Paying for Powers

The devolution of various welfare powers to Scotland has led to speculation as to what a Scottish benefits system might look like. However, analysis from David Bell suggests that Holyrood may struggle to meet the bill for existing benefits in future years, let alone new ones. 

The Scottish Parliament will gain control over range of welfare powers once the Scotland Bill 2015 is passed. These mainly cover disability-related benefits such as Disability Living Allowance, Carer’s Allowance and Attendance Allowance but also include the Winter Fuel Payment and Discretionary Housing Grants. The main client group for these benefits will be older people, partly because they are more likely to be disabled and partly because some grants, such as the Winter Fuel Payment, are specifically targeted at older people.
 
In 2013-14 £2.5 billion was spent in Scotland on the benefits to be transferred to Scotland. It will take some time to transfer the administrative functions for these benefits to Scotland. When this occurs, under the principle of “no detriment”, the Scottish Government’s budget will increase by £2.5 billion and the DWP’s budget will drop by £2.5 billion. The Scottish Government will be given extra funds to meet the payments to those that are currently eligible for the transferred benefits.
 
But what will happen in subsequent years? Will the transfer remain fixed at £2.5 billion? Will it increase? Will it decrease? These questions have hardly been discussed. Instead, attention has focused on how the Scottish welfare system might be made “fairer”, or perhaps more generous, than in the rest of the UK. Yet the size of the transfer will limit the Scottish government’s ability to radically redesign Scotland’s benefit system. The resources that can be allocated to benefits is influenced both by the availability of tax revenues and by UK Government decisions as to how to allocate revenues between different spending priorities.
 
There are a variety of ways of determining the budget transfer to Scotland to cover the new welfare powers after the initial year. It could be adjusted for inflation, for population change, for changes in the incidence of disability etc. These adjustments will determine how the risks to the budget are to be shared between Scotland and rUK. For example, if there is no population adjustment, Scotland’s more rapid ageing will mean that the demand for disability-related benefits will increase more rapidly than will the budget transfer from the UK government. Thus, the Scottish Government may have to seek transfers from elsewhere in its budget to cover its disability benefits bill.
 
The Office of Budget Responsibility (OBR) has provided forecasts of the costs of individual benefits up to 2019-24 the UK as a whole. If we assume that the two governments agree on an indexation rule in which the Scottish Government continues to receive its 2013-14 share of spending on the benefits to be transferred to Scotland, then OBR forecasts imply that the budget transferred to Scotland to meet its new welfare commitments will only increase from £2437 million to £2451 million between 2013-14 and 2019-20. This indexation rule (constant shares) would not take account of any increase in demand caused by Scotland’s relative ageing. However, Scotland’s share of UK spending on these benefits has actually been in steady decline over the last decade. This may reflect increasing take-up in other parts of the UK. This would tend to offset any additional demand resulting from demographic change.
 
After the initial “no detriment” transfer, it seems unlikely that there will be a significant subsequent increase in the budget transfer to Scotland to meet its new welfare powers. This will pose a budgetary challenge to the Scottish government since it will have to find funding from other parts of its budget if it wishes to make the new Scottish welfare system more generous than that in rUK. If there is no significant transfer from elsewhere in the budget and there is a desire to enhance provision for working age benefit claimants, then it will also have to overcome the “endowment” effect, which implies that individuals value what they already have more than something that is equally valuable by any objective measure but that is not yet in their possession. The implication is that policies which involve reducing some benefits in order to enhance others are likely to incur significant political costs.
 

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post by David Bell
University of Stirling
6th September 2015
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