5Devolution of welfare powers
83.The Scotland Bill will see approximately £2.5 billion of spending powers devolved to Scotland. The block grant will need to be increased to take account of the devolution of these spending responsibilities. As with tax powers, this adjustment must be indexed so that its value is not eroded over time. The issues involved in finding a suitable method of indexing spending powers are similar to those on the tax side and, as with the devolution of tax powers, the Smith Agreement stopped short of saying what form indexation should take. The UK Government paper that accompanied the draft clauses of the Scotland Bill did not offer a way forward other than to highlight the need for cooperation:
The UK and Scottish Governments will need to work together to determine how this funding changes in subsequent years to dynamically and mechanically reflect changes in the welfare spending that would have been undertaken by the UK Government over time.99
Indexation
84.There are several elements to the devolution of spending powers that require consideration. The first issue is the indexation of the adjustment to the block grant. Here the effects are the reverse of those we discussed for tax powers. It seems likely that the governments will want the adjustment to be indexed to what happens to equivalent revenues in rUK. If the adjustment were based on some form of needs assessment then, as well as being incredibly complicated, the Scottish Government might be insulated from spending risk. As David Phillips et al’s paper argues, “this might remove any incentive for the Scottish Government to reduce welfare spend. A definition of ‘need’ would also have to be introduced into the block grant process for the first time.”100 We also note the work of Professor Bell which shows that the main source of variation in benefit projections over the next 30 years is associated with changes in the costs of the state pension. Professor Bell states that “the implication of these projections is that the UK Government will continue to bear a significant proportion of the risks associated with population ageing in Scotland.”101 We intend to examine Scotland’s population trends and their impact on the development of public policy in a future inquiry. As part of that inquiry we will consider the extent to which Scotland, under the devolution settlement, bears the risks associated with an ageing population.
85.As with tax powers, in determining the appropriate method of indexing spending powers the governments must consider whether to account for relative population growth. As rUK’s population is growing faster than that of Scotland’s then demand in rUK for those benefits is also expected to rise more quickly than demand in Scotland. Under these circumstances, unless the population differential is taken into account, then Scotland’s share of that spending might exceed its expected need.102 In our view this would breach the second ‘no detriment’ principle of taxpayer fairness. However, if a per capita approach is taken the gains from a comparatively slower population growth are removed. A Per Capita Indexed Addition approach would also mirror the method we recommend the Governments explore for indexation on the tax side, providing welcome simplicity to this aspect of the fiscal framework.
86.Although we think indexation has obvious merits there is the question of what happens if the rUK benefit against which the adjustment is being indexed changes beyond recognition. Professor Bell has raised the hypothetical example of disability benefits being devolved to local government to build up support for social care.103 We offer no solution but note it as something both governments should reflect on.
87.We recommend that both Governments explore basing the adjustment to the block grant to take account of the devolution of spending powers on a Per Capita Indexed Addition approach. This is consistent with the mechanism we recommend the Governments explore for indexing tax powers, it also keeps the adjustment process relatively simple and mechanical. Alternative options based on an assessment of need risk adding a substantial degree of complication while blunting incentives for the Scottish Government to reduce welfare spend.
Eligibility
88.The second element of the devolution of welfare powers that the governments must address is the relationship between benefits that are being transferred and those that are not. Professor Heald and David Phillips both observed that addressing the interaction between devolved and reserved powers is the key issue to solve in relation to the devolution of spending powers. It is also one in which Professor Heald told us that he foresaw “lots of difficulties”;104 David Phillips et al have pointed to the “scope for significant (and reasonable) disagreement”.105 We discuss some of those challenges below.
89.A number of the benefits that are due to be devolved are used to determine eligibility for benefits that will remain reserved. For example, Carers Allowance (to be devolved) reduces eligibility for other out-of-work benefits such as Income Support or Universal Credit (reserved). Complications may arise if the Scottish Government decides to change the eligibility criteria for particular benefits, as Phillips et al explain:
For instance, eligibility for Personal Independence Payments (PIP)—one of the benefits which will be devolved to Scotland—are used to determine whether people are also eligible for a range of things that will not be devolved—such as disability premiums in Housing Benefits, Tax Credits and Universal Credit, and exemptions or deductions from Vehicle Excise Duty, for instance. Any change in the eligibility criteria for PIP after devolution, or a change in the nature of the benefit, could therefore have knock-on effects for UK Government spending on these benefits.106
90.Such issues are not limited to the welfare side. The inter-relationship between devolved taxes and reserved benefits adds further complexity. For example, the Universal Credit is based on an assessment of net income; if the Scottish Government were to cut taxes this would lead to an increase in people’s net income which in turn would lead to a reduction in the amount of Universal Credit that could be claimed.107 In these circumstances there would be a saving to the UK Government. Under the second ‘no detriment’ principle the UK Government might be expected to transfer that saving to the Scottish Government. While understanding mechanical interactions might be complicated, they are likely to be more straightforward to determine than secondary behavioural effects, as Professor Bell cautions:
Determining liability for consequent adverse (or beneficial) effects on the other government’s policies and funding would be extremely complex and time consuming if second and subsequent round effects were included in the calculations.108
The Chief Secretary to the Treasury told us that “the best thing to go for is something that can be assessed mechanically between the two Governments, based on an agreed set of criteria, which I hope would be laid out in the framework.”109
Complexity
91.The transfer of benefits to the Scottish Government under the Scotland Bill is likely to add to the complexity of the welfare system. This complicated division of responsibilities is not just a challenge that governments and those charged with implementing policy will have to grapple with. It will also present a challenge to the large number of people in Scotland who are partly dependent on those benefits—the majority of them older members of the population—and to those agencies and organisations who support them.110 Many of the people claiming benefits will have to interact with both Scottish and UK-administered systems of welfare. In our Work of the Committee inquiry, Parkinson’s UK told us that this could cause:
real issues for people who look like they are going to be stuck between two systems, which are possibly moving in different directions, where a number of key issues have not been resolved and the impact that that has on people who are probably claiming multiple benefits is of great concern to us.111
There is a clear risk that a system in which some benefits are devolved and some are reserved will create confusion and uncertainty for those who depend on welfare support. Both governments must work together effectively to ensure that claimants are not disadvantaged by the process of transition from one system to another or by the
interaction of those separate systems in the future, not least because those claiming multiple benefits are likely to be on the lowest incomes. The needs of those who rely on benefits should be at the heart of the process of devolving spending powers to the Scottish Government. We expect to monitor progress in this area as part of our future work.
99 UK Government, Scotland in the United Kingdom: an enduring settlement, Cm 8990, January 2015, para 2.4.10
100 David Phillips, David Eiser and Professor David Bell, Adjusting Scotland’s Block Grant for new Tax and Welfare Powers: Assessing the Options report published by the Institute for Fiscal Studies, November 2015
101 Written evidence submitted by Professor Bell to the Devolution (Further Powers) Committee inquiry into the Fiscal Framework
102 This is the reverse of the effect of differential population growth on the devolution of tax powers
103 Oral evidence taken by the Devolution (Further Powers) Committee of the Scottish Parliament on 21 January 2016
104 Q49
105 David Phillips, David Eiser and Professor David Bell, Adjusting Scotland’s Block Grant for new Tax and Welfare Powers: Assessing the Options report published by the Institute for Fiscal Studies, November 2015
106 David Phillips, David Eiser and Professor David Bell, Adjusting Scotland’s Block Grant for new Tax and Welfare Powers: Assessing the Options report published by the Institute for Fiscal Studies, November 2015
107 Q49
108 Written evidence submitted by Professor David Bell to the Devolution (Further Powers) Committee inquiry into the Fiscal Framework
109 Q188
110 Written evidence submitted by Professor David Bell to the Devolution (Further Powers) Committee inquiry into the Fiscal Framework
111 Written evidence submitted by Parkinson’s UK to the Scottish Affairs Committee inquiry into The Work of the Committee
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Prepared 9 February 2016