Welfare Reform (Further Provision) (Scotland) Act 2012: annual report 2017

Executive Summary

Background

• The Welfare Reform (Further Provision) (Scotland) Act 2012 tasks the Scottish Government with producing an Annual Report on the impacts of the UK Welfare Reform Act 2012 (the Act) on the people of Scotland. This is the fourth, and final, annual statutory report (an initial report was also published in 2013), and the second to be published since the passing of the Scotland Act 2016.
• As this is the final report, the content will go beyond the statutory duty and will place the impact of provisions in the Act in the wider context of all welfare measures passed by UK governments since 2010. This includes drawing on analysis published by the independent Office for Budget Responsibility on the financial impact of all welfare reform measures across the 2010-15 and 2015-17 parliaments. Local Authority level analysis of the financial impact of welfare measures passed in the 2015-17 parliament are also presented, along with estimates of the number of households affected by these policies.
• The report also brings together evidence of the impact of welfare reform on income inequality, poverty and child poverty in the UK and the impact on equality groups, including the impacts on women and people with disabilities. A detailed summary of each measure brought in by the Act (and other significant changes) is also provided, along with evidence of the impact of each of these measures on households and other actors such as landlords and local authorities where appropriate. This is divided into three sections: low income benefits, disability and incapacity benefits and housing related benefits.

UK government Welfare Reforms

• The Office of Budget Responsibility ( OBR) identify 150 separate welfare measures that were passed by both Coalition and Conservative UK governments in the period 2010 - 16 ( see section 2.1) ^[1] . The OBR analysis shows that, compared to a counterfactual scenario where the pre-2010 welfare system remained unchanged, welfare measures passed by both UK governments should have reduced spending by £19.6 billion in 2015/16. Their analysis also suggests that all post 2010 measures are estimated to reduce spending by £47.5 billion by 2020/21 ^[2] (see figure 1e). Within this £47.5 billion figure, £13.9 billion of savings are a result of measures introduced in the 2015-17 parliament.
• A significant proportion of these savings result from measures which changed the annual uprating of benefits in line with increases in inflation (cost of living), either by freezing rates or changing the inflation index used to uprate these benefits. Around £21.8 billion (45%) of the expected savings in 2020/21 are from uprating policies passed by the Coalition government and a further £4.5 billion (9%) come from the 4 year benefit freeze which was introduced in 2015/16.
• Non-uprating policies passed in 2010-15, which include most measures introduced by the Act, saved around £8.4 billion by 2015/16 and are estimated to save £11.8 billion by 2020/21.
• A number of key policies introduced by the Act have not delivered the expected saving in welfare spending. These include:
  • The introduction of Personal Independence Payment which was expected to save £1.4 billion by 2015/16, but have only saved around £0.1 billion according to the OBR (rising to £0.6 billion by 2020/21).
  • The limit of contribution based ESA ( WRAG) to 1 year was expected to yield a significant saving (£2 billion by 2015/16), but is now only thought to have saved around £0.2 billion by 2015/16 ( see section 2.3).

Figure 1e: Reductions in Social Security spending ( GB-level) from Coalition and Conservative government policy

Source: OBR 'Welfare Trends' (2016), HMT Policy Costings since 2015

Financial Impact of Welfare Reforms in Scotland

• The financial impact of these welfare measures in Scotland has been estimated by deriving appropriate Scottish shares of savings, which are based on available published data from DWP and other sources ( see annex A).
• Welfare measures introduced by the Coalition government (including those in the Act) is expected to have reduced annual spending by £1.6 billion by 2015/16, with £1.0 billion of this reduction attributable to uprating measures. In total, welfare measures passed by both UK governments (Coalition and Conservative) is expected to reduce annual spending in Scotland by £3.9 billion by 2020/21.
• Around £0.9 billion of this reduction is from measures announced by the Conservative government in the 2015 - 17 parliament. The benefit freeze is expected to reduce spending in Scotland by £370 million and the reduction in the work allowance of Universal Credit by £250 million by 2020/21. Measures such as the lower Benefit Cap and the removal of housing benefit to 18-21 year olds should have a relatively small impact on spending. The Benefit Cap will reduce spending by an estimated £6 million by 2020/21 and the removal of housing benefit by around £3 million by 2020/21.

Figure 2e: Reductions in Social Security spending (Scotland-level) from Coalition and Conservative government policy

Source: OBR 'Welfare Trends' (2016), HMT Policy Costings since 2015.

Financial Impact of Welfare Reforms at a Local Authority Level

• The analysis in this section estimates the likely financial impacts of welfare reforms across local authority areas in Scotland. The impact of the reforms varies significantly from area to area, largely because benefit claimants are unevenly spread across Scotland. The analysis is similar in its overall approach to that in a report by Sheffield Hallam University for the Scottish Parliament's Welfare Reform Committee in 2016 ^[3] .
• The analysis shows that whilst Glasgow is estimated to experience the largest fall in total welfare spending (£120 million by 2020/21), other local authority areas could experience more significant falls in spending taking into account their smaller size. West Dunbartonshire, North Ayrshire, Dundee, Inverclyde and North Lanarkshire in particular are likely to experience the biggest falls in welfare spending by 2020/21 relative to their working-population size.
• Local Authority areas which are estimated to be less affected by welfare reforms, when adjusted for working-age population size, include East Dunbartonshire, Shetland Islands, Edinburgh, Aberdeenshire and Aberdeen. However, some policies will still impact these areas disproportionately. For example, the impact of the Benefit Cap in 2020/21 will reduce spending in Edinburgh by £1.2 million ^[4] , around 20% of the total financial impact (£6 million) of Benefit Cap in Scotland.

Impacts of Welfare Reforms on Equality Groups

• There have been a range of impacts on equality groups as a result of the Act and subsequent welfare reforms. Many have left these groups worse off and/or have negatively impacted on their wellbeing.
• There is some evidence to suggest that women are disproportionately impacted by the UK Government welfare reforms. The fact that lone parents - who are mostly women - are more reliant on many low income benefits is a big factor in this. However, the extent of impact on women is difficult to assess because most benefits are paid for the household as a whole. It should also be noted that men are marginally more likely to be sanctioned.
• There have been large-scale reforms to disability and incapacity benefits which have affected disabled people. The ESA assessment process has received criticism from claimants and advocacy organisations, whilst further changes to entitlement have reduced incomes for disabled people in the Work-Related Activity Group.
• Reassessments from DLA to PIP have resulted in a number of people receiving no award or a reduced award, whilst the introduction of a stricter test has meant that some claimants have lost their Motability entitlement. It should be noted, however, that 57% of those reassessed from DLA saw no change to their award, or had their award increased.
• Other equalities groups have also been affected by reforms. Young people, for example, are marginally more likely to be sanctioned, and have been affected by some policies directly, e.g. a removal of default entitlement to housing element of Universal Credit.

Impact of Welfare Reform on Income Inequality and Poverty

• In March 2017, The Institute of Fiscal Studies ( IFS) published the results of an analysis ^[5] which quantified the expected impact of UK welfare changes (and personal tax changes) on income inequality in the UK and poverty rates in the UK. Scotland level analysis is not available at this time.
• Those on lower incomes are more likely to receive at least some of their income from benefits, whilst for higher income households, earnings make up the larger share of their income.
• IFS predicted change in real household income between 2016-17 and 2020/21 show that the highest income households are expected to benefit the most over this time period, in contrast to projected falls for the lowest income households, especially when measured after housing costs have been deducted.
• As a result of the focus of cuts on households with children the IFS expects the number of children in absolute poverty to increase. In their May 2017 briefing note, the IFS have updated their projections to show that absolute child poverty AHC will increase from 27.1% in 2015/16 to 31.6% in 2020/21, which is a return to levels not seen since the early 2000s.
• It is important to note that poverty rates can be influenced by a number of factors, and IFS projections factor in both changes in income and changes in composition of households, which in itself can be a driver of poverty.

Scottish Government Mitigation

• In 2017/18, the Scottish Government will spend around £454 million on measures that either directly mitigate the changes introduced by the Act or are part of wider measures tackling poverty in Scotland.
• Mitigation spending includes spending on currently devolved benefits - Discretionary Housing Payments and Scottish Welfare Fund. Through Discretionary Housing Payments, the Scottish Government have fully mitigated the bedroom tax ^[6] . In addition to these benefits, The Scottish Government and Scottish local authorities continued the Council Tax Reduction scheme in 2016-17. The child allowance in the Council Tax Reduction Scheme was increased by 25% from 1 April 2017, benefitting up to 77,000 households by an average of £173 per year and helping nearly 140,000 children.
• The UK government laid regulations on 3rd March to change entitlement for housing costs within Universal Credit ( UC) for people aged 18-21 years which come into effect on 1 April 2017. In the meantime the Scottish Government has agreed with CoSLA that the Scottish Welfare Fund ( SWF) will be extended, on an interim basis, to help 18-21 year olds adversely affected by the UK government's changes.

Impact of Specific Welfare Policies

Sections 8 -10 of this report provide a detailed summary of the background, latest developments and impacts of each welfare measure related to the Act and other significant welfare measures. Key points to note are:

• Universal Credit ( section 8.1): The gradual rollout of UC continues, with less than 8% of the expected future caseload in Scotland currently claiming UC. Feedback so far from areas where UC Full Service has rolled out indicates a significant rise in rent arrears. There is also evidence at a GB level that referrals to foodbanks are rising in areas where UC full-service is being rolled out, linked in part to the 6 week wait for the first UC payment.
• Changes to Tax Credits - 2 child limit and removal of the family element ( section 8.2): These changes were announced in 2015 and are separate from the Act. IFS analysis suggests that, due to the 2 child limit, households with 3 children will be £2,500 worse off per year and families with 4 children of more will be £7,000 per year worse off.
• Conditionality and Sanctions ( Section 8.3): The Act introduced a new sanctions regime for a number of benefits. The number of referrals to sanctions under Jobseeker's Allowance has fallen since the introduction of Universal Credit. However, new data shows that over 10,000 people on UC in Scotland were sanctioned in 2016, with younger people being particularly vulnerable to sanctions.
• Benefit Cap ( section 8.4): The Benefit Cap was originally introduced by the Act, with a lower cap introduced in November 2016. To date over 7,300 households in Scotland have been affected by the Benefit Cap at some point since its introduction in April 2015. In February 2017 (latest data) 3,640 households were affected by the new cap. Before the new lower cap was introduced, there were around 800 households being capped per month in Scotland.
• Personal Independence Payment ( section 9.1): introduced by the Act, the process of replacing Disability Living Allowance ( DLA) for people of working age and replacing it with PIP started in April 2013. The change in criteria used to assess people's needs under PIP and emphasis on the most severely disabled has meant people losing out in some areas and gaining in others. The latest costings from the OBR suggest that the introduction of PIP saved £0.1 billion by 2015/16, although it was initially expected to reduce spending by almost £1.4 billion by 2015/16.
• Bedroom Tax ( section 10.1): The Act introduced a percentage reduction in Housing Benefit for working-age households judged to be under-occupying their property in the social rented sector. The bedroom tax affected around 71,000 households in Scotland, although Discretionary Housing Payments are available to fully mitigate those affected. DWP's own review of the bedroom tax suggested that no more than 8% of those affected had downsized.
• Local Housing Allowance ( section 10.2 and 10.5): The Local Housing Allowance ( LHA) sets the maximum Housing Benefit that can be paid in each 'Broad Rental Market Area' for five property types. The Act introduced CPI uprating to LHA rates, but this was later superseded by a 1% uprating policy introduced at the Autumn Statement 2012. Survey evidence from DWP on the impact of LHA changes showed that 46% of respondents had spent less on household essentials, 38% had spent less on non-essentials and 31% said they had borrowed money from family or friends.
• The LHA cap for social sector tenants ( section 10.3 and 10.5): LHA rates are only applied to setting maximum housing benefit in the private rented sector. Post 2015, the UK government announced that it would extend this to the social rented sector. There are two groups which will be particularly negatively impacted by this policy. Firstly, vulnerable tenants living in supported accommodation where, as a consequence of the higher level of services required, have rents that currently exceed the LHA rate. And, secondly, single adults under the age of 35 with no dependents, who under the rules will only be entitled to a Shared Accommodation Rate ( SAR), a potentially significant reduction in entitlement for some people.