Scotland, the UK and the devolution of welfare — an enduring settlement?

Today the SNP’s annual conference opens in Aberdeen amid continued flux over the balance of control between Edinburgh and London on key issues such as social security spending. Given the deep welfare cuts that will bite next April, just as the campaign for the Holyrood elections gets underway, the noise around this issue is going to get louder.

The original deal on welfare, as set out in the 1998 Scottish Act which reserved powers for Westminster, has been abandoned. Last year the Smith Commission set out a raft of new benefits to be devolved, the detail of which is still being haggled over this week through the provisions of the new Scotland Bill. The deal that emerges may well raise important questions about the future of welfare policy across the UK — some of which are yet to be aired.

Let’s start with what is already agreed: the Smith Commission devolved control over ten social security benefits, £2.5bn of spending, the biggest of which are Winter Fuel Allowance (WFA), Disability Living Allowance (DLA), Carer’s Allowance and Attendance Allowance (AA).

This immediately poses a question: will the Scottish government have the appetite to undertake any significant reform of these areas of spending or will it opt to preside over the UK’s status quo? The benefits in question overwhelmingly go to that key voting demographic: older people (Professor David Bell of Stirling University estimates that typical age of WFA claimants will be seventy; for those on DLA and AA it is sixty). They’ve evolved in a haphazard manner over time: given a blank sheet of paper few would recreate the same benefit structure today. Whether the goal is a more personalised system of social care, or a preventative approach towards fuel poverty, there are strong grounds for arguing these benefits could be re-designed and better spent.

Another crucial issue, also highlighted by Professor Bell, concerns how the transfer to cover these welfare payments will be uprated or ‘indexed’ over time. If you think this sounds like a techy, second order point, think again. The issue of who carries the fiscal risk of expenditure rising faster on these benefits in Scotland than in rUK — due to differing demographic trends or the prevalence of disability — is a major one that could come back to bite Holyrood (or indeed Westminster).

This debate about devolved benefits largely flowing to older people has now been joined by one about the future of working age welfare in a period of austerity. That’s because David Mundell, the Scottish Secretary, is proposing to use the forthcoming Scotland Bill to make clear that the Holyrood could boost welfare benefits (as long as they pay for this), generating a rash of stories about new powers to ‘top-up’ tax credits.

We don’t, however, yet know what this really means. If it turns out that, contrary to the billing, these top-up powers exclude tax credits and Universal Credit (other than the housing element which it’s already clear that Scotland will be able to vary) then they will be bereft of meaning and irrelevant to most of the forthcoming cuts. The great majority of working age welfare will fall within UC — exclude this, and there isn’t much left to ‘top up’.

If, however, some element of tax credits and Universal Credit (UC) are included — so Mundell’s top-up proposal has real content — then the implications aren’t yet clear. Will it lead to a coherent and sustainable welfare settlement?

To answer this we need to look under the bonnet of recent changes to tax credits. One element of the cuts have indeed come in the form of real terms cuts to the basic level of tax credit entitlement that a family gets. The ‘top-up’ proposal could therefore permit Scotland to opt to uprate these entitlements in line with inflation (again, so long as it picks up the tab).

But the overwhelming majority of the impending cuts to tax credits don’t take this form. They’ve focussed on how rapidly any given level of tax credit support is removed. One example is the repeated cuts to ‘work allowances’ in UC (these allowances allow claimants to keep all of their earnings up to a threshold). Another example is the decision to accelerate the rate at which tax credits are removed as earnings rise (the so-called ‘taper’ rate) — creating an 80% marginal rate of tax on the working poor from next April.

One thing these cuts have in common is that they are especially damaging to work incentives. Another common thread is that enabling the Scottish Parliament to boost the generosity of the basic elements of tax credits wouldn’t — and couldn’t — reverse these changes. To do this would require Scotland to be able to amend all their component elements (such as work allowances and the ‘taper’ rate in UC). And DWP have been very clear that this is out of bounds.

This raises a query about the options available to the Scottish government if we do move into a ‘top-up’ world: for instance, would it be possible to make tax credits more generous without impairing work incentives? Over the next few years, while the current system of tax credits is still in place, the answer should be ‘yes’: Edinburgh could decide to make working tax credit more generous relative to child tax credit, acting on working poverty while also improving the incentive to work.

But once we are in a world of UC, as may be the case by the time these new powers come into effect, the in/out of work distinction disappears. It is, after all, a single benefit. If the generosity of the basic elements of UC are increased while other elements of the benefit remain fixed, this does nothing to improve work incentives and will actually weaken them for some. Not a great choice to be presented with.

The inner workings of UC are, of course, pretty arcane; but none of this is an abstract debating point. This distinction between the components of UC that might and might not be varied in Scotland has real salience given that Nicola Sturgeon has argued that boosting the size of the ‘work allowance’ in UC would be her priority for working age welfare.

Nor is it persuasive to argue, on the grounds of administratively feasibility, that it simply wouldn’t be possible to have a different Scottish version of UC (indeed, the Smith Commission proposals are already predicated on the capacity to vary UC within Scotland, as is the case with housing).

The politics of the UK government’s latest tilt towards the devolution of welfare aren’t hard to discern. It’s in large part a response to pressure to deliver on the spirit of the ‘vow’ made by various pro-union leaders ahead of the independence referendum. Less overtly, it’s likely to be an attempt to force the SNP’s hand in advance of May’s election: either pledge to use your tax powers to make different choices on welfare (and if so create space for the Scottish Conservative’s as the ‘low tax, low welfare’ party); or refuse to do so and take some heat from your leftist activists.

But when it comes to the actual policy content things are murkier. If the top-up proposal is meaningful — and includes additional elements of Universal Credit — then it well may prove very hard to devolve in a coherent fashion only some aspects of what is supposed to be an integrated benefit. Conversely, if the ‘top up’ powers over welfare turn out to be mythical then the Scottish Secretary (and now the UK government) has a major credibility problem. More widely, the democratic case for saying that it is correct that some components of tax credit (and UC) policy can be determined in Scotland, while others must be reserved, has yet to be clearly made.

All this confirms that over a year on from the referendum and Westminster and Holyrood are both still adjusting to the post-referendum landscape. Both sides are yet to properly move outside of their comfort zone. We have little idea how much real appetite there will be within the Scottish government to undertake the hard politics of welfare reform, with the inevitable creation of losers as well as winners, as opposed to merely mitigating Westminster’s more egregious sins — like the bedroom tax. Nor is it clear that the UK government has properly thought through what it’s embarking upon and what it will mean for the future of what has hitherto been a UK wide welfare state. The post-referendum settlement is still taking shape.

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Gavin writes on politics, economics and public policy in a personal capacity. He is also Chair of the Resolution Foundation and Chair of the Living Wage Commission.

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Gavin Kelly

Gavin Kelly

Gavin is chair of the Resolution Foundation and chair of the Living Wage Commission. He writes here in a personal capacity.