Welfare reform: annual report 2018

1. Executive Summary

The Welfare Reform Act 2012 was enacted by the UK Parliament on 8 March 2012. [1] This report is sixth in a series of Scottish Government reports which examine the impacts of the Act, and the third since the Scotland Act 2016. [2]

The first chapter of this report looks at how the social security system has changed in recent years, and is expected to change in the years to come. The second chapter of the report provides a detailed update on Universal Credit ( UC) and its roll out. The report reviews new evidence on several welfare reforms in particular detail.

The Benefit Cap

Since the introduction of the policy in April 2013, almost 11,000 Scottish households have been subject to the Benefit Cap at one point. Since the cap was lowered in 2016, an average of 3,500 Scottish households have been capped each month. [3] Among families to whom the cap is applied through Housing Benefit (as opposed to UC), 89% contain children, while 64% are lone parent households. [4]

The Two Child Limit ( 2CL)

Across the UK, so far 9% of Child Tax Credits ( CTC) or UC claimants with three or more children have been affected by the limit. This share will continue to increase each year as more of the cohort of children eligible for benefits in a given year will be born after April 2017 or be part of households making new claims to UC. Across Scotland, 4,000 households in receipt of CTC or UC have added a third or subsequent child to their claim since April 2017. [5] Whilst around 5% of these 4,000 households are exempt and can therefore continue to claim for three or more children, the remaining 95% or 3,800 claimants are affected by the policy. [6] Across the UK,
around 74,000 households are affected, and of these, around 4% or 2,900 are exempt. Of these, exempt households across the UK, around 190 have received exemptions because the child
was conceived non-consensually. There is no data available on how many of these cases are
in Scotland.

Personal Independence Payment ( PIP)

As of April 2018, there were 190,000 PIP claims in payment in Scotland. There appear to be persistent problems in the PIP eligibility assessment process. In recent months, 56% of the reports of one of the assessment agencies were considered unacceptable by UK Government quality control processes. [7] Across Great Britain, claimants have made 781,000 disputes of PIP awards to the Department for Work and Pensions ( DWP), through which 18% of original decisions were overturned. [8, 9] , At the next stage of appeal, 68% of cases going to tribunal were decided in favour of claimants. [10] The High Court recently overturned DWP regulations which stated that limitations on mobility which occurred due to psychological distress would not qualify claimants to the mobility element of PIP. The DWP will conduct a review of potentially affected cases, which is estimated to cost £3.7 billion in backdated awards. The court ruling could also lead to an annual increase in expenditure of around £400 million from 2018/19 onwards. [11]

Employment and Support Allowance ( ESA)

Since 2011, an estimated 70,000 people across Great Britain who transferred onto ESA have been underpaid due to errors made by the DWP. [12] These people were not paid the disability premiums they were entitled to, and lost an average of £5,000 per person, with some losing
as much as £20,000. Initially, the DWP planned to only reimburse claimants affected after 21 October 2014 as social security legislation prevented the DWP from paying back underpayments built up before this date. That meant claimants would have lost around £100 million to £150 million of underpaid benefits. However, following widespread pressure, including legal action taken against the DWP by the Child Poverty Action Group, DWP recently reversed this decision, and agreed to repay underpayments incurred as far back as 2011. [13, 14] The DWP expect to pay out up to £500 million of underpayments by April 2019, but do not plan to pay any compensation to reflect the value of lost passported benefits, like NHS prescriptions, dentistry treatment and free school meals.

The overall change in welfare spending

Welfare reforms imposed by successive UK governments since 2010 will have resulted in an overall £3.7 billion reduction in welfare spending in Scotland by 2020/21. We estimate that by 2020/21 the post-2015 Conservative Government welfare reforms with the largest financial impact on Scotland will be the Benefit Freeze (£367 million), the reduction of UC Work Allowances (£236 million) and the introduction of the 2CL (£92 million). Since 2010, the share of economic output as measured by the Gross Domestic Product ( GDP) allocated to welfare spending has fallen by over 2% in Great Britain. [15]

The impact of tax and welfare reforms on Child Poverty

UK Government reductions in the generosity of social security are set to make it more difficult for the Scottish Government to meet the ambitious targets to reduce child poverty passed in the 2017 Child Poverty (Scotland) Act. [16] The Tackling Child Poverty Delivery Plan identifies a number of key priority groups who are at most risk of poverty. [17] These groups include lone parents, families with three or more children, families with a disabled adult or child, families with a child under one and young mothers. Various welfare reforms introduced in the July 2015 budget such as the removal of the ‘family element’ for CTC and UC and the 2CL have explicitly focused on reducing benefit generosity towards families with children, including those in priority groups. The reduced generosity of the social security system is a key driver of increased poverty rates for lone parent families and families with three or more children. [18]

By 2021/22 the share of children living in relative poverty after housing costs is estimated to increase by 8% in Scotland as a result of tax and welfare reforms implemented by UK Government since 2010. [19]

Scottish Government welfare reform mitigation

In 2018/19, it is estimated that over £125 million will be spent by the Scottish Government on policies to mitigate the impacts of welfare reform and support people on low incomes. These policies include full mitigation of the Bedroom Tax, Crisis Grants delivered through the Scottish Welfare Fund, and advice services for people affected by welfare reform.

Council Tax Reduction scheme

As part of the wider measures to tackle poverty, £351 million has also been allocated to fund the Council Tax Reduction ( CTR) scheme, which reduces Council Tax liabilities for people with lower incomes.

Universal Credit ( UC)

UC roll out continues across Great Britain, however, further delays have been announced which mean that the roll out will now not be completed until March 2023. [20] As of May 2018, there were around 90,000 UC claimants in Scotland, who were predominately young and out of work. [21] Thus far, only a minority of claimants with more complex claims, such as families with children and people with disabilities, have been affected by the transition to UC. More of these households will come onto UC through managed migration which is scheduled to begin in July 2019.

Transitional Protection ( TP)

Although households who are part of the managed migration will be entitled to TP, over time some households will lose it due to a change of circumstances, while for others inflation will gradually erode their TP entitlement until eventually their benefit income is the same as for new claimants of UC.

There are a range of estimates of what proportion of the people who will move onto UC will do so through managed migration, and therefore be entitled to TP. The Office for Budget Responsibility ( OBR) estimated that 1.9 million GB households will be migrated. [22] The most recent estimate comes from an explanatory memorandum to the Social Security Advisory Committee which estimated that approximately 2.09 million households, containing around 2.87 million claimants, will be migrated from legacy benefits to UC. [23]

Based on their 1.9 million household estimate the OBR estimated that implementing TP across Great Britain will cost the UK government £0.3 billion in 2020-21, peaking at £1.3 billion in 2022-23, compared to a scenario in which claimants were moved onto UC without protection. Afterwards it will slowly decline as claimants gradually lose TP due to UC entitlements increasing beyond legacy benefit entitlement, or changes of circumstances. [24]

UC waiting times

UC claimants must wait five weeks for their first payment, which is relatively long compared to the legacy system and problematic for claimants already experiencing poverty. For example, Child Benefit and Tax Credit claims were processed within 16 working days on average in 2016/17 whilst Housing Benefit claims were processed within 22 calendar days on average in 2017/18. [25, 26] The DWP’s March 2018 estimate showed that following the UC waiting period, payment of full benefit entitlement on time failed for 21% of claimants with 13% not receiving any payment. [27] When claimants do not receive their payment on time, the average wait is a further four weeks, totaling nine weeks since their initial claim. The DWP do not expect payment timeliness to improve significantly above 80% in 2018. [28]

Generosity

UC is less generous than legacy benefits. The OBR and Resolution Foundation estimate that across Great Britain and by full roll out, UC would be less generous by £2.4 billion per year in 2022/23 and £2.7 billion per year in 2021/22 if transitional protection was not provided. [29, 30]

Self-employment rules

Self-employed people are subject to an additional set of rules which do not apply to employed claimants. UC work coaches have the discretion to decide whether the claimant’s business should be considered as ‘gainful self-employment’. [31] Once claimants have been considered gainfully self-employed for over 12 months, they are treated as having gross earnings equivalent to 35 hours per week at the National Living Wage even if their earnings are lower than this level. This policy is known as the Minimum Income Floor ( MIF). The MIF policy means that claimants with fluctuating monthly incomes (as can be the case for self-employed people) could receive a lower UC award than claimants who earn the same income in a more stable pattern. Effectively, where a self-employed claimant’s profits fall below the minimum wage in a month, the MIF reduces the ability for the benefit system to compensate for low earned income.

Surplus Earnings ( SE)

SE reduces future benefit entitlement when claimants temporarily earn too much. When claimants earn too much to receive UC in a given month, SE acts as a record of how much income claimants made over and above the amount it took to reduce their monthly UC award to zero. SE then uses this historical excess income to reduce the claimant’s future UC entitlement. This policy can affect both employed claimants, for example when they receive a bonus, and self-employed claimants, when they make more earnings in a given month. SE’s complexity has led the UK Government’s Social Security Advisory Committee, among other commentators, to express their concern that claimants will not fully understand it. [32] SE can leave claimants with a confusing choice over whether to submit claims to UC each month even if they know they won’t be entitled to payment.

Conditionality

UC claimants are more than six times as likely to be sanctioned than claimants of any of the legacy benefits UC replaces. [33] The latest evidence suggests that the UC conditionality and sanctions regime can lead to deterioration in mental health, food security and even cause destitution. [34] Those sanctioned are much more likely to be young unemployed people who are less likely to have the financial resilience to withstand reductions in their benefit income.

Conclusion

Since 2010, the UK Government has enacted a range of welfare reforms that have significantly reduced the generosity of the UK welfare system. We estimate that the welfare reform policies of successive UK governments since 2010 mean that welfare spending in Scotland in 2020/21 will be £3.7 billion lower than had they not been introduced. Within its limited powers, the Scottish Government has taken action to reduce the impact of welfare reforms, however the substantial welfare cuts will continue to have an effect and make Scotland’s child poverty targets more challenging.