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

3. Financial impacts of welfare measures

3.1 Expected and actual savings from selected Welfare Reform Act measures

In April 2014 (following the UK Budget 2014), the Scottish Government published an analysis of UK Government cuts to welfare spending in Scotland ^[27] . This analysis was based on the most up-to-date HM Treasury policy costings at the time.

Table 3: Actual and forecast spending in 2015/16 ( GB level) compared to the OBR baseline (£ millions)

	Policy measures ( OBR categorisation)	Apr-2014 estimate	Oct-2016 estimate
Uprating measures	CPI indexation (replace RPI and Rossi) for most benefits and tax credits	10,600	5,200
	Child benefit frozen for three years from 2011/12	1,300	1,400
	Pensions triple-lock	-1,600	600
	Three-year freeze in the basic rate and 30-hour element of working tax credits	1,000	1,000
	1% cap on uprating of most working-age benefits from 2013/14	2,700	1,600
	1 year uprating freeze on Child Benefit and Local Housing Allowance rates	300	400
	All other smaller uprating measures	1,100	1,100
Non-uprating measures	Reforms to disability benefits - introduction of Personal Independence Payments	1,400	100
	Introduction of Universal Credit	100	-
	1 year limit to contribution based Employment and Support Allowance	1,500	200
	High income child benefit charge	1,800	1,400
	Tax Credit reforms ( including removal of the family element)	1,800	1,600
	Further Tax Credit measures (childcare costs, hours threshold etc)	1,200	1,200
	Cut in Local Housing Allowance to the 30 th percentile of local private sector rents	500	500
	Matching the basic state pension increase in 2011/12 in the PC min income guarantee	-700	-600
	Bedroom tax	500	500
	Tax Credit (admin and collection)	500	500
	All other smaller non-uprating measures	2,800	2,100
Total reduction annual in spending		26,900 [28]	19,600*

*Individual entries do not sum to total, likely due to rounding.

This analysis indicated that the total reduction in spending, as a result of UK welfare measures, was around £26.9 billion in 2015/16 (see table 3). Scotland's share of this reduction was estimated at just under £2.5 billion in 2015/16 alone, with a cumulative impact of welfare reforms over a six year period (2010/11 to 2015/16) of around £6 billion.

Since this analysis was published, revised policy costings for all UK government welfare measures have become available. Taking these into account, in October 2016 the OBR concluded that UK government policy reduced social security spending by £19.6 billion in 2015/16. This figure is around £7 billion lower than the Scottish Government's 2014 estimate (£26.9 billion). Hence the Scottish estimates provided in this report ( see section 3.3) are different to what was published previously.

Figure 1: Actual and Forecast UK welfare spending compared to a 2010/11 baseline

Source: OBR Welfare Trends (2016)

It should be noted that despite UK government policy, total welfare spending has been increasing (in nominal terms) over the last parliament and is expected to increase further to 2020/21. Figure 1 places reductions in spending due to UK government policy in the context of total welfare spending at a UK level. The OBR generate a simple projection of social security spending based on the parameters of the welfare system in 2010, adding in the effects of changes in the size and age-structure of the population ^[29] .

Had the UK government not introduced any changes to welfare measures and default uprating had taken place, it is estimated that total welfare spending would have been £236 billion in 2015/16 and £278 billion in 2020/21 ^[30] . However, actual spending in 2015/16 was £217 billion and is expected to reach £231 billion in 2020/21. The difference between the two sets of figures is the estimated direct impact of welfare reforms since 2010.

Figure 2: Welfare Spending Trends as Nominal cost, Real cost and as share of GDP

Source: OBR 'Welfare Trends' (2016)

In terms of welfare spending as a share of GDP, if welfare spending follows this projected path to 2020/21, the share will have fallen by from 12.1% of GDP in 2010/11 to 10.1% in 2020/21, a 2.1% fall over 10 years (see figure 2). This would take welfare spending back to roughly its pre-crisis share of GDP. However, as pointed out by the OBR, whilst welfare spending in support of pensioners would also have fallen to around its pre-crisis level, spending in support of children and working-age people would be at its lowest share of GDP since 1990-91. In real terms (2010-11 prices), welfare spending will have remained relatively flat, having fallen by around £1 billion between 2010/11 and 2020/21.

3.2 Financial impact of welfare policies at a GB level

The financial impact of all UK government welfare reforms since 2010 is set out in analysis by the Office for Budget Responsibility ( OBR). This concludes that by 2015/16 total welfare spending was reduced by around £19.6 billion as a result of measures introduced by the Coalition government. Most of this reduction (£11.2 billion) is a result of changes to the uprating of benefits. Uprating covers a number of separate policy measures ( see section 2.2), most of which were not set out in to the Act ^[31] . Around £8.4 billion of reductions came from non-uprating measures.

The impact of Coalition government measures will continue to have an effect on welfare spending beyond 2015/16 (see figure 3). By 2020/21, coalition measures will have reduced spending by £33.6 billion. Again, the majority of these reductions will be a result of changes to the uprating of benefits (£21.8 bn). The size of these reductions due to uprating should be understood within the context of the most appropriate measure of the cost of living for people receiving benefits ^[32] .

Figure 3: Reductions in Social Security spending ( GB-level) from Coalition and Conservative government policy

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

Measures introduced by the 2015-17 Conservative government (see table 4) add a further £13.9 billion reduction in welfare spending by 2020/21. The 4 year benefit freeze (an uprating measure) which came into place in 2016-17 is expected to reduce spending by £4.5 million by 2020/21 ^[33] , the reduction of the work allowance in Universal Credit will save around £3.2 billion and Tax Credit Changes (including the limit of Child Tax Credits to two children) will reduce spending by £1.6 billion.

One of the biggest savings is expected from a policy that does not apply in Scotland - a 1% reduction in rents for social housing in England each year, from 2016/17 to 2019/20. The reduction in the taper rate announced at the Autumn Statement 2016 will increase spending marginally by £0.6 billion by 2020/21.

Table 4: Conservative government welfare measures - impact at a UK level

All costings in £ billions	2016/17	2017/18	2018/19	2019/20	2020/21
Benefit freeze	0.00	0.81	2.36	4.37	4.48
UC WA reduction	0.12	1.23	2.23	2.85	3.19
Reduce SRS rents by 1% (England only)	0.59	1.18	2.14	3.19	3.17
TC and UC 2 child limit	0.00	0.31	0.75	1.17	1.56
Cap social rents to LHA	0.00	0.00	-0.01	0.23	0.78
TC and UC family element removal	0.11	0.23	0.41	0.54	0.65
Support for Mortgage interest loan	-0.03	-0.04	0.27	0.25	0.25
ESA WRAG reduction	0.00	0.03	0.11	0.17	0.21
Pension credit saving credit freeze	0.14	0.14	0.14	0.14	0.13
Benefit Cap	0.07	0.16	0.11	0.10	0.11
TC income rise disregard	0.09	0.15	0.16	0.10	0.06
HB 18-21 entitlement end	0.00	0.01	0.03	0.04	0.04
UC conditionality	0.00	-0.01	0.00	0.04	0.04
Pay to stay	0.00	0.02	-0.19	-0.17	-0.21
UC taper	0.00	-0.04	-0.18	-0.40	-0.57
Total	1.09	4.18	8.33	12.62	13.89

3.3 Financial impact of welfare measures at a Scotland level

The financial impact of welfare reform in Scotland has been calculated based on an estimated Scottish share of spending ^[34] on a benefit/tax credit associated with each welfare measure introduced at a GB level. Policies which do not apply to Scotland are excluded from the analysis. A summary of the methodology used in this analysis can be found in Annex A.

Figure 4 shows that Coalition government welfare measures reduced spending in Scotland by around £1.6 billion in 2015/16. As in the case with GB level figures, the majority of the cuts (£1 billion) are from uprating measures which are not directly related to the Act. By 2020/21 Coalition government welfare measures will have reduced spending in Scotland by £2.9 billion in total, again with the majority of reductions coming from changes to uprating policies (£1.9 billion).

Figure 4: Reductions in Social Security spending (Scotland-level) from Coalition and Conservative government policy

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

The cuts introduced by the Conservative government will reduce welfare spending in Scotland by around £0.9 billion by 2020/21. The benefit freeze will reduce spending in Scotland by £368 million and the reduction in the work allowance of Universal Credit will reduce spending by £254 million. Measures such as the lower Benefit Cap and the removal of housing benefit to 18-21 year olds will have a relatively small impact on spending. The Benefit Cap will reduce spending by an estimated £6 million by 2020/21 ^[35] and the removal of housing benefit by around £3 million by 2020/21.

Table 5: Conservative government welfare measures - impact at a Scotland Level

All costings in £ millions	2016/17	2017/18	2018/19	2019/20	2020/21
Benefit freeze	0	66	194	359	368
UC Work Allowance reduction	10	98	177	227	254
TC and UC 2 child limit	0	19	47	73	98
Cap social rents to LHA	0	0	-1	19	68
TC and UC family element removal	8	18	31	42	50
Support for Mortgage interest loan	-2	-3	22	20	20
ESA WRAG reduction	0	4	14	21	26
Pension credit saving credit freeze	15	15	15	15	14
Benefit Cap	4	9	6	6	6
TC income rise disregard	8	13	14	8	5
HB 18-21 entitlement end	0	1	3	4	4
UC conditionality	0	0	0	3	3
2 child exemptions	0	0	-1	-2	-3
Pay to stay	0	0	0	0	0
UC (taper rate change)	0	-3	-14	-32	-45
Total	42	234	507	763	868

Some of the estimates in table 5 are subject to significantly more uncertainty than others. For example, the savings from changes to support for mortgage interest are based on a Scottish home-ownership rates compared to the UK. The 'pay to stay' policy and the 1% reduction to social sector rents do not apply in Scotland because of the devolution of responsibility for housing policy.

3.4 Number of households affected by welfare measures passed in the 2015-17 parliament

Table 6 shows the UK level estimates of the impact of each measure in terms of the number of households affected and the Scottish estimate based on an appropriate share. A note of the appropriate time period to which these figures relate to is also provided.

It is not possible to accurately assess how many households in total will be affected by all welfare measures introduced since 2015 because many households will be affected by more than one policy measure and there is not sufficient data to determine the extent of overlaps. Consideration of the timing of impacts of different measures also needs to be considered. For example, the benefit freeze will impact most working-age benefit claimants from 2016-17, whilst the full impact of UC will only be realised by 2022 at the earliest.

Table 6: Number of Households Affected by Post-2015 Policies

	UK/ GB Estimate	Scotland Estimate	Assumed Share	Time period
Benefit freeze	5,700,000	750,000	13.2%	2019/20
UC Work Allowance reduction	3,000,000	220,000	7.3%	Full rollout of UC (2022)
TC and UC 2 child limit	640,000	50,000	7.8%	By 2020/21
Cap social rents to LHA	800,000	70,000	8.8%	Long-run*
TC and UC family element removal	1,180,000	90,000	7.6%	By 2020/21
Support for Mortgage interest loan	170,000	10,000 - 20,000	8%	2018/19
ESA WRAG reduction	500,000	60,000-70,000	13%	Long-run*
Pension credit saving credit freeze	1,000,000	110,000	11%	Long-run*
Benefit Cap	66,000	4,000	6.1%	2016/17
TC income rise disregard	unknown	-	-	-
HB 18-21 entitlement end	11,000	800	7.3%	Long-run*
UC conditionality	220,000	20,000	9.1%	Full rollout of UC (2022)
UC (taper rate change)	3,000,000	220,000	7.3%	Full rollout of UC (2022)

*These policies only affect new claims (or new households with new tenancies). The number of households affected are calculated on the basis that all households currently in receipt of relevant benefit are affected ( i.e. the long-run steady-state impact when all claims have been made after the specified date). It could take a number of year to reach that steady-state for some benefits.

A full methodological summary, including the sources for all UK level estimates is provided in annex C. The numbers associated with each policy are subject to varying degrees of uncertainty. For example, there is some confidence around the number of households affected by the Benefit Cap. This is based on outturn data which shows that 66,000 households across GB were capped in February 2017 ^[36] . On the other hand statistics for Support for Mortgage interest are not published by DWP. Whilst the GB estimate is what was reported in the Impact Assessment accompanying the policy, the Scottish share is based on Scotland's home ownership rate compared to GB, not taking into account the rate of homeownership amongst benefit claimants specifically.

Figure 5 divides the welfare savings estimate in table 4 ( see section 3.2) by the number of household estimates in table 6 to give an indication of the scale of the annual financial loss to households from each post 2015 welfare measure. GB level figures are used as it removes a degree of uncertainty around the Scottish level impacts. The figures are illustrative of the loss expected at a household level, this does not take into account on-flows and off-flows to benefits and the analysis also assumes full rollout of the policies listed. Therefore, it gives an indicative sense of the household impact of each measure passed in the 2015-17 parliament and note a point estimate of average household impacts.

Figure 5: Expected Savings divided by the number of households affected by Conservative welfare measures

Figure 5 shows that, although the removal of housing benefit entitlement to 18-21 year olds will not save a lot in aggregate terms (around £40 million at a UK level), the scale of the cut is large for those households affected ^[37] . The 2 child limit to tax credits will see a similar scale of cuts for households affected, in line with IFS analysis that suggests that 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. The Benefit Cap will also have a substantial effect on certain households.

Polices such as the Benefit Freeze, which is expected to reduce overall expenditure significantly, will reduce household income by around £800 per year or £16 per week (by 2020/21), which is much less significant compared to the impact of other policies. The actual reduction experienced by households will depend on household type, the number of different benefits claimed within the household and the future path of CPI inflation.