Last month I posted a blog analysing the report of the Expert Working Group on Welfare appointed by the Scottish Government to review its work on the cost of benefit payments in an independent Scotland, and the delivery of benefit payments and to offer views on immediate priorities for change. At the end of July, the Institute of Fiscal Studies produced a briefing note, Government spending on benefits and state pensions in Scotland: current patterns and future issues (IFS Briefing Note BN 139). The IFS briefing analyses current patterns of benefit spending, review some possibilities for policy change and comments on the long-term demographic and fiscal outlook. It brings together some highly relevant information and analysis and this blog provides a brief summary of it.
Current spending patterns
The IFS compared spending on benefits in Scotland both to spending in Great Britain (or the UK) as a whole and to spending in the different regions of Great Britain. The key figures are:
- total benefit spending (broadly defined to include state pensions and tax credits) in Scotland was £17.2 billion in 2011-12 which is around 30% of all government spending in Scotland and around 11.4% of GDP (including a geographical share of North Sea oil and gas income).
- Benefit spending per person in Scotland was £3,238 in 2011-12, 2% higher than the average for Great Britain as a whole;
- The gap between spending per person in Scotland and the rest of Great Britain has been shrinking for several years (down from 7% in 2005-06).
- The most costly benefits are the state pension by far the largest at £6.3 billion, followed by tax credits (£2.2 billion), disability allowance/attendance allowance (£1.9 billion) and housing benefit (1.7 billion).
- Spending per head was higher than for Great Britain as a whole on old age benefits including (4%), but lower on tax credits (12%).and housing benefit (9%). The most striking difference was in spending on disability benefits which was 22% higher.
Comparisons amongst the regions of Great Britain show a more nuanced picture. Although benefit spending per person in Scotland is 2% higher than the Great Britain average, it is lower than in Wales and in three English regions (the West Midlands, the North West and the North East which are respectively 4%, 9% and 12% above the GB average).
Reasons for differences
Given that benefits, pensions and tax credits are reserved matters, the explanations for differences in spending levels between Scotland and Great Britain as a whole cannot be found in policy differences. To some extent they are due to demographic differences; a slightly higher proportion of the Scottish population is of pensionable age and a slightly lower proportion are children. This does not explain why spending on disability benefits is so much higher. However, the proportion of Scottish residents claiming to have a disability is higher across all age groups. The fact that spending per person on housing benefit is lower reflects the fact that rents are on average lower in Scotland (both in the private and social rented sectors) and that a higher proportion of those tenants are in the social rented sector in which rents tend to be lower.
The impact of tax and benefit reforms
The IFS also analysed the impact of the major tax and benefit reforms (whether already implemented or planned) for the period from January 2010 to April 2015. Those reforms will result in a substantial net reduction in household income averaging £560 (1.7%) across the UK as a whole. The changes are broadly regressive as poorer households suffer proportionately greater loss in income than those in the middle and upper middle ranges of the income distribution. However, average household income losses are a little lower than those in the rest of the UK. The averages, of course, conceal variation amongst different types of households (e.g. age, number of children, employer/unemployed, disabled/not disabled).
Possible changes in policy in an independent Scotland
Independence would enable Scotland to pursue different policies on benefits, pensions and taxation. The IFS reviewed a number of possible changes that might be made from existing UK/GB policies short of radical restructuring of the benefit system. The existing policies that might be reconsidered were:
- the ‘triple lock’ on pensions;
- the so-called ‘bedroom tax’;
- the overall benefit cap;
- capping increases in local housing allowances;
- separating support for council tax payments from universal credit;
- withdrawal of child benefit for high earners; and
- the treatment of capital in means-tested benefits.
The ‘triple lock’ on pensions
The Scottish Government has committed itself to retaining the current ‘triple lock’ on the rate of the state pension under which the state pension increases annually by whichever is the higher of the increase in average earnings, inflation as measured by CPI and 2.5% after the introduction of the new flat-rate pension in 2016. The IFS notes that this is potentially a very expensive policy in the long-term and one that would impact more heavily on Scotland given its higher proportion of elderly people and more rapidly ageing population. The IFS also considers that the triple lock policy is not a particularly rational policy because pensions increase by more in the long-term if wages and inflation are volatile than if they are stable even if the long-term increases in wages and inflation are the same. So, even if the aim is to ensure that pensions increase at a higher rate than wages, there are better targeted ways of doing it. Accordingly, they recommend that the Scottish Government carefully consider this policy.
The ‘bedroom tax’
The other commitment made by the Scottish Government is to remove the ‘bedroom tax’, strictly speaking a reduction in the amount of housing benefit paid to tenants deemed to have more rooms than they need. This would be far less expensive to implement than the pension triple lock and would assist a group of people whose income is being reduced by current policies. However, it would reintroduce a difference between the treatment of tenants in the public and private sector which might be thought anomalous.
The overall benefit cap
This recently introduced policy restricts the maximum amount a household can earn to £350 per week for childless single persons or £500 for families. Although this is likely to affect only about 2,500 families in Scotland, they face substantial decreases in their income. The UK coalition government has argued that it is unfair for families on benefit to receive more than the average family in work receives in net earnings, and that the reform will both encourage people to search for cheaper accommodation and to take up paid work. There is considerable scepticism about whether these effects will be realised and concerns about the fairness of the policy as it breaks the link between the needs of claimants which vary according to their circumstances and the payment received.
Capping increases in local housing allowances (LHA)
Increases in the amount of rent for which private sector claimants can claim housing benefit are capped at inflation as measured by CPI. However, rents may rise by more than inflation and rents often increase at different rates in different areas. Rents are expected to rise by more than inflation over the next few years so the LHAs will in general fall behind actual rents and more so in some areas than in others. There are obvious concerns about the fairness and rationality of this policy.
Council tax, child benefit and treatment of capital
The IFS also questions the wisdom of existing policies on support for council tax payments, withdrawal of child benefit for high earners and the treatment of capital in means-tested benefits. Space does not permit a full analysis.
Much of the interest of the IFS briefing lies in the data concerning the current system. It emphasises that – at least in terms of economic analysis indicators – the major divide in the UK as regards benefits is not the border between Scotland and England but that between London and the South-East and the rest of the UK. The differences between different regions of England are far more pronounced than those between Scotland and the rest of Great Britain. Scotland’s benefit spending per person is only 2% more than the GB average. Spending in the North-East of England is 12% higher; in London it is 3% lower; and in the South East (outside London) 11% lower. However, the scale of difference in spending on disability benefits should also give pause for thought.
The IFS concludes that there is ample room for changes in policy in an independent Scotland even within something broadly resembling the existing benefit framework. However, independence would also create an opportunity for a more radical redesign of the benefit system to reflect different priorities. Whichever approach is taken policy-makers will have to take account of certain constraints. One key constraint is that Scotland’s higher proportion of older persons and more rapidly aging population will – all other things being equal – tend to result in benefit spending growing faster than in Great Britain as a whole. Major redesign of welfare benefit systems often creates large numbers of losers as well as winners and this prospect may prevent reforms being made. The only sure way to reduce the number of losers is to increase the cost of the reforms. In addition, policy-makers have to take into account and decide the relative weight to be given to a wide range of considerations including the effect of benefits on work incentives and the use of benefits to redistribute income. As the IFS point out, there will always be difficult trade-offs amongst the desire to redistribute wealth, the cost of the system and work incentives. As I suggested in my previous blog, this ought to be a key issue in the referendum campaign and all parties ought to be pressed to spell out their plans for the future of welfare benefits.
The Scottish Government has ‘refreshed’ its Working Group with the appointment of five new members and it is to “look at options for creating a new system that best suits our needs and circumstances.”
Pending the publication of reports by the Working Group, the IFS briefing is essential reading for anyone wishing to inform themselves about the implications of independence for welfare benefit policy.
Tom Mullen is Professor of Law at the University of Glasgow
 Northern Ireland has a separate benefits system from the rest of the UK, although it has always shadowed UK policy.