Welfare reform: annual report 2019

2. Welfare spending in context

Using 2017/18 expenditure data^[8] produced by the UK Government it is possible to estimate total Scottish social security expenditure. Figure 1 shows how benefit spending fitted into overall Scottish public spending in 2017/18.

Figure 1 – Scottish public spending in 2017/18

Source: 2017/18 DWP Benefit and Expenditure tables, Government Expenditure and Revenue Scotland 2017/18^[9]

Of the £73.4 billion of public spending in Scotland in 2017/18, around 26.5%, or £19.5 billion, was attributed to social security. Of this £19.5 billion, almost half, or £9.3 billion, was spent on pensions and pension-related benefits which remain reserved to the UK Government. A further £6.8 billion of reserved spend was attributed to social security for children and working-age people. 

The remaining £3.4 billion was spent on benefits which were devolved under the Scotland Act 2016 and other Scottish Government support for people with low incomes. The Scottish Government currently delivers Carer’s Allowance Supplement, Best Start Grant and Best Start Foods. Over the coming years other non-means-tested benefits, including disability and carer’s benefits, will come under Scottish Government control. In total, devolved benefits accounted for around 15% of social security and related spending, including pensions, in 2017/18.^[10] In addition to these devolved benefits, the Scottish Government spent around an additional £450 million on policies which support people in low income families, including Discretionary Housing Payments, Fairer Scotland, Council Tax Reduction and the Scottish Welfare Fund.

The 2018 Welfare Reform report estimated that social security changes introduced by the UK Government since 2010 could lead to an annual £3.7 billion reduction in welfare spending in Scotland by 2020/21. Of the more recent welfare reforms which were implemented post-2015, the largest spending reductions resulted from the working-age benefit freeze and changes to UC (including reductions to work allowances, the introduction of the two-child limit and the removal of the family element, otherwise known as the first child premium). The effects of these policies are summarised in sections 2.1–2.3, while the Scottish Government’s modelling of these policies impacts is discussed in section 4. The underlying assumptions and methodology are discussed in Annex A.

2.1 Working-age benefit freeze

Whilst near-zero inflation in September 2015 limited the impact of the benefit freeze in the first year of its implementation, the second year of the benefit freeze^[11] meant that many working‑age benefit claimants did not see their benefit entitlements rise in line with CPI^[12] in April 2017 to keep up with increasing costs of living. The value of benefits has eroded significantly over the past two years as CPI inflation exceeded the Bank of England’s 2% target throughout 2017/18, hitting 3% in September 2017^[13] and therefore reducing 2018/19 benefit entitlements further than expected. Our modelling indicates that the benefit freeze could reduce annual benefit spending in Scotland by around £300 million. The Resolution Foundation^[14] estimated that by 2019/20, the benefit freeze could have reduced welfare spending in the UK by around £4.4 billion per year, while the Joseph Rowntree Foundation estimate^[15] that by 2020, the benefit freeze will have brought 400,000 people across the UK into poverty. 

The impact of the benefit freeze is reflected in the contraction of the average income of the poorest fifth of the population in 2017/18 when ranked by equivalised^[16] household disposable income.^[17] The Office for National Statistics suggest^[18] that a reduction of 1.6% came after a continuous increase in the average income of the poorest fifth and was mainly driven by a fall in the average value of cash benefits received. The average income of the richest fifth of the population increased by 4.7% over the same time period.

2.2 Universal Credit work allowances and taper rates

The cuts to UC work allowances which began in 2016/17 have been partially mitigated by the reduction in UC taper rate which was implemented in 2017/18, and further mitigated by the increases in UC work allowances which took effect from April 2019. However, these more recent changes have not been sufficient to counteract the effect of the much larger work allowance reduction introduced in 2016/17. Our modelling estimates that the combined effect of these changes since 2016/17 could reduce annual welfare spending in Scotland by around £100 million once UC is fully rolled out. Section 3.1 provides more information on how these work allowance and taper rate changes have led to a less generous UC award for many claimants.

2.3 The family element and the two-child limit

Children born on or after 6 April 2017 will no longer entitle their parents to the family element of Tax Credits or first child premium of UC, and can be excluded from a Child Tax Credits or UC award altogether if they are the third or subsequent child in the family. Until recently, families with children born before the 6 April 2017 could also be affected when they made new UC claims, however the UK Government recently announced that all children born before that date will be exempt from the limit. 

We estimate that once UC is fully rolled out, the removal of the family element and introduction of the two-child limit could reduce annual benefit spending in Scotland by around £100 million. The two-child limit and the exemption for children born before 6 April 2017 are discussed in more detail in section 5.