Up-rating devolved Social Security assistance: multi criteria decision analysis - January 2024

Defining the Options

23. Each option for uprating devolved social security assistance includes an inflation metric and a reference period. The inflation metric is the specific measure used to calculate inflation (e.g. CPI) and the reference period is the period over which a metric is measured (e.g. the year to September 2022). A range of inflation metrics and reference periods have been combined to form a set of options.

Possible Inflation Metrics

CPI

• Consumer Price Index is a National Statistic and is a headline measure of inflation in the UK.
• It is used by the Bank of England for inflation targeting and official forecasts are available for CPI.
• This metric is included in the options appraisal.

CPIH

• Consumer Price Index including owner occupiers housing costs is a National Statistic and a headline measure of inflation in the UK.
• It is a relatively new measure based on the methodology of CPI but including housing costs.
• Official forecasts are not available for CPIH.
• This metric is included in the options appraisal.

RPI

• Retail Prices Index lost its status as a National Statistic in 2013 due to methodological flaws but has been used to uprate social security assistance in the UK in the past.
• This metric has been excluded from the options in line with National Statistician guidance that RPI is a very poor measure of general inflation^[15].

CPI estimates for lowest income households

• Estimates of inflation rates (consistent with CPI methodology) specific to UK household types are published by ONS^[16].
• Available for household characteristic, e.g. income level or presence of children.
• The estimates use spending habit information to weight the goods and services in the CPI basket to make it specific to the household type.
• ONS have classified these statistics as experimental and have cautioned against their use for anything other than research purposes^[17].
• This metric has been discontinued by ONS and so is excluded from the appraisal as it is unlikely to be available for future uprating decisions.

Household Costs Indices

• ONS have been developing Household Costs Indices since November 2017^[18] and officially launched them on 4 December 2023. The indices will be published quarterly and are intended to complement lead measures of inflation CPIH and CPI by providing insight into the inflationary experience of different household subgroups.
• This data reflects that different household groups can experience different levels of inflation and builds upon previous ONS releases of CPI and CPIH consistent inflation rate estimates for UK household groups based on characteristics such as income levels and house tenure.
• This data is not classified as national statistics but experimental and so ONS advise a degree of caution when using these statistics.
• This metric is included in the options appraisal.

A sector specific inflation rate

• ONS publish detailed information on inflation rate components of CPI. These could be used to uprate devolved social security assistance according to their purpose. For example, food inflation could be used to uprate Best Start Foods.
• However one sector specific inflation rate is unlikely to be reflective of recipients’ overall spending needs and may be difficult to identify for some devolved assistance. For example, for Scottish Child Payment it is for clients to decide what they spend payments on^[19]. Most devolved social security assistance does not prescribe what payments should be spent on.
• These rates are more prone to volatility and uprating has implications for both present and future rates and costs (e.g. future uprating is applied to those rates). For instance, ONS note that food and energy prices are particularly volatile^[20].
• Additionally, this analysis considers all devolved social security assistance as a whole. It was deemed to require a disproportionate amount of resource to undertake an options appraisal using different options for different payments.
• This metric has not been considered further because of these issues.

An inflation rate specific to Scotland

• There is experimental work being undertaken by ONS to develop CPIH consistent rates for UK regions^[21] (starting with Northern Ireland^[22]).
• This is likely to be more reflective of price changes in Scotland.
• This metric is still under development so has not been used here but officials will continue to monitor its development for future use.

Possible Reference Periods

Table 3

Reference period: September

Description:

• Use annual rate for month of September.
• Any month before September 2022 has not been considered to prevent double-counting of inflation since devolved social security assistance was uprated in 2023-24 by the September 2022 12-month CPI rate which includes changes in prices between September 2021 and 2022.

Reference period: More recent month

Description:

• Use annual rate for a more recent month, closer to the time of uprating.
• For each respective metric, the latest feasible month that outturn inflation would be available has been used, allowing enough time to implement in April. Scoring more than 1 more recent month was deemed to require a disproportionate amount of time and resource (e.g. October, November and December).
• Also, given that inflation has fallen consistently in 2023, any month after September has an equal or lower CPI rate than currently forecast for January 2024. So as per option B, would provide a negative change in real terms benefit values over the past 4 years, shown in Annex A1. This means it is unlikely October, November or December periods would score more highly than September as they would not have a higher relevance score than September but would have a lower score for delivery.
• The latest months possible are January^[23] for CPI and CPIH; and December^[24] for Household Costs Indices.

Reference period: Forecast

Description:

• Use a forecast rate from the Office for Budget Responsibility (OBR).
• The 2024 Q2 forecast from the OBR Autumn forecasts could be used for this to reflect the period when uprating is applied (e.g. April).
• This is only available for CPI.

Reference period: Forecast and re-base

Description:

• Use the forecast rate but then re-base the values in the following year based on the difference between the previous year’s uprating and the realised inflation rate, to bridge any gap between forecast and out-turn inflation.
• For example, if uprating in April 2023 used a forecast rate of 5% but the out-turn inflation rate was 10% then the rate used to uprate next year would be increased to account for this. See example below.
• Figure 5 shows a comparison between forecast and outturn CPI rates for April/Q2 (to represent April when uprating is applied). Out-turn inflation in April 2022 was much higher than forecast.

Example: Forecast and re-base for April 2024

24. All figures are illustrative.

Source: Internal analysis of OBR Economic and Fiscal Outlooks and ONS CPI Inflation

Remaining Options

25. The matrix in Table 5 shows the possible combinations of metrics and reference periods to define potential uprating options. Not all combinations are possible, those which are not are marked with an X.

Final list of options

26. The remaining options are:

Timing of Uprating

27. The current Scottish Government uprating approach is to implement uprating annually at the beginning of the financial year in April, as is set out in the Act.

28. One of the disadvantages of annual uprating is clients can experience rising prices in the economy with a delay in the corresponding uplift of their devolved social security assistance income, this is a particular issue when inflation is rising quickly in the economy. This could be addressed by uprating more frequently, for example bi-annually or quarterly, or by automatically uprating when the uprating index increases by a certain threshold^[25].

29. However there are also challenges with more frequent uprating:

a) Delivery of devolved social security assistance becomes more challenging because of having to update payment systems more often. It would also lead to higher devolved social security assistance rates and costs due to compounding effects of uprating being applied to higher rates (compared with less frequent uprating) at each round of uprating.

b) The robustness of the measure used to uprate may decrease as the frequency of uprating increases. Transitory changes in prices, such as market shocks, may have a larger impact on a measure assessed over a shorter period of time.

30. Given these significant challenges and the existing legislation which states the Scottish Government must bring forward regulations annually before April to amend the level of devolved social security assistance listed in section 86B of the Social Security (Scotland) Act 2018, the recommendation is to continue to apply uprating on an annual basis. Scottish Government officials will keep this approach under review.

31. There are other mechanisms that government can use to get support to those who need it in particular circumstances, such as the Scottish Government’s additional Carer’s Allowance Supplement Coronavirus payment made in 2020 and 2021.

Stakeholder Engagement

32. In producing and applying both the list of possible options and scoring criteria, input was received from several internal Scottish Government stakeholders, including operational staff in Social Security Scotland, and legal and policy teams within the Scottish Government. Although formal engagement with external stakeholders was not deemed necessary as part of this process, previous recommendations made by external stakeholders regarding government benefit uprating policy, including by the Scottish Commission on Social Security, were considered in producing this analysis.