scotland Housing Benefit is only the fourth largest benefit).

Second, benefit spend per head is higher in Scotland than Great Britain but the difference is shrinking (now only 2% more). However, IFS think that specific trends in ageing and disability are likely in time to increase once more the relative welfare spend per head in Scotland relative to GB. Expenditure on disability benefits per person is 22% higher in Scotland.

So, what explains these differences? IFS point to:

  • An age profile that has more older people and fewer children in Scotland
  • A higher level of disability benefit claims at all working ages in Scotland as well as the larger proportion of older households (who are more likely to be claiming disability-related benefits)
  • Housing benefit costs less in Scotland because the private rented sector is smaller (where HB costs are typically much higher) and the larger social sector in Scotland has lower rents than in GB.

A further consequence is that Scotland has been marginally less affected by the welfare reforms underway and anticipated out to 2015 (a 1.6% fall in household incomes compared to 1.7% in GB). This is again due to lower rents but also the income distribution in Scotland which lessened tax changes, and also because of the larger share of pensioners (who are generally less affected by the changes compared to working age households).

Finally the IFS considers SNP reform proposals should there be independence and argues that reversing the bedroom tax changes would cost about £50 million a year and while that might be ok, they argue that keeping the triple lock for basic pensions would become very expensive in the long term, as it would tend to push the basic pension up relative to average earnings.  They also point out that independence would create the opportunity to improve on some of the less well designed reforms e.g. the benefit cap, uprating local housing allowances capped at CPI and separating council tax benefit from the rest of the Universal Credit. The yes campaign made much of this in the media today but it is important to note that the IFS argue that there are better ways of making the same savings in each case – not reversing them. The IFS are also skeptical about the feasibility of having more radical reform of welfare benefits based on an enhanced contributory principle.

McCrone makes several additional points. First, it is important to recognise the broader need to reform the welfare benefits system to remove anomalies, simplify and reduce poverty traps, but he notes that this is a very difficult context within which to undertake it, one likely to worsen the position of many of the worst off in society. The underlying need for reform is often lost in the heat of the battle over the shape the cuts and reform are presently taking. McCrone notes the large number of losers even within the DWP impact assessment – which has a small net benefit overall. Like many others he is concerned second with the reforms to disability benefits and the hardship they cause to so many of their client group.

Second, he argues that even without independence there is a case for devolving certain benefits, such as: Housing Benefit (since the rest of social housing policy is devolved), maternity allowances, TV licenses for the over 75s, industrial injuries benefits, attendance allowance, widows’ benefits and carers’ allowance (a case can even be made for the new personal independent payment replacing DLA, and severe disablement allowance).

I have argued elsewhere (with Mark Stephens) that HB should not be devolved unless as part of a wider set of income-related benefits. Moreover, McCrone himself acknowledges that long term demographic trends will increase the cost of these benefits and that will have to be paid for out of higher taxes or cuts elsewhere (or economic growth). If Scotland is independent this will have to happen to a large extent (depending one presumes on the exact parameters of any post-yes vote negotiations over basic pensions), as it would with a pure form of fiscal autonomy. McCrone argues that if there is a no vote, there is a case for something akin to Purviss’ devolution-plus – increasing the taxes raised in Scotland beyond that proposed by the 2012 Act, including a share of other taxes via assigned revenues – to increase accountability and reduce the dependence on the block grant from Whitehall. If so, the increasing cost of local management of devolved benefits would be more transparent, localised and credible to the rest of the UK[1].

Welfare benefits will be one of the touchstone issues for the referendum – and it is one which the yes campaign thinks they can make effective progress with (as they will also do regarding the growing English Euro-scepticism and the prospect of a vote to leave the EU after the UK general election). What the IFS report shows, as does Gavin McCrone’s book, is that welfare reform is a thorny complex multi-faceted area, beset by issues including long term demographic patterns and connections to other areas of social policy like housing, disability and ageing. Whatever happens in the referendum, it will, as with so many other issues, remain highly problematic and no constitutional solution will remedy it of itself. Far from it. As with other economic and financial policy areas – the resourcing trade-offs between taxes, spending cuts elsewhere and economic growth will shape what is possible if, as seems likely, there will be a natural growth in welfare spending.

References

McCrone, Gavin (2013) Scottish Independence: Weighing up the Economics. Birlinn: Edinburgh.

Phillips, David (2013) Government spending on benefits and state pensions in Scotland: current patterns and future issues. IFS Briefing Note BF139.


[1] Alongside a needs assessment for relative spend for every devolved country and English planning regions to replace Barnett.

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