Economic impact of spending on social security - Technical note

Introduction

The Scottish Government is investing a record £6.3 billion in social security benefits in 2024-25 to support the most vulnerable in our society. This spending provides an important financial safety net to those most in need. In general, social security spending can also have a role in supporting the broader economy, acting as a stabiliser for the economy by providing additional income when there is a downturn. This provides short-term benefits, as supporting those who need it most can increase spending in the economy.

These policies have the potential to improve long-term economic outcomes, by reducing the worst impacts of financial distress. Policies which, for example, support people’s health and wellbeing, and so also support their continued participation in the labour market, can have a lasting positive economic impact.

This analysis is supported by the emerging evidence relating to the outcomes associated with social security spending administered by Social Security Scotland.^[1] Early analysis shows that social security spending is supporting a variety of Scottish Government outcomes related to reducing child poverty and material deprivation, improving health and wellbeing and helping to narrow inequalities. It also sets out the potential that social security payments have to improve economic outcomes. For example, investment today to mitigate the harmful effects of poverty can lead to longer term benefits to the economy in future through:

• reduced demand for, and expenditure on, public services, such as reducing health-care spending;
• improved productivity, through a healthier, more productive, workforce; and
• greater and more equal labour market participation, by reducing labour market barriers, particularly for disadvantaged groups.

This technical note explores how some of those economic channels can be modelled, with a focus on GDP. In addition to their impact on GDP, all of these channels would also lead to improved tax revenues in future, although these impacts are not considered in this note. This technical note sets out an approach to modelling both short-run impacts and potential longer-term impacts. Further detail of the modelling is in Annex A.