State of the debate: Funding welfare policy

Published: 21 August 2014
Author:

David Phillips discusses IFS research on how welfare policy might be funded in an independence scenario, drawing our attention to potential funding challenges.

The future of the welfare state has emerged as a key issue in the Scottish independence debate. The Scottish Government has said it would offer more generous pensions, disability benefits and offer free child care to all 1 to 4 year olds in an independent Scotland. The Yes campaign argues that the welfare state is at risk in the United Kingdom and that only independence can protect it, and ensure a fairer Scotland. On the other hand, the No campaign argues that the decline in oil revenues and Scotland’s ageing population mean an independent Scotland would struggle to fund existing welfare and pension arrangements, let alone offer more generous policies. What are voters to make of these competing claims?

The Scottish Government are right that independence would give it substantially more power over welfare policy than it currently has. Benefits and pensions are currently a reserved matter controlled by the UK Government in Westminster. If Scotland votes Yes, the Scottish Government could use its new powers to substantially redesign the system and/or increase the generosity of particular benefits. And, while the provision of childcare is already devolved, the Scottish Government is correct in saying that independence would mean Scotland would keep more of the additional tax revenue if more parents to go back to work (or work longer hours) as a result of expanded free childcare provisions. Such revenues could partly pay for the additional free childcare (although, contrary to what has sometimes been suggested by the Scottish Government, the boost to revenues would unlikely be anywhere near enough to fully pay for these policies).

Such policies are clearly attractive to many voters: free childcare would benefit many parents, and who would complain about receiving a more generous pension, potentially a year earlier? Social policy experts also find much to commend in the general aspirations for a “fairer Scotland” and in the specific policies proposed (see recent blog posts by Bronwen Cohen and Kirstein Rummery). But the welfare system is expensive, taking up around 30% of all government spending; increasing the generosity of the system would further push up costs. So an important question is whether such generous policies would be affordable without the need for tax rises or spending cuts elsewhere. Here the Scottish Government and Yes campaign are on shakier ground.

Researchers at the IFS have looked at how the Scottish Government’s finances might evolve after independence both in the shorter term (until 2018–19) and in the longer term (as far as 2062–63). Based on the Office for Budget Responsibility’s (OBR’s) forecasts for oil revenues, and Scotland taking on a population-based share of the UK’s national debt, our forecasts suggest an independent Scotland would start life with a budget deficit of 5.5% of GDP in 2016–17. Even if the government of an independent Scotland continued with the austerity measures planned by the UK government, the deficit would still be 2.9% of GDP in 2018–19 (by when the UK as a whole is forecast to have a small budget surplus). Given high levels of debt, and longer-term challenges from continuing declines in oil revenues and an ageing population, borrowing this amount of money for long would be unwise, and the government of an independent Scotland would need to look for additional tax rises or spending cuts on top of those planned by the UK government.

The Scottish Government is more optimistic about oil revenues: if they do rebound as it hopes, pressure on the Scottish Government budget would certainly be less in the short term. That might make funding more generous welfare policies easier in the early years of independence. But in the long-term an independent Scotland is still likely to face a tougher challenge than the UK as a whole to achieve fiscal sustainability – even under the more optimistic types of assumptions favoured by the Yes campaign (such as higher oil revenues, higher inward migration and Scotland inheriting a less-than-population share of the UK’s debt). This would mean the government of an independent Scotland would need to raise taxes or cut spending in the coming decades. The longer such difficult decisions were delayed, the bigger the tax rises or spending cuts would have to be.

So, while the Scottish Government may have a real desire to offer more generous pensions, welfare, and childcare arrangements, doing so would not be without its challenges. Without a step-change in economic performance, taxes would probably have to rise, or spending in other areas be cut to fund existing levels of welfare provision, let alone increase the generosity of benefits. That does not mean a more generous welfare state is not possible in an independent Scotland. The question is whether Scots would be willing to pay the higher taxes needed, or willing to sacrifice government spending in other areas to fund such policies. That is, as yet unknown. And how “fair” an independent Scotland would be would depend on what these tax rises or spending cuts were.

The Scottish Government hopes to avoid this tricky question by banking on faster economic growth in an independent Scotland. Such growth would generate additional revenues to fund a more generous welfare state without putting up tax rates. But it is much easier to say things would be better if the economy grows more quickly than it is to develop and implement policies that would actually deliver that extra growth. The Scottish Government has suggested a few policies – such as cuts to corporation tax and expanding free childcare – but the immediate effect would be to cost the government money. This could leave less money rather than more available for welfare.

 

Does territorial autonomy redirect violence from the national to the subnational level?

Local Turnout in Europe: The Roots of Municipal Politics

Giorgia Meloni’s triumphal march stops in Sardinia: a regional election with national implications

The same, but different? A return to power-sharing in Northern Ireland

Territorial inequalities under devolution: do Scottish and Welsh residents perceive a gap between capital cities and their local communities?

Constitutionally Sound podcast