Calum Crichton is
a Finance graduate from the University of Strathclyde. Calum won the 2012
University of Strathclyde's Journal of Economic Studies Prize and recently
received Glasgow City Council's 2013 International Finance Services District
Award. He lives in Glasgow and is a Youth Rep for Better Together.
This week the Institute for Fiscal Studies (IFS) published its report analysing the UK benefits system in the context of the Scottish independence referendum, where it considered both the current welfare expenditure in Scotland and the UK, as well as the options available to a hypothetical independent Scottish government. Welfare is a highly important issue for any government and will be a key feature in the debate about Scotland's constitutional future, so the more detail on how welfare would work for Scotland post-referendum the better.
The SNP have so far jumped on a key conclusion from the report, specifically that an independent Scotland could reassess the UK government's welfare policies, parts of which make "little economic sense." This makes attractive newspaper headlines for SNP ministers, but as usual with this type of thing the devil is in the detail.
What we know so far of how welfare would work in an independent Scotland is that, according to a report commissioned by the SNP government, it would need to stick with the UK's welfare system for a few years. A transitional period, if you like, until Scotland developed the infrastructure needed to administer and deliver its own separate welfare system. This is problematic enough for the SNP because it creates a mass amount of uncertainty over Scotland's future welfare system, something they have been trying to avoid. It also indicates that there would be no quick reversal of unpopular UK welfare policies, which would still be implemented in Scotland for up to two Westminster administrations even if the referendum goes the SNP's way.
When one looks a little closer at today's IFS report yet more questions are raised about the SNP's welfare plans. The report starts off by analysing some basic facts on welfare, including the level of benefit spending per person in Scotland and the UK (2% higher in Scotland), the composition of benefit spending, and the impact of UK government reforms. But then comes the important part – the long term implications of independence.
Just take a look at Figure 14 in the IFS report, which gives the projections for the proportion of the population that will be aged 60 or over in Scotland and the UK until 2051.
For those following the debate closely you will have seen similar chart appear in the House of Lords' report into the economic implications of independence:
What these charts show – and what the IFS point out – is that Scotland is ahead of the UK in terms of its demographic transition. In other words, it faces much greater long term expenditure challenges, specifically on pensions, health, and social care costs.
The IFS uses these trends to consider the sustainability of the 'triple lock' system, whereby pensions are uprated in line with the maximum of either inflation, average earnings, or 2.5%. John Swinney has already promised to keep this system in an independent Scotland, but the IFS raise doubts over the feasibility of this. Based on OBR projections, the report notes that the 'triple lock' will eventually lead to the state pension rising by more than average earnings, concluding the "policy commitment would become costly in the long term."
But that is not to say the 'triple lock' would be impossible to keep in an independent Scotland, nor does it imply that somehow Scotland would be incapable of managing its own welfare system. Indeed, demographic advances will be a challenge for Scotland and the UK regardless of the constitutional settlement.
What the report does indicate, however, is that an independent Scotland would have some very tough decisions to make in the long term in relation to the set-up of its welfare system, taxes, and public spending – more so than the UK.
As the IFS point out:
"This means that even on relatively conservative assumptions, ageing looks set to add a bit more to the costs of Scotland’s benefits bill than it does to that of Great Britain as a whole. This means that funding the benefits system in the decades ahead may prove somewhat more burdensome for an independent Scotland. It will also make undertaking major reforms of the benefits system perhaps even more difficult for Scotland than for the UK as a whole, as such reforms are either costly
or create many losers.
"Like the UK, one option to ease the fiscal burden of the ageing population would be to make further cuts to benefits. Thus, whilst the government of an independent Scotland might undo some of the benefits cuts implemented by the current UK government (as Scottish government ministers have said they would do), it seems likely that this slightly more generous system could not be sustained
in the long term without discretionary tax rises or further cuts to spending on public services."
Although not considered in the IFS report, something else worth mentioning is that Scotland faces much greater revenue challenges than the UK due to its over-reliance on oil revenues, which account for 20% of tax revenues for the country. Unfortunately these projections aren't looking too good either after the OBR
downgraded their assessment of future oil and gas revenues last month:
So what we know for certain is that an independent Scotland would face much greater volatility on the tax side and much greater pressures on the expenditure side than it would as part of the UK. Of course that is not to say independence is not a viable option for Scotland, only that it may not be the best one. The key challenge for SNP ministers, therefore, is to set out exactly what changes they would make to the welfare system, and what taxes would need to increase or public services cut to pay for it.