Good morning. As this is our first formal session in front of you, I ask you to bear with me while I give you a little bit of background—it will not take long.
Thank you for inviting us to this session of the Social Security Committee. We welcome the chance to discuss our role and our work on social security. I will say a few words about what we do, our role in the budget process and how we work with the Scottish Government, but first I will provide a bit of context.
This year will be the third in which we have produced the independent economic and fiscal forecasts that must be used by the Scottish Government in its budget. It will also be the first time that social security makes up a significant component of the Scottish budget. With the devolution of executive competence for new benefits in April 2020—next year—around £3.5 billion of the Scottish budget will be spent on social security. Our job is to estimate how much will be spent on devolved social security benefits and programmes in the current financial year and over the subsequent five years. These forecasts are of the amount of money that will be paid out to claimants.
Our forecasts determine how much of the Scottish budget is allocated to social security. Any differences between the allocations, based on our forecasts, and the actual amount that is spent on social security will have to be managed by the Scottish Government during the financial year.
While we are forecasting the spending in Scotland, our colleagues in the Office for Budget Responsibility are forecasting benefit spending in England and Wales. Those forecasts are used by the Treasury to estimate the block grant adjustments—that is, the funding that is received here from the United Kingdom Government for the benefits that are devolved to Scotland. Any variation in those block grant adjustments will also have to be managed as part of the Scottish budget.
That is a bird’s-eye view of what we do and how our forecasts and the OBR’s forecasts fit into the Scottish budget. I will now explain a bit about how we forecast and how we work with the Scottish Government.
Forecasting can seem like a dark art at times, but, in principle, what we do for social security benefits is relatively simple. The cost depends on three things: the number of people who are eligible to receive the benefit; the fraction of those who apply for and are awarded it, which we call the take-up rate; and the amount of payment awarded. We look at past trends and consider how well those will predict the future. If trends are stable or there are no policy changes, the past is usually a reasonable predictor of the future. However, when policy is changed or a new benefit is introduced, we have to make assumptions and judgments about what will happen.
With new benefits or new policies, we do not have past data to look at and use as the basis for our forecasts. Through the process, we work closely with the Scottish Government, and we ask it to provide all available information on new benefits, such as the eligibility criteria application process and its communication plans. We review that information along with data on any existing benefits, to consider how things such as benefit take-up might change. We then use those assumptions to produce the forecasts, which will have a greater level of uncertainty because they are new—indeed, our colleagues in the OBR have had a similar experience when forecasting the UK Government’s changes to, for instance, the disability living allowance and personal independence payments. The early forecasts are quite volatile until things settle.
What we can do is explain transparently how we have produced our forecasts and highlight the forecasts that are most uncertain. Inevitably, of course, our forecasts will be wrong—no prediction of the future will be precisely right. What is important is that, once we have new or outturn data, we look back, understand why the forecast was wrong and try to improve it in the future. Every September, we publish a forecast evaluation report, and this year we considered our social security forecasts for the first time.
Having just discussed the challenges of forecasting new benefits, I can point to two examples that illustrate that point. First, we underestimated spending on the new pregnancy and baby grant last December by £2.5 million, or 59 per cent, because of an unexpectedly large number of claims in the first few days after launch. The early data on claims for that grant, combined with a better appreciation of the Scottish Government’s approach to launching new benefits, led the commission to increase its forecasts of spending in May. Secondly, the forecast of carers allowance that we produced in December 2017 was based on a full year’s spending, as the exact date of devolution was not available at the time that we made our forecast. Although the forecast error for that benefit appears large, at 74 per cent, accounting for the actual date of devolution and using our model reduces the forecast error to 2.6 per cent, which is very much in line with the kind of errors that the OBR would have.
Our next forecasts will accompany the 2020-21 budget, and we see two areas of particular interest relating to social security. First, as I have already alluded, there is a significant expansion in social security spending in the budget, and the Scottish Government will have to prepare to manage in-year any variations from the forecasts—the fact that that must be done in-year is the most important point. Secondly, the Scottish Government is proposing significant reforms to the social security system.
All the policy changes and new benefits that are planned for 2020-21—the next fiscal year—will be included in our forecasts. As we get information on the Scottish Government’s plans, we will incorporate them in our forecasts. Where the Scottish Government proposes changes to be introduced after the start of the fiscal year, we do not anticipate including them in our forecasts, and the benefit will be forecasted on the basis of a continuation of existing policy.
Thank you for your patience. I hope that you found that overview helpful. We are happy to answer any questions that you have just now, or at any other time.
We expect that it might be useful for you to hear from us at this point each year, because we will have just published our forecast evaluation report, and also perhaps in the weeks or months following the publication of the Scottish budget, which, for the past few years, has been in December.