Item 4 is a presentation by Professor Steve Fothergill of Sheffield Hallam University. He has conducted a piece of independent research on the impact of welfare reform on the Scottish labour market, which the committee commissioned. The study is part of a series of reports that have evaluated the effects in Scotland of the changes to the social security system.
I know that Professor Fothergill has been here before. I welcome him back and invite him to make his presentation. We can have a discussion thereafter.
Thank you very much, and congratulations on your new role, chair—I am sorry; it is “convener” north of the border.
During the presentation, it will be important that people can see the two screens. I always find the video screens in the Parliament building to be a bit small, but we will do our best.
I have three things to note by way of introduction. First, the study that I am about to present is very much joint work by me and my fellow professors Christina Beatty at Sheffield Hallam University and Donald Houston at the University of Glasgow.
Secondly, the research is co-funded. The Scottish Parliament and the committee in particular have had a good financial deal, because two thirds of the funding for the study came from my university, which was keen that we took our work on welfare reform to the next stage. You are getting value for money.
Thirdly, I emphasise the subtitle of my presentation—“An exploratory analysis”. We certainly do not regard this study as the final word on the impacts of the welfare reforms on the labour market. The three of us plus another colleague are putting together an application for—wait for it—£400,000 to do much more comprehensive research on the issue. However, the work that we have done for the committee takes us a significant step forward.
In your introduction, chair—sorry, convener—you mentioned that this is not the first time that I have appeared before the committee. In fact, I think that poor Kevin Stewart has now heard from me on four occasions in total.
All good—well, all bad for some folk.
Tina Beatty and I have, for better or worse, gained a reputation as the go-to people on documenting the impact of welfare reforms, and I hope that that reputation is justified. We have done studies not only here in Scotland but in Northern Ireland, Wales and England.
The study that I am presenting today is the fourth in a series, and it builds on the shoulders of the three previous studies. The first one, from way back in April 2013, was an attempt to document the financial losses across Scotland as a whole and in each of its 32 constituent local authority areas.
The second report drove those estimates down to ward level for every ward in Scotland. The third report, which I came to the committee to talk about earlier this year, looked at the impact on different types of households. All those three reports tried to document what is actually happening and to quantify the impacts in terms of financial losses.
The new study that I will talk about today takes everything on to a new level, because it asks whether welfare reform has resulted in higher employment and lower unemployment levels. It looks at the consequences, or results, of welfare reform.
We are looking at the overall impact on the Scottish labour market. Welfare reform might have triggered some individuals to look for work who might not otherwise have done so but, if they find work, they will often displace other individuals in the search for jobs, and those other individuals will be unemployed instead.
The study is an exercise in looking at the overall impact on the labour market: is the employment rate higher and the unemployment rate lower? It is also an exercise in tracing the cumulative impact of all the reforms—certainly all the reforms that were announced prior to the July 2015 budget. I will comment towards the end on the new round of reforms, but the study is about documenting what has happened so far.
As far as we know, the study is the first attempt that anyone has made anywhere in the United Kingdom to look at the impacts of the welfare reforms on the labour market. Why does all this matter? It matters because the Westminster Government uses two main arguments to justify the reforms. The first is that they save the Treasury money and reduce the budget deficit. I will not take on that argument here today.
The second argument is that welfare reform encourages out-of-work claimants to find work and in-work claimants to seek more hours or find higher-paid work. If there is no discernible positive impact on the labour market—if we cannot identify the positive impact on employment—the second argument that is used to justify welfare reform falls by the wayside. In the context of the wider political debate about welfare reform, that is an important point: if there is no evidence of a positive impact on the labour market, the justification can only be that it saves money.
I will take a step backwards and go over some of the background and the numbers that were generated in the previous studies, to provide context for what comes later. I will start by looking at which reforms we are covering. I hope that the reforms are familiar to most committee members. My slide lists eight reforms that have impacted up here in Scotland. If this was an English audience, I would be talking about the bedroom tax and the changes in council tax benefit, too, but you have found mechanisms to avert the impact of those measures on claimants.
Let us not forget that the welfare reforms have been happening simultaneously with other changes, too. There is more conditionality in the benefit system than there was a few years ago; sanctions are certainly being more widely applied, especially to unemployed claimants; and there are higher personal tax allowances, which increase the financial incentive for people to take up employment. A lot is going on. We are tracking the overall impact of all the changes.
The estimates that we generated on the financial losses that arise from welfare reform are deeply rooted in the Treasury’s statistics. We start with the Treasury’s estimates of how much it expects to save. We use certain impact assessments that the Westminster Government produces and combine them with benefits data to trace through the impact on different areas and households.
The figures that show the overall financial losses that arise from welfare reform are taken from the third of the previous reports. We have revised and updated the figures. When all the reforms come to fruition, the loss will be around £1.5 billion a year. I am going over the details just to refresh the memory of those who have heard this before and perhaps to bring up to speed the new committee members. We are certainly talking of very large financial losses.
The loss In Scotland averages £440 per adult of working age. That is not per claimant—the figure spreads the financial loss across all adults between the ages of 16 and 64, whether or not they receive benefits. That gives the committee a feel for the magnitude of the losses. The figure is little different from the Great Britain average—it is less than the financial hit in Wales, northern England or London and much more than that in southern England. The figure would have been higher—by about £25 a head—if you had not successfully averted the impact of the bedroom tax and the council tax benefit reductions. I know that those losses have been borne by other public sector budgets rather than by welfare claimants.
10:15The enormous variation in the financial losses across Scotland is important to the logic of what I will say about the impact on the labour market. It is hardly surprising that some places are hit harder than others, because we know that there are far more benefit claimants in some places than in others.
The current slide shows our revised and updated estimates of the financial loss per adult of working age in each of Scotland’s 32 local authority areas. In Glasgow, which is up there at the top of the list, the loss is £580 on average per year per adult. Down at the bottom of the list is Shetland—there is a big variation. Members know their geography of Scotland just as I do—if not better than I do. To a large extent, that geography reflects the economic strength and wellbeing of different local economies. Those figures are important, because I will deploy them in tracing through the labour market impact.
Given that the screens in the room are small, members probably cannot read the next slide, but its information is in the report, too. Here we ask whether we would expect each reform to increase the financial incentive to take up work. The first column shows a list of the reforms—we have broken down the child benefit reform into its two elements. The second column asks whether the changes increase the incentive to find work. The third column asks whether the changes increase the incentive to take on extra hours. The final column asks whether the incentive is big or small. I do not want to work my way right through the table but, in general terms, the answer is that the reforms increase the financial incentive to take up work or to increase hours of work. They do so to varying degrees; some reforms have a bigger impact than others.
That is the theory, but what about the practice? How do we go about disentangling the impact on the labour market? The central problem that we face is that welfare reform is only one of several things that are happening simultaneously. Since 2012, the UK and Scottish economies have gone through something of an upturn. That upturn coincides with the implementation of the welfare reforms, which began to bite from around 2011-12. However, that does not necessarily mean that we can attribute the upturn in the economy simply to the welfare reforms—a lot of other things have been going on simultaneously.
The key to our approach—this is central to understanding what we have done—is that we are looking at the big variation in the impact of the reforms from place to place. If the reforms are having an important impact on the labour market, it should be possible to observe a much bigger impact in places where the reforms hit hardest. We know that the reforms are hitting very hard in Glasgow and less hard in Shetland, so we should expect to observe a bigger impact in Glasgow than in Shetland, as the places are at the two ends of the spectrum. That is central to our approach.
There are practical problems in operationalising all this. I flag up that you should not assume that everything that was initiated under the previous coalition Government in Westminster has been implemented—far from it. In fact, probably about 90 per cent of the financial losses that will arise from the changeover from disability living allowance to personal independence payments is still in the future. The reassessment of existing claimants begins only next month—that is when the big losses will kick in. Quite a lot of the financial losses to arise from the incapacity benefit reforms are still in the pipeline. There have been all sorts of delays in the work capability assessments and the appeals procedure. Those delays have in turn delayed the implementation of means testing of employment and support allowance for those in the work-related activity group.
We have not thrown all the financial losses into the pot. We have had to reduce the financial losses to allow for things that are still in the pipeline. We have also taken out of the jigsaw the removal of child benefit from higher earners, which, to be frank, will probably not have a significant impact on employment or labour market participation. Most of those higher earners are already in work and nearly all of them are in full-time employment.
At this stage, I will get into the numbers. I will show a series of scatter diagrams. Members probably cannot read all the detail on the screens, but it is in the report. I will carefully talk you through what the scatter diagrams do, as I am not sure how many people are used to dealing with them.
On the horizontal axis, from right to left, on the first diagram is the financial loss per adult of working age that arises from the welfare reforms. The loss is adjusted to take out things that are still in the pipeline, so it includes just the things that had already happened by the end of last year. On the vertical axis is the out-of-work benefit claimant rate. It rolls together the numbers of all those who are out of work and on jobseekers allowance, incapacity benefit, employment and support allowance and income support as a lone parent. Each dot represents a Scottish local authority.
We are looking at whether there is a relationship between the financial losses and the reduction in the out-of-work benefit claimant rate. We have taken the period from February 2011—that is about when the first of the coalition Government’s welfare reforms began to be implemented—through to November 2014. That was the latest data that we could get when we knocked up the report in June and July.
There are some fancy numbers on the diagram that describe the statistical strength of the relationship; one is called an R2. The line is what we call a regression line.
You do not need to be a statistician to see that on this graph there is a clear relationship. The bigger the financial loss that arises from welfare reform, the bigger the fall in the out-of-work benefit claimant rate. Immediately you might think, “Aha—here is evidence that the welfare reforms are working exactly as the Westminster Government thought they would work.” Wait a minute—let me go through the full logic and evidence.
In the next slide, I have split the reduction in the out-of-work benefit claimant rate into its two main components: jobseekers allowance and employment and support allowance, which, you will remember, is the new incapacity benefit. As you will see, there is a relationship between the financial hit arising from welfare reform and the change in JSA numbers but no such relationship between the hit and the ESA numbers. In other words, the scale of the financial hit does not seem to have had any effect on the numbers of people on ESA.
Intuitively, I find that a little surprising, given that ESA has been targeted much more than JSA by some of the welfare reforms. Even though large numbers of people who would have been able to claim incapacity benefit have lost eligibility for ESA, and even though ESA has become means tested for many claimants, there is no evidence of an impact on ESA. However, the numbers show a clear relationship between the reduction in JSA and the financial impact of welfare reform.
The information comes from Department for Work and Pensions benefits statistics, which are rock solid and reliable, because the DWP accurately counts the number of people who are out of work and on different benefits. For some of the other labour market data, the statistics are not so good and are often based on sample surveys, particularly something called the labour force survey, which involves 80,000 people a year across the United Kingdom. For any one local authority area, the sample can be quite small and the data much less reliable.
To get round the problem of dealing with the less reliable data in the labour force survey, we have had to group local authorities and pool observations to get bigger samples, and this is, for better or worse, the grouping that we have adopted. The areas in question are not quite functional economic areas, although they are closer to functional economic areas than individual local authorities are, but the main point is to group the 32 authorities into smaller numbers where we think that the data will be more reliable.
The next slide shows through labour force survey data the relationship between a number of economic variables. At the top, we show the relationship between welfare reform financial losses and the change in the economic activity rate. The middle table refers to the employment rate—in other words, the share of all adults of working age in employment—and the bottom table shows what we call the International Labour Organization unemployment rate. That is not the same as the numbers on jobseekers allowance; it is a survey-based measure of unemployment that comes in much higher than the numbers on jobseekers allowance. The ILO unemployment rate is the basis of the headline unemployment statistics these days. When we hear that there are 1.8 million unemployed, it is the ILO unemployment figure that is quoted. These days, JSA unemployment is down around 800,000 or 900,000.
If you look carefully at the graphs—and I know that it is difficult to look at them on the screen—you will see that the dots are scattered pretty much everywhere. A statistician could draw a regression line, but the R2 tells us that the relationships are very poor indeed. There is not much evidence of strong relationships between the change in the financial losses arising from welfare reforms and the change in any of those specific variables.
The next slide illustrates another data set, the business register and employment survey, which is an account of the number of jobs in each area. In terms of statistical reliability, this data set comes midway between the rock-solid, good DWP benefit data and the rather ropy labour force survey statistics, so we have drawn up the tables on the basis of both. The top one has 32 dots on it to represent all the Scottish local authorities, and the bottom is based on the grouping that we have adopted, which brings local authorities into a dozen or so areas. The question that we are asking is: has there has been a bigger increase in the number of jobs in the areas where welfare reforms have hit hardest? As you can see, the dots are absolutely all over the place. There is no statistical relationship here, no matter whether we are looking at individual authorities or at groups of authorities.
I know that I am getting a little bit technical and that this might take a little bit of time to digest, so I will stand back from the slides and talk about what all of this is actually telling us. It is telling us that bigger losses from welfare reform are indeed associated with bigger falls in the overall out-of-work claimant rate, but that applies only to JSA not to ESA and there is no observable relationship with labour market participation or employment rates and no relationship with employment growth.
Although we are observing that, where welfare reforms have hit hardest, unemployment measured by JSA is falling fastest, we economists know something about what happens in economic upturns, and one of the things that we have observed over many years is that, in economic upturns, unemployment always tends to fall fastest in the areas that have the highest unemployment. There is convergence in unemployment rates. It is easier to have a big reduction in unemployment when the starting rate is 10 per cent than it is if the unemployment rate is already at 4 per cent. Halving the unemployment rate in an area of 10 per cent unemployment takes five percentage points off the rate, but in an area where the starting rate is only 4 per cent, that is not possible, because there are not five points to play with.
10:30It is perfectly possible that what we are observing with the big reduction in jobseekers allowance in the areas where welfare reform has hit hard is not the impact of welfare reform but the effects of a normal economic upturn. To explore that, we have compared three different economic upturns. The set of graphs that compares the three upturns is important to the overall logic of our argument. All three upturns were associated with a similar reduction in the number of people who were out of work and claiming unemployment benefits. The top graph is the one that I showed earlier, which outlines the relationship between the upturn from 2011 to the end of 2014 and the financial losses arising from welfare reform. The period from February 1998 to November 2004 is a longer one, but unemployment fell by similar amounts from a similar level. During the period from August 1993 to August 1996, unemployment fell by similar amounts, although it did so from a much higher starting point.
On the horizontal scale, we have in each instance put the financial losses arising from welfare reform in the 2011 to 2014 period. That is not to say that the things that happened in that decade had any impact on what happened in the 1990s; we have done that to ensure that each local authority is positioned on the same point on a left-to-right spectrum. Basically, we were asking whether we observed the same geography in the reduction in employment in the most recent upturn as we did in previous upturns, and the answer is an emphatic yes. A similar reduction in unemployment was observed in the areas of high unemployment that were recently hit hard by welfare reform as was observed in previous upturns when the welfare reforms were not happening. This set of graphs shows that it is impossible to attribute the big reduction in JSA unemployment in the hardest-hit areas to welfare reform; it says that the reduction is a normal feature of economic upturns rather than being a result of welfare reform.
I will now approach the whole issue from a rather different angle, after which I will try to wrap everything up. One of the things that everybody out there in the world and certainly economists have been noting about the recession that we had in 2008 and the subsequent economic upturn is that employment has held up remarkably well. The graphs that I have just put up on screen show the trajectory of three different recessions. The dark line—the bottom one on the gross domestic product graph—represents the post-2008 recession, while the other two lines represent the recessions in the early 1980s and the early 1990s. The graphs show that, in the recession that we have just been through and the subsequent upturn, the fall in output was bigger than it was in previous recessions and the subsequent recovery has been slower in terms of GDP. By contrast, employment fell by less in the recent recession, and it has stayed surprisingly high.
People who believe that welfare reform has been highly effective could use these figures to argue that what has really happened is that welfare reform has leaned heavily on people to look for work so employers have taken on lots of cheap labour instead of investing in plant and machinery, and that welfare reform therefore lies at the root of the resilience of employment during the recession and in the subsequent upturn.
I will just briefly show you a figure for employment in Scotland, lest you were thinking that Scotland’s employment trajectory is any different from the UK average. The graph on the screen represents the trajectory since the start of the 2008 recession. The dark line represents the UK while the lighter blue line is Scotland and, as you will see, it has pretty much been tracking UK employment trends.
Going back to the argument that those figures demonstrate the positive effects of welfare reform, I think that there is a problem in that respect. The welfare reforms kick in three to four years after the recession kicks in; in other words, they first kick in from quarters 12 to 16 after the start of the recession. The figures that I am showing you track GDP since the first quarter of 2008, but the coalition Government’s welfare reforms do not begin to come in until early 2011 or 12 quarters in. Those reforms, which include the bedroom tax, the council tax benefit changes in England et cetera, do not kick in until April 2013, which is the best part of 20 quarters after the start of the recession.
If you look carefully at these graphs, you will see that employment started to hold up long before the welfare reforms kicked in, which means that it is very difficult to attribute the resilience of employment to the reforms. As you can see, employment has held up better during and after the recent recession, but as that started well before the coalition Government’s welfare reforms, it is difficult to attribute the extra jobs to welfare reform.
If we bundle all of that together, what can we conclude? I have to conclude that on balance, taking all the statistics together, the evidence provides little support for the view that welfare reform is having an important and positive impact on the labour market in Scotland. In other words, the second argument that is advanced to justify welfare reform looks very, very shaky indeed.
I will make some final remarks on the new cuts in welfare. Everything that we have looked at so far has been what has happened to date. We cannot monitor the impact of the new cuts because they have not begun yet, but they are coming. They include reductions in tax credits; a lower household benefit cap, particularly here in Scotland, now that the cap is really being brought down outside London; lower ESA payments for claimants in the work-related activity group, who will be placed on the same basis as JSA claimants; and a four-year freeze in most working-age benefits.
As the chancellor George Osborne said in his budget in July, when all those reforms come to fruition there will be £12 billion a year of new savings. We would expect, on the basis of that saving across the UK as a whole, that further big losses to claimants in Scotland are in the pipeline. Given that we know that the figure for the pre-2015 reforms in the context of a saving to the Treasury is £18 billion across the United Kingdom, I would say that £1 billion a year is probably in the pipeline for you in Scotland. I also have to ask why the new cuts should have any greater positive impact on the labour market than the reforms that have happened so far, particularly given that a large proportion of them relate to tax credits and will therefore reduce the financial incentive for many individuals to take up work.
At that point, I will stop. Thank you very much.
Thank you, Professor Fothergill. That was a fascinating and challenging presentation. A couple of questions come to mind about what you said. You suggested that the big reductions in JSA unemployment since 2011 cannot be attributed to welfare reform and you spoke about the impact of the recent economic upturn and previous upturns. Is it your assertion that the reduction in JSA unemployment would have happened even if there had been no change to the benefits system?
Implicitly, that is what we are saying. If you go back to the three graphs that contrasted the recent upturn with the two previous upturns, you get the same sort of geography. There are bigger falls in JSA unemployment in the high unemployment areas where the impact of the welfare reforms is greater, but we observed exactly the same thing in the other periods when welfare reform was not happening. It is fairly difficult to attribute the change in JSA unemployment to welfare reform.
Is it therefore implicit in what you are saying that the further cuts that are in the pipeline will not have the desired effect of reducing unemployment in a significant way, given what we have seen so far?
We can only judge the future on the basis of past and present evidence. There is no evidence that the welfare reforms to date have reduced unemployment, so I would not expect the welfare reforms that are coming to reduce unemployment. That is not to say that they will not have any impact. They will take a great deal of money out of some people’s pockets; a reduction of £1 billion per year in Scotland is far from negligible. I do not think that the evidence supports the claim that the reforms will have a positive impact.
You said at the beginning that there are essentially two arguments. One is that there had to be cuts in benefits in order to save money, and the second is that there had to be cuts in benefits to stimulate greater employment. You have suggested that there is no causal link between the cuts in benefits and the increase in employment, which would have happened anyway.
If we are saying that the Government has a valid reason for saying that those who are on benefits have to make a contribution to the cuts in public expenditure, has any work been done to take a comparative look at what burden has fallen on the shoulders of the better-off to find out whether they are contributing as much to the savings and reductions in public expenditure?
I would have to refer you to the work that the Institute for Fiscal Studies has done on the impact on different income groups. If my recollection of the IFS work is correct, it says that the welfare reforms hit towards the lower end of the income spectrum, but it is not quite as simple as that, because there are odd little bits of the package—particularly the withdrawal of child benefits from higher earners—that have hit people higher up the income scale.
I am talking about not just welfare benefits but the totality. Compared with the burden that has been placed on those who are on benefits as a contribution to reductions in public expenditure, what kind of contribution are people who are in circumstances such as mine making to those cuts in public expenditure, either through minimal cuts in welfare benefits or taxation? In other words, can we see a comparison anywhere between what the poorer sections of society are having to contribute and what is contributed by those who are better off, like me?
10:45
Looking more generally at the overall package of austerity, a team at the London School of Economics and Political Science led by John Hills has attempted to quantify those things, as far as I understand. I am not wholly familiar with the details of that team’s work, but I think that the conclusion is that the burden is borne towards the lower end of the income spectrum.
However, it is more complicated than simply comparing high income and low income; it is also about different types of households. One thing came out strongly from the last report that we did for the committee when we documented the impact of the welfare reforms on 15 different types of household in Scotland. Some types of household have escaped virtually unscathed. The welfare reforms impact negligibly on pensioner households and they do not impact on student households, but they impact massively on, for example, lone parents, and they impact on couples with children much more, on average, than they do on couples without children. We can talk about where people are on the income spectrum, but we need to bear it in mind that there are other dimensions; it is about type of household, as well as how much income people have coming in.
Once again, your report makes grim reading on the impacts that there have been on people. You said that the first idea was for the Treasury to save money—that has obviously happened—but you say that there has been no evidence of the reforms having a positive impact on the labour market.
One of the reforms that we are about to see is the changes to tax credits. We know that nearly 200,000 families and 346,000 children in Scotland will be affected. You said that those reductions in tax credits might actually reduce the financial incentive to work. Is that the case?
Yes—if we are comparing the situation of being out of work with that of being in work. If someone in work will not get as much in tax credits as they would have got under the old regime, it will be less financially attractive to move into work. That pushes in the opposite direction to the claim that welfare reform is all about incentivising people to take up employment.
If someone is already in work and getting tax credits and their tax credits are reduced, that provides an incentive for them to try and take on extra hours or to move on from low-paid employment to higher-paid employment to offset that loss of tax credits but, if we simply compare being out of work with being in work, being in work is less attractive when the tax credits are cut.
One of the things that people may try to do is take on extra employment—part-time employment as well as the full-time employment that they already have, which will reduce the ability of someone else to find employment. Would that be right?
Yes indeed. This can be a zero-sum game, particularly in difficult labour markets. That applies to substantial chunks of Scotland and large parts of northern England and south Wales. In difficult labour markets, it is a zero-sum game, as there is not quite enough work to go around. If somebody else manages to get extra hours by taking on a part-time job, as you say, that job will not be taken by somebody coming off the dole queues.
That is why, when we consider the labour market impacts, it is not sufficient to ask whether anybody has started looking for work who never looked for work before. What matters is whether there are more people in work. That is what we are trying to ascertain in this study.
Are you aware whether the DWP—or the Treasury, for that matter—has carried out any impact assessment on the proposal to reduce tax credits?
The DWP and the Treasury tend to produce impact assessments on each element of the welfare reforms, but those assessments generally do not go much beyond telling us how much will be saved and which income groups that will fall on. The assessments do not trace through to where those people are—which is one of the great advantages of the work that we have done over the past two or three years—nor do they attempt to trace through to what impact there will be on labour market engagement and levels of employment and unemployment. Those assessments are only part of the jigsaw.
I am not up to date on the full range of new impact assessments that have come out. I suspect that one will be sitting there on the impact of the tax credit reductions that I need to read, but it will only get us so far along the line in understanding what is happening.
Would it be fair to say that the changes may well be a disincentive to work?
For many people who are currently not in employment, that would be a fair assessment.
Thank you.
You talked about £1.52 billion being taken out of the Scottish economy by the reforms. What is the impact on employment of that money going out of the Scottish economy, in particular in the areas where unemployment is already very high?
We would expect a reduction in spending power of that magnitude to have some knock-on effects on local employment levels. We have not calculated that in the context of Scotland, but we did some similar calculations in Wales. In Wales, which is a smaller place than Scotland, the financial loss is about £1 billion a year. If my memory is correct, our estimate was that that might have a knock-on effect of about 7,000 jobs being lost in local consumer services. Grossing that up for Scotland, with £1.5 billion a year being taken out of the Scottish economy through the pre-2015 reforms, maybe 10,000 jobs would go in local consumer services. That is a bit of a back-of-the-envelope calculation with quite a margin of error in it, but it seems plausible.
The impact would be highest in areas where there is higher unemployment.
We would expect so, but because of the way in which labour markets and local economies work, it is a bit more complex than that. If money is taken out of the pockets of people in North Lanarkshire, some of the impact is felt in Glasgow through lower retail spend. Local authorities are not hermetically sealed boxes. However, in broad terms, that would be true.
That might be one of the reasons—although I doubt whether it is a sufficiently powerful reason—for the fact that we cannot identify any relationship between the change in employment and the impact of the welfare reforms. On the positive side, we would expect the welfare reforms to encourage more people to look for work, with the result that firms take on more people, but on the negative side, if there is a reduction in the money in people’s pockets, that will have a knock-on effect on local consumer spending. The graphs are all over the place. The relationship between welfare reform and employment change is totally random, as you can see from the top graph on the slide entitled “Jobs in each area late 2010—late 2013”.
Would you suggest that employment would be higher without the welfare reforms, given that you mentioned the possible loss of 10,000 jobs in Scotland and 7,000 in Wales—and some tens of thousands of jobs, one would expect, in England?
Yes and no. Employment would be higher in that there would not be the knock-on effect on local consumer spending. However, we must then ask what central Government—the Westminster Government—would have done instead to save that amount of money.
If the fixed bit of the jigsaw is the amount by which the Westminster Government wanted to reduce the budget deficit, if it did not cut welfare benefits, it would have cut something else, which in turn would have had knock-on effects on employment. It is a bit of a complex picture. It depends on the assumptions that we make about whether the same amount of spending would have been taken out of the economy by other means.
I am sounding terribly technical here—like an economist, I am afraid—but these are technical issues.
Not at all—it is fascinating. I would like to ask further questions, but I said that that would be my final one.
I want to stick with the issue of financial loss that Kenny Gibson has raised. One of the slides gave a breakdown by local authority area. For example, Glasgow was at the top with a financial loss of £580 per working-age adult from the pre-2015 reforms. Presumably, there will be individuals or families in Glasgow that will suffer substantially more of a loss, if that figure is an average. I know that this is perhaps related to size of family and other factors, but do you have any idea of what the maximum loss might be?
Let me underline that the £580 figure is an average of the loss across the entire working-age population of Glasgow. We know, for example, that single parents in Glasgow are losing on average a little over £2,000 per year. That figure was in our third report to the committee.
At the extreme end, the biggest impact on any household is probably in the territory of £4,000 to £5,000 per year. That is because some households draw on multiple sources of benefit. In a household in which both adults have been on incapacity benefit—which is now employment and support allowance—one might lose that entitlement entirely and the other might find that their entitlement is means tested. They will probably also have been claiming housing benefit. If they are in the private rented sector, their entitlement to housing benefit will have been reduced. If they claim disability living allowance—about half of all ESA/incapacity benefit claimants claim DLA as a top-up—they may well lose it.
It is the most vulnerable groups—the ones at the margins—who might drop off in both instances. The people with the highest level of disability should, in theory, stay on ESA and DLA, but at the other end of the spectrum where the disabilities are more marginal, they could find that they are losing not only ESA but DLA as well. These things add up. I estimate the maximum loss to be £4,000 to £5,000 at the extreme, but there will be other households where there is no reduction at all.
Those are shocking figures. For anyone losing household income of that amount, including me, it would be pretty painful. I am not as badly off as some of those families, so the sudden impact of that level of reduction on a household that already has a relatively low income and is perhaps also having to cope with disability and illness will be quite a traumatic experience.
The way we have often characterised this in our other reports is that, particularly in the case of incapacity benefits, the previous benefits system worked in a way that allowed people who were out of work long term with health problems to live tolerably decently—not well, but to get by with some dignity. What the reforms essentially do is squeeze that group. They will not remove their income, but they will push them down to the poverty line. That is what is likely to happen.
I have a final question on financial loss. You said that you have some other statistics that show a breakdown by ward. The slide on financial loss by local authority shows East Renfrewshire, which includes the poorest part of my constituency—Barrhead and Neilston. The figures for Barrhead and Neilston will be much higher than the figures that the slide shows, because the other side of the constituency is one of the wealthiest parts of Scotland—Giffnock and Newton Mearns. Some of the figures that you have shown us hide more localised impacts.
11:00
Absolutely. Kevin Stewart might remember that, in the second report that we produced for the committee, we generated statistics like the ones on the screen for every ward in Scotland and I came to the committee with maps. The report includes a map for each local authority, and you will be able to see within East Renfrewshire exactly the differences that you highlight.
I add a word of caution. The maps were produced 18 months or two years ago and they are now slightly out of date. We have updated some of the base statistics on the financial impacts. As time has moved on, we have got more evidence on outturns in terms of some of the hits and the Treasury has adjusted some of its statistics about financial savings. Those ward-level statistics are not absolutely compatible with the figures that I have shown you today, which are the adjusted and updated figures, because the ward statistics have not been updated yet.
You said that the figures for the impact on the labour market discount or exclude the changes to child benefits and tax credits for higher earners. If we go back to the table in the slide entitled “Financial loss by local authority”, do the figures that you highlight there include the reduction?
Those are the overall figures including the taking away of child benefit from higher earners and so on. When we tried to trace through the labour market impact, we took out of those figures certain elements of the jigsaw, such as child benefit to higher earners and a substantial chunk of the impact of the changeover from DLA to PIP, because that has not happened yet. That does not have any impact on the ranking of the local authorities. It reduces the figures a little bit, but Glasgow—
How much does it change them?
It reduces the figures by about a third, principally because the DLA reforms, which are a big piece of the jigsaw, have mostly not been implemented yet. That is something that is waiting to hit people; it is about to hit people. I do not think that people are alert to what is in the pipeline. So far, the changeover to PIP has been implemented only for new claimants—for people who ask for DLA for the first time. Once the retesting starts, that will be a big one. In Scotland, we are talking about the financial losses being second only to the loss of tax credits.
I want to get this clear. If we go back to the previous table on the slide, we see that my area of the Borders had a reduction of £380 per annum per working-age adult. If the cut in tax credits and child benefits to high earners is included, that figure would fall by a third. Is that what you are saying?
If you exclude those things, yes. Those figures are our estimates of what the financial loss will be when all the pre-2015 reforms come to fruition, which they have not yet done. You should take off a third, probably, to indicate what has already come to fruition. Actually, we exclude the impact on the higher earners, but the figure is still in the £200s. The full impact has not yet fed through.
In paragraph 50 of your report, you highlight the difficulties in
“disentangling the impact of welfare reform”
from the impacts of other changes to the employment market. Will you expand on that? What difficulties did you face and does that undermine the conclusions in any way?
My version of the report does not have numbered paragraphs—the numbers have probably been inserted by your committee staff.
It is on page 11, in the first sentence under the heading
“Assessing the labour market impact”.
I know what you are getting at. We tried to sidestep the complications by focusing on the differences between places. That is our way of trying to get round some of the complications. We know that there has been a general upturn in the UK and Scottish economies, which has been triggered by a revival in consumer borrowing, the housing market and so on. To try to disentangle the impact of welfare reform, we looked at the differences between the places where welfare reform is not a big bit of the jigsaw and those where it is. We are asking whether we are seeing bigger changes where it is a bigger bit of the jigsaw. Looking at the differences between those places is one way into the problem, and we thought that it would be the most fruitful.
I said that this was an exploratory exercise. There are other ways in that we would like to try if I can get £400,000 of funding for a major research study. With the resources that we have, we thought that the best approach was to look at the differences between places where the reforms are a big hit and places where they are a small hit. The question is whether there is a difference, and the answer is, “Not really.”
Your report focuses on the financial aspects of the reforms and not so much on non-financial aspects such as the promotion of work skills. Do you have any comment on those aspects of the reforms and the impact that they have had? Or rather, why was that aspect not included in your analysis?
This is really a rather modest piece of research. The committee put £5,000 into it. There is a limit to what we can do.
I note that those other things were happening simultaneously, notably the toughening of the benefit sanctions regime and the introduction of the work programme to replace all the previous programmes that had been running. However, this is—and always was—set up to be an exercise in tracing through whether the big financial losses in some places feed through to bigger impacts in some places. For better or worse, that is what we set out to do.
Is that quite a big weakness?
Not necessarily. I think that the research has to be seen on its own terms. We asked whether there is a relationship between the changes in the labour market and the financial hits arising from welfare reform. Across Scotland, there does not seem to be such a relationship.
There are some factors that you have not incorporated into your analysis, such as work training schemes and other programmes that you have not analysed in any way.
Work training schemes were there before the work programme. It is not the case that a work training scheme or welfare-to-work programme has suddenly been introduced during this period and there was nothing in the preceding period.
However, they are not in this particular report.
The analysis does not try to disentangle the impact of the work programme. However, I know a lot of statistics on the impact of the work programme, which I could quote to you. It is not moving people back into work at a significantly higher rate than its predecessor programmes, so I do not think that the introduction of the work programme makes big changes to the overall jigsaw.
I would like a bit of clarification. Can we go back to the table that shows figures by local authority, Professor Fothergill? There were bits and pieces in Mr Lamont’s questioning that you may not have picked up on. He mentioned changes to tax credits and the impact that they would have in reducing the numbers. Am I correct to say that the impacts of tax credits are not in those figures?
The tax credit changes that were announced before the July 2015 budget are in the figures. We have not yet been able to look ahead and document how much more will be taken from Scotland or from individual areas as a result of the reforms that were announced in July this year. Our figures include the tax credit losses that were announced by the previous coalition Government.
But not the ones from the recent budget.
They do not include the new ones. As a rule of thumb, the overall loss in Scotland from the pre-2015 reforms is £1.5 billion, and we are talking about a probable further £1 billion loss from the new reforms. The figures—I am doing the calculation in my head—all need to be upped by 60-odd per cent to get the summation of the pre-2015 reforms and what is going to kick in over the next five years.
Thank you for that clarification.
A couple of the questions that I was going to ask have been answered, but I want to go back to the table that shows the overall financial loss per working-age adult. I note that South Lanarkshire comes 10th in the list, with a loss of £470 per working-age adult. I have some figures from the South Lanarkshire website—I am not sure how accurate they are; they are from February and July this year—that suggest that about 5,500 people are on JSA and about 17,500 are on ESA or incapacity benefits. Have you done any calculations to work out the loss per claimant rather than the loss per working-age adult?
In some of the earlier reports, we presented figures for the loss per claimant arising from each element of the reform package. I do not go over too much of the old territory in the new report, but if you go back to some of the statistics in our earlier reports you will see that, for example, the freeze in the value of child benefit that happened between 2011 and 2014 took very modest amounts from large numbers of people, whereas the average financial loss that will arise from people losing entitlement to disability living allowance when the personal independence payment comes in is about £1,000.
It is all in the reports. I think that the average loss to a tax credit claimant was about £900, but I would have to go back to the earlier reports to check that. That amount then varies by type of household.
I will do some of those calculations myself based on the South Lanarkshire figures. I think that I have figures for each of the council wards in my constituency. It would be really interesting to look at the further impact.
You should remember that the £470 figure is just an average across all adults of working age. There will be enormous variation whichever way you look at it.
Also, some people claim multiple benefits.
Yes. That is an element of the jigsaw that we always have some difficulty in pinning down. I think that we bottomed it out in the previous report that we brought to the committee. We have to remember that, typically, many claimants are affected by more than one element of the package.
I think that I will go and read John Hills’s book, “Good Times, Bad Times: The Welfare Myth of Them and Us”, which does some of that tracking of the pound right to the person.
In reaction to your report, Mr Fothergill, a spokesperson for the DWP said last week:
“Our welfare reforms are transforming the lives of some of the poorest families in our communities while making the system fair for those who pay for it. There are 173,000 more people in work in Scotland since 2010 and we provide more than £80 billion a year in support to people of working age, ensuring there is a strong safety net in place.”
It is very easy to say that there are more people in work. There are more people in work now in Scotland than there were in the depths of the recession. Whether that is attributable to welfare reform is deeply questionable. That is what we have been trying to get at in the report—does the evidence suggest that the welfare reforms are behind those reductions in unemployment? The evidence does not suggest that the welfare reforms are behind them.
So, the DWP is wrong.
It is not wrong in terms of the facts of the matter, but it is wrong to read across from 173,000 new jobs in Scotland and say that welfare reform is working. Our evidence does not support that linkage.
11:15
If we reversed welfare reform—I prefer to call it social security cuts—what would we expect to happen to the claimant count, and where is the tipping point? If we increased benefits, at what point would we have increased them so much that there would be a disincentive to work?
Any increase in out-of-work benefits would increase the incentive to be on out-of-work benefits rather than in employment. You are talking about simply reversing what has happened, but we are saying that the cuts have not reduced the level of unemployment in Scotland, so why should restoring what has been cut affect the level of unemployment in Scotland? It would change people’s lives through how much they have in their pockets, but there is a bit of symmetry in the process. If cutting the benefits has not led to higher levels of employment and lower levels of unemployment, why should increasing or restoring the benefits have any effect?
Is there any indication of what impact, if any, some of the stuff that has happened in Scotland with the bedroom tax element and the council tax benefit element has had on unemployment or the labour market?
It has not had an impact in Scotland because you have avoided the impact. The work that we have done in Scotland is a pilot piece of work and we have not yet replicated our study in England, but I would be surprised if the inclusion of the bedroom tax and the council tax benefit reductions changed the overall jigsaw. In the grand picture of things, those elements are relatively modest.
The fact that you have dodged implementing those two parts of the package is worth a reduction in the impact of the cuts of about £35 per working-age adult per year, but that is against a backdrop of a loss, still, of £440 per adult. I would be surprised if those elements made a big difference down in England, but I am speculating because we do not have the hard evidence yet.
I have never understood why the poor need benefit cuts to incentivise work yet city financiers need bonuses to incentivise work. From your perspective, what social security policies should we implement to incentivise work and allow people to maintain a dignified life?
I read into our figures that the incentive to work is not the crucial factor but that the availability of work and the strength of the local and national economies are what matter. You will get people back in work when there is an upturn in the economy. That has happened this time around, with welfare reform going on, but it also happened in the 1990s and the 2000s as the economy grew and we were not seeing welfare reform on the current scale. As the economy grows, people move back into work. I would say that getting people into work is less about financial incentives than about the economy.
The Scottish Trades Union Congress and others have said that the availability of good employment is the key factor in getting people into jobs.
I doubt whether you have looked at this, but I will throw it out there. Is there any correlation between other public policy decisions, such as cuts to local government funding and the like, and impacts on local labour markets?
I cannot comment on the specific situation in Scotland, and I am now going well beyond the research that we have done for the committee. However, from looking at figures for England, I know that the places that have been hit hardest by welfare reform in terms of financial losses for adults of working age tend to be the places whose local authorities have experienced the largest reductions in Government grant. They have faced a double whammy.
I would have loved to have brought along maps documenting the financial impact across the whole of Great Britain—we have them, and they were in earlier reports. They show lots of dark areas—Merseyside, south Wales, north-east England, west-central Scotland and so on—and a great big light area in southern England outside London, where the reforms impact very lightly in terms of financial losses and where the local authorities have escaped the worst of the austerity cuts of the past five years.
I wonder why that is.
It is difficult to read the slide that features comparisons of recessions and recoveries but, if I am reading it correctly, it shows the trends that you mentioned earlier and shows that employment has recovered in this recession, as it has previously. However, if we compare that with the GDP figures, the GDP now seems to be lower. Does that say anything about the nature of this recession in terms of in-work poverty and the fact that the jobs that people are going into are low-paid, low-productivity jobs?
It says that we have had little growth in productivity. Output has recovered on the back of expanding employment rather than expanding output per head. This recovery is different in that respect from the recovery from the two previous recessions. Economists have been deeply puzzled by what is going on and why.
I have been using this graph to illustrate the fact that the resilience of employment started well before the welfare reforms were implemented. We are halfway along the graph from left to right before the welfare reforms kick in in quarter 12 or 16 after the recession, and that indicates that this recovery is based on low-wage, low-productivity employment.
I thank Professor Fothergill. As I said earlier, this subject is challenging. You have given us an interesting insight into what is happening and have left us with some interesting questions to ponder, not the least of which is the fact that the state of the economy is making a greater impact in terms of getting people off benefits than the cuts to the benefits. I hope that that type of infthattion feeds into the UK debate because, clearly, it is not just a matter for us in Scotland. Thank you for that work.
Thank you for the hearing.
11:23 Meeting suspended.