To continue the tradition, the new report that the committee has today is another example of piggy-backing a piece of work for Scotland on something that has been done for Britain as a whole. The new report is the son of a document called “The uneven impact of welfare reform: The financial losses to places and people”, which we published in March. That was the first attempt to document in a quantified way the expected impacts of the new round of welfare reforms.
The report that we are presenting today zooms in specifically on Scotland and looks at how much—in terms of pounds and pence—claimants in Scotland can expect to lose as a result of the new welfare reforms that have been announced since the May 2015 general election. It also looks down to the local authority level, so there are figures that document the losses for each local authority in Scotland, and it compares Scotland with the rest of Great Britain.
All the figures are absolutely brand new. We published the GB report back in early March, but we were then wrong-footed by the Treasury because, two weeks later, the chancellor produced in his budget revised estimates of the financial saving that he expected from the welfare reforms that he announced in 2015. That required us to rejig all our calculations. Therefore, members will not find in the GB report from March 2016 the figures that I am presenting today and which are in the new report for Scotland—they are absolutely brand-new figures.
By the way, I should say that, when we document the impacts of the welfare reforms, we are not attempting to pass judgment on them. As you might expect, my colleague Tina Beatty and I have personal views on the pros and cons of the welfare reforms, but that is not the point here; the point is to sit back and objectively try to document what will be the impact on specific places—in this instance, Scotland. Our starting point is always the Treasury’s estimates of the financial savings that are to arise from each element of the welfare reform package.
The main way in which we move from the national United Kingdom scale down to the local scale is by deploying benefit numbers. We know how many claimants there are of each benefit in each local authority area up and down the country, and we can get expenditure figures, so we can begin to translate the national figures down to the local level by using the claimant number and expenditure data. It sounds simple, but actually the task is a lot more complex, and we have to bring to bear quite a lot of other official data—for example, from the Government’s impact assessments, which might say that the Government expects a reform to impact more severely on a certain type of household or a certain place.
That said, I must underline that it is an imprecise science, not because our methods are somehow flawed but because although we try to predict what the impacts of the reforms will be in terms of financial losses, the world is always uncertain and it never works out quite as the chancellor, for example, might expect. Therefore, there can be quite a difference between what was initially expected to be the impact of reforms and what the outturn is. I will show the committee an example of that in a minute. We have to make the best possible assessment at this point in time.
I will take a step backwards and move away from the new reforms to refresh your memories on the pre-2015 reforms. There was a lot going on that impacted on Scotland. I have listed on the next slide the eight big Westminster-instigated changes that led to financial losses in Scotland and I will go through them quickly. One was the housing benefit changes to local housing allowance; that was about housing benefit for those in the private rented sector. There were also changes to non-dependant deductions, which are about contributions that, for example, grown-up children in employment should make towards the housing costs of their parents if they are still living at home. There was also the benefit cap, which I am sure members are familiar with. We had the changeover from disability living allowance to personal independence payments, and a raft of reforms to employment and support allowance, or what was incapacity benefit—ESA is the new incapacity benefit.
Some of those reforms came into effect in the post-2010 period and were actually initiated by Labour, but the coalition Government introduced an additional layer, particularly around means testing of ESA for those who were in the work-related activity group. There were changes to child benefit, such as its withdrawal from higher earners, and there were a lot of detailed changes to tax credits, which reduced entitlements. On top of that, we had the 1 per cent uprating of benefits, which the chancellor certainly intended to be a below-inflation uprating, although it did not quite work out like that, because inflation slowed a great deal.
The committee might think that one or two things are missing from that list, and they definitely are. Up here in Scotland, you managed to avert the impact of the bedroom tax and the impact of reductions in council tax support. In both cases, that was an aversion of the impact on claimants, because it was still a financial loss for the public sector up here—for the Scottish Government and local authorities.
What was also initiated prior to 2015 was perhaps the biggest reform of all, which was the changeover to universal credit. However, we need to understand that universal credit is a repackaging of existing benefits. In its original form, it was not intended to save money by reducing claimants’ entitlements. That is changing, and I will show the committee some of the figures in a moment. There are also a number of detailed changes that I will not go into. A lot of people zoom in on sanctions, for example, but they were not new; it is just that they were applied a bit more vigorously—quite a lot more vigorously, actually, in the post-2010 period.
I will stick with the pre-2015 reforms. First, we will look at what was expected to be saved—or taken from claimants—up here in Scotland and what is our best estimate of the outturn at the end of the day, or by March this year. Back in 2013, when we did the very first report for the Welfare Reform Committee—this committee’s predecessor—we estimated that the reforms would lead to the loss in Scotland of £1.52 billion a year from claimants’ pockets. However, the outturn was substantially less than that—we put the figure at £1.1 billion a year.
We can see on the slide what the big elements are and what elements resulted in smaller savings than were expected. What really stands out is employment and support allowance, where the outturn savings have been only a fraction of what was originally expected. That is not because we got the figures wrong; it is because the world did not develop in the way that the Government expected. The work capability assessment, for example, which I am sure all committee members have heard of, did not move large numbers off ESA as was expected. Even for those who stayed on ESA, a far higher proportion were placed in what is called the support group, rather than the work-related activity group. When the Westminster Government means tested the benefits to those in the work-related activity group, it saved far less money because far fewer people were in that group. There was therefore a major undershoot in those savings, which has a big implication for Scotland, because it has very large numbers of adults of working age who are out of the labour market on ESA.
We can see other things if we look down the list on the slide. When we first came to the Scottish Parliament, we expected the bedroom tax to impact up here, but the Scottish Government averted that. However, the committee will see on the slide the broad package. The uprating of benefits did not take as much money as expected from people, because inflation slowed down and there was therefore a smaller saving to the Exchequer. That rather underlines that this is a somewhat imprecise science.
We move to the slide on the new reforms; I will go through what they are. They are the reforms that the Westminster Government has introduced since the general election in May 2015. The changes to universal credit work allowances lower the threshold at which universal credit is clawed back from claimants as their income rises. George Osborne was originally going to introduce that reform to tax credits as well, but he got knocked into touch on that one by his own back benchers. However, that reform is already operational in universal credit. Generally, people have been moved from existing benefits on to universal credit, so the ultimate effect is the same, although it is rather delayed.
There is a raft of changes to tax credits, the most major of which concern children. For example, the eligibility for tax credits for third and fourth children will be removed for births after March next year, and the family element is being removed, too.
Mortgage interest support is being changed from a welfare payment to a loan.
The local housing allowance cap that has been applied in the private sector will also be applied in the social rented sector. That will limit housing benefit entitlement, which will have a particularly large impact in Scotland, where there is a large social rented sector.
Housing benefit for unemployed 18 to 21-year-olds is coming to an end as an automatic entitlement.
On employment and support allowance—that hoary chestnut—the benefit rate for the work-related activity group is getting cut down to the jobseekers allowance rate.
The benefit cap is being extended—I believe that that came into effect last week or the week before—and is now set at £20,000 in Scotland, when it used to be £26,000.
The final new reform on the list is the four-year freeze in the money value of benefits, which, in real terms, will mean a significant reduction if inflation accelerates.
Do not forget that the changeover from DLA to PIPs—one of the big pre-2015 reforms—is still trundling along into the post-2015 era. That is not expected to be completed until 2018. Indeed, the existing claimants of DLA began to be reassessed only from October last year. That is an on-going reform from the pre-general election period. Westminster has also introduced some things that do not apply to Scotland, such as the pay-to-stay arrangements and the changes in social sector rents.
Let us get to the hard numbers. The slide on the financial loss from the post-2015 reforms is the most complex slide in the presentation. Unfortunately, it is also the most important. Parliamentary staff have produced a rather nice graphic that summarises the information—I see that members have that before them.
We will start with a look at the bottom line. How much do we expect to be taken from claimants in Scotland by 2021, when the new round of reforms will have come to fruition? We expect the annual loss to be a bit over £1 billion a year. To put that into context, we can think of the figures that I showed you earlier, which said that the rate of loss from the pre-2015 reforms was about £1.1 billion a year. That means that, if we take the decade as a whole, we are looking at just over £2 billion a year being taken from claimants. The pace of welfare reform is not slowing at all—there is only marginal slowing.
If you look down the columns, you can see big things and small things. We expect the big financial losses to come from the benefits freeze, the changes to universal credit work allowances, the continuing change from DLA to PIPs and the cuts to tax credits. By comparison, the changes to housing benefit for 18 to 21-year-olds represent tweaking at the edges, as they provide a relatively small financial saving.
The second and third columns are probably best looked at together, as some of the reforms hit large numbers of people but take only modest amounts from them, whereas other elements of the reform package hit small numbers of people but take quite large amounts from them.
The benefits freeze, which means that people’s benefits do not rise with inflation, hits large numbers of households, but the average loss by the time we get to 2020 is relatively modest, although I think that it will still be quite painful for many people. We estimate that 700,000 households will be affected and that the average loss will be £450.
By comparison, if you look at the item that is third from the bottom on the list, you will see that 11,000 households are estimated to be impacted by the extension to the benefits cap, but the average annual loss is £2,400. That might not sound like many households, but it is interesting to compare that figure with the figures for the pre-2016 benefits cap, which tell us that only 900 households were affected. The lowering of the maximum amount from £26,000 to £20,000 impacts on a great deal more households.
We cannot add up all those numbers to give a total figure for how many people are affected by the welfare reforms because we need to bear it in mind that some individuals are affected by more than one element of the reform package. Someone who is out of work because they are sick or disabled might be affected by the changes to employment and support allowance and also be hit by the changeover to personal independence payments. If they live in social rented accommodation, they might find that the new LHA cap impacts on them, and if they are claiming tax credits for a child, they might find that there will also be a financial loss there. In some cases, several changes will impact on the same people.
It is important to bear in mind exactly how the reforms impact on people. In that regard, the Westminster Government has been really quite clever—or cleverer than it was last time round—because comparatively few people will find that their cash payment is reduced from one week to the next. The benefits freeze is a cut to the real value of benefits, and not to the cash value, and there is then a raft of reforms that impact not on existing claimants but on new claimants or claimants with revised claims. For example, the work allowances within universal credit come into effect only when someone is transferred on to universal credit for the first time or their circumstances change and they have to make a new claim for universal credit. Likewise, the lower ESA payment rates impact only on new claimants. The changes that are reducing people’s cash payments from one week to the next are the change from DLA to PIP and the lower benefits cap; they are definitely reducing existing payments.
How does all that impact on individual local authorities in Scotland? The measure that we use in the list in the next slide is the financial loss to claimants averaged across the whole of the working-age population in each local authority area. That is the best measure of the intensity of the hit, virtually all of which is on working-age adults. It barely touches pensioner households. The loss per working-age adult is therefore the best measure.
In Glasgow, the average is £400 per adult of working age. That is not per claimant; it is the average of the financial loss across every adult between the ages of 16 and 64 in Glasgow. At the other end of the spectrum, in Shetland, we estimate that the loss is £160 per adult of working age. That does not mean to say that anyone losing money loses less in Shetland than they do in Glasgow; rather, it is a reflection of the fact that there are far more welfare benefit claimants and people in receipt of benefit in Glasgow than there are in Shetland.
If you look along the list, you will see that it is older industrial Scotland that is in the firing line—Glasgow, West Dunbartonshire, North Ayrshire, Inverclyde, Dundee and North Lanarkshire. At the other end of the spectrum are the hitherto prosperous oil locations—Aberdeen, Aberdeenshire and Shetland. Edinburgh is well towards the prosperous end of the spectrum these days, too.
We have seen that pattern before in our earlier studies for the Scottish Parliament. There is a clear relationship between the scale and intensity of the financial hit and the extent of deprivation.
In the next slide, there is a little diagram of the type that economists like to produce. The vertical scale is the financial hit—the loss per adult of working age; the horizontal scale is the share of LSOAs—lower layer super output areas, which are basically neighbourhoods—among the most deprived 20 per cent in Scotland. The level of deprivation goes up as you move from left to right. Each of the dots is a Scottish local authority. The relationship is clear: the higher the level of deprivation, the bigger the financial hit from the welfare reforms. That is exactly what you would expect, because a deprived area almost by definition has quite large numbers of people who are reliant on welfare benefits, and if you are cutting benefits, it hits the poorest areas hardest.
How does Scotland compare with the rest of Great Britain? Scotland is more or less on—it is fractionally below—the national average. However, you need to bear it in mind that at least one important element of the reform package that impacts England—the pay-to-stay arrangements under which better-off social tenants have to be charged market rents—does not apply up here in Scotland, and that is a reason why you are fairly well down the rankings.
In the next slide, £12,295 million a year is the Treasury’s figure of what it expects to save. About £1 billion of that will be saved here in Scotland. On average, across all adults of working age in Scotland—those between the ages of 16 and 64—the financial loss will work out at about £300 a year by the time the reforms all come to fruition in 2021.
Before I wrap up my presentation, let me just ask a couple of questions. First, will the financial loss be offset? I think that if you had a Conservative minister here, they would say, “We are cutting welfare benefits, but we’re also putting money back into people’s pockets through other routes.” Let us take a look at that. The present Westminster Government is planning to increase personal tax allowances. If it delivers on the promise that was published in last year’s summer budget, that increase will be worth £380 a year per taxpayer by 2021. However, to be fair, it would be worth only about half that much if we allow for inflation.
You need to bear in mind when you are looking at welfare claimants that only a proportion of them pay tax. That even includes people who are in work and claiming benefits. A person who is in part-time, low-paid employment probably does not earn enough to pay income tax, so an increase in the personal tax allowance is not worth very much to them.
The national living wage has come in. There is no question at all but that that is good for the earnings of low-paid workers, but bear in mind that, as earnings increase for those in work, benefits are withdrawn, so there is a bit of an element of swings and roundabouts in this.
Then there are discretionary housing payments, which are on the table to assist people who hit problems with housing benefit entitlement in particular. The Westminster Government has put at least £800 million on the table for discretionary housing payments, but that is over a five-year period. That comes to £15 million a year in Scotland, which, in relation to the overall welfare cuts, is quite a modest sum. I imagine that, in Scotland, you have pretty much got that all committed already to offsetting the bedroom tax. There is also improved financial support for childcare—tax allowances and, up here in Scotland, you are going to introduce additional free childcare for three and four-year-olds—which is helpful.
Taking that package as a whole, some people will have some of what they lose through the welfare cuts offset through one or another of those routes. However, there is no guarantee that the full loss will be offset, and such positive changes sometimes impact on people who are not affected by the welfare reforms. For example, the childcare changes may help people who are in work and not claiming benefits at all.
Will more people find work as a result of the new welfare reforms? You had the Secretary of State for Work and Pensions here a couple of weeks ago, and I expect that he said that the welfare reforms will encourage more people to find work. Let us look at that claim. First, you must remember that, in the vast majority of cases, claimants were already financially better off in work long before all the welfare reforms. The tweaking at the edges and the new withdrawal rates in universal credit may affect just how much better off they will be, but it was always the case that the vast majority of claimants would be better off in work. Secondly, you must bear in mind that reductions in in-work benefits—which apply to the universal credit work allowances and to tax credits—have the perverse effect of making employment rather less attractive.
Bear in mind, too, that the big number of people who are out of work and on benefits these days are not on jobseekers allowance but are on employment and support allowance, which is the modern-day incapacity benefit. That is true across Britain as a whole, and it is particularly true here in Scotland. The barriers to getting people on ESA into work are rather more complex than those affecting JSA claimants. Often, there are health issues that have to be addressed as well as issues of skills and the availability of appropriate employment. Furthermore, the highest claimant rates are in the places with the weakest local economies, and, in the work that we did for the Welfare Reform Committee, we could find no evidence—up to 2015—of the previous round of welfare reforms having had a positive impact on the Scottish labour market. Will more people find work? I am sceptical about that.
In conclusion, you should bear in mind that the pace of welfare reform is barely slowing. It is my observation—correct me if I am wrong—that welfare reform has dropped down the news agenda a little bit of late, probably because it has been obscured by other things such as Brexit but also because it seems like old hat: it is seen as an issue of 2012 or 2013 rather than of 2016 and 2017. However, that is not true at all. Welfare reform is proceeding full steam ahead. In Scotland, as in the rest of Britain, we are looking at financial losses both to people who are in work and to people who are out of work. There will be multiple hits for some households and individuals and, once again, the poorest places will be hit hardest.
I end with a plea to the committee: do not be blinded by the devolution of welfare powers. I know that there will be a natural tendency for the committee to focus on the powers that the Scottish Government now has over welfare issues—and I am sure that that will become a large part of your agenda, if it is not already—but Westminster is still a very big player in all of this and it is still having a huge impact up here in Scotland.
Thank you very much.