Smith Contributions - Devolving Welfare – the Devil will be in the Detail

Published: 25 November 2014
Author: Nicola McEwen

The Smith Commission seems set to include some welfare devolution in the Heads of Agreement to be announced on Thursday. But what does welfare devolution mean in practice? Professor Nicola McEwen argues that there are a variety of models of welfare devolution, each with different implications for the ability of the Scottish Parliament to redesign welfare and meet social and economic needs.

Will welfare devolution be a bonus or a burden for the Scottish Parliament? Four factors should be borne in mind when evaluating any welfare proposals included within Thursday’s Heads of Agreement:

 (i) Administrative responsibility or legislative power?

Some forms of devolution pass responsibility without power. The Liberal Democrats, for example, envisaged in their Smith submission that the Scottish Government would administer and deliver some programmes designed by the UK Department of Works and Pensions (DWP). The Scottish Government may then be able to influence how programmes are accessed, the culture of delivery, and perhaps tailor programmes to suit local geographic needs. The Conservatives supported a flexible approach which would allow the Scottish Government, subject to the approval of the Scottish Parliament, to finance an increase in the level of benefits which Scottish claimants can access. These measures would create some policy opportunities for the Scottish government, but the UK Government and the UK Parliament would keep control of the power to design the social security system or determine which benefits should be offered, to whom, and under what conditions, and any other aspect which defines the scope and nature of the policy.

(ii) Legislative devolution with welfare parity would constrain Scottish autonomy

If welfare devolution was accompanied by the objective of maintaining ‘parity’ in the rates of contributions and benefit payments across the UK, as in Northern Ireland, it could bind the Scottish Parliament to changes in UK welfare policy and limit the opportunities for policy change. In Northern Ireland, social security – though formally devolved – is closely aligned with the UK system, with an expectation that the Assembly will pursue parallel legislation and reform.  This form of devolution can, with intergovernmental agreement, accommodate some relatively minor differences, for example, regarding residence qualifications or designating who in the household should receive benefits. But it limits the capacity to redesign social security policy in more fundamental ways, or crucially to prevent UK-led changes. The refusal of the Northern Ireland Assembly to pass complementary legislation which would fully implement the UK Government’s welfare reforms has, to date, led the Treasury to impose fines of £114 million – its estimate of what would have been saved in Northern Ireland had welfare reforms been fully implemented.

(iii) Sharing welfare bureaucracy limits the scope for policy change.

Most benefits applied for by Scots are processed by DWP offices based in Scotland, but the bureaucratic, IT and payment systems these DWP processing centres use are very centralised. Sharing the DWP’s welfare bureaucracy may therefore make it difficult to develop different policies for Scotland.  Newer IT systems, like the one designed for Universal Credit, should be able to accommodate some regional differences, but the systems underpinning other benefits are older and have much less flexibility. A shared delivery system, e.g. for disability benefits, would therefore struggle to cope with distinctive benefits north and south of the border, and may mean that devolved benefits would have to keep step with ongoing and future changes in UK social security. On the other hand, establishing a separate Scottish welfare bureaucracy, while providing more opportunities for policy innovation, would carry significant costs over and above the costs of the benefits themselves. These costs would likely have to be carried by the Scottish Government.

(iv) Financing welfare devolution.

Social security carries a heavy price tag. Total spending on benefits and tax credits in Scotland amounted to £17.7bn in 2012/13 – around half of the current Scottish budget. A third of the total amount is spent on the state pension, which is unlikely to be devolved. Another third is allocated to personal tax credits, housing benefit, disability and incapacity benefits. Under the current arrangements, social security is financed under Annually Managed Expenditure (AME), which means that the Treasury covers the actual costs incurred in meeting social security demand. Continuing to finance devolution in this way would mean having to estimate what the costs would have been without devolution, as the Scottish Government would be expected to carry any costs associated with policy change. Even without policy divergence, the benefits cap – a cap in Annually Managed Expenditure – now imposes strict spending limits on a broad range of welfare benefits wherever and however they are delivered in the UK.

An alternative way to finance welfare devolution in Scotland would be to include it within the block grant, with changes subject to the Barnett formula. The challenge would be to determine the basis on which to calculate how to adjust the block grant upwards to reflect these new responsibilities. It would be important not to follow the precedent set by the Social Fund and Council Tax Benefit; when these were abolished and responsibility passed to the devolved administrations, the block grant was supplemented to cover the programme costs minus a 10% cut. There would also be big risks in using this method to finance benefits, like Housing Benefit or Job Seekers Allowance, whose costs depend very much upon the state of the economy and are very difficult to forecast.

So, in evaluating whatever proposals emerge from the Smith Commission, the devil will be in the detail. What form of devolution is on offer, how will Scottish welfare be delivered and financed? These issues are fundamental to the nature and scope of devolution. They determine how much power the Scottish Parliament would have to shape any new social security policies, as well as its capacity to respond to those in need.

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