Working age welfare benefits, personal taxation, and the labour market: White Paper implications

Scotland’s Future describes an ambitious vision for tax and welfare policy in an independent Scotland. Welfare and taxation policies will be better integrated with education, health and employability initiatives. Benefits will provide a standard of living that allows dignity and respect for those who cannot work, while support those who can into work. There will be a focus on a social investment model that recognises that people require lifelong investments made at different times in their lives. These principles will help foster a society which is more inclusive, more respectful, and more equal.

Within the context of these general principles, Scotland’s Future provides a reasonable level of detail on some of the key policies on personal taxation and working age benefits we can expect an SNP-led government to seek to implement if Scotland becomes independent in 2016. These include uprating working age benefits, tax credits and tax allowances by inflation (rather than current UK policy which uprates many benefits by 1%), abolishing the ‘bedroom tax’ and benefit cap, and postponing the roll-out of Universal Credit (intended by the UK Government to replace a number of working age benefits), and of the Personal Independence Payment (intended by the UK Government to replace Disability Living Allowance). Scotland’s Future also contains a range of proposed actions on labour-market regulation, including the uprating of the minimum wage by inflation, and strengthening employment protection through action on minimum terms and conditions (zero-hours contracts are mentioned), maternity and paternity rights, and a stronger role for unions and collective bargaining. There is also an ambition to deliver ‘a transformation in the provision of childcare’, in part to increase labour market participation by parents of young children.

Many of these are populist, headline grabbing policies designed to appeal to swing voters at the referendum. Capitalising on discontent around the bedroom tax, the move from DLA to PIP, and the growth in the use of zero-hours contracts are all ‘easy hits’ in this regard. But to what extent do the policies add-up to a coherent set of reforms that will improve the functioning of the Scottish labour market?

Scotland’s Future recognises both that the existing tax and benefit system does not always provide clear incentives that encourage low earners to enter the labour market, and also that in-work poverty is a growing problem as a result of low wages and short hours contracts. Many of its specific proposals are designed with these twin problems in mind – greater provision of childcare is expected to encourage women to return to work by reducing the costs of doing so, the uprating of personal tax allowances and tax credits in line with inflation is designed to improve the after-tax incomes of those in-work, whilst a range of actions around labour market regulation are aimed at improving the incomes and working conditions of employees.

Many of these proposals chime well with the recommendations of Alan Milburn’s recent report for the UK government into how best to address inequality and social mobility. However, some of the proposals seem somewhat contradictory with the wider aims of improving work incentives. For example, Universal Credit (which the Scottish Government proposes to abolish) has been designed to simplify means tested welfare benefits and improve work incentives; while the separate earnings disregard for second earners receiving Universal Credit (which the Scottish Government also proposes to abolish), has been proposed to improve work incentives, particularly those of women in low income families.

Scotland’s Future does not attempt to cost its proposals, but can we get a broad handle on the likely magnitude of the net fiscal costs of these measures? Most of the specific proposals have relatively low cost implications, as shown in Table 1. (The combined cost of these proposals is less than the target to raise an additional £250m tax revenue per year from measures aimed to reduce tax avoidance.)

Table 1: Costs of implementing some of the welfare proposals in Scotland’s Future in 2013/14 (click to enlarge)

The policy that may cost substantially is the headline grabber on childcare. By the end of its first parliament, all Scotland’s 3 and 4 year olds will be entitled to up to 1,140 hours of childcare per year. Assuming an average hourly childcare cost in Scotland of £3.75, this policy could cost up to £4,300 per child, or £512m per year if it was taken up for all Scotland’s 119,000 3 and 4 year olds. It is of course expected that some of this cost would be recouped, through reductions in payments of benefits to low-income families who decide to enter the labour market, and also through higher income tax receipts. It is difficult to know with certainty what the net cost of this proposal will be, as it clearly depends on the number of households that are able to enter the labour market as a result, and the type of work that they do. 

Table 2 shows the average level of benefit income received by families with one or more child aged 2-4 in Scotland in 2010/11, by economic status of the benefit unit. On average, a couple where one works full-time and one does not work only receives £40 per week more in benefits than a couple where both work. A workless lone parent receives on average £100 per week more in benefits income than one who works full-time, but only £30 per week more than a lone parent who works part-time. Thus the extent to which the provision of childcare will generate net fiscal benefits to the Treasury depends on how the incentives take-effect: if the policy largely encourages people who are currently not working to enter part-time work, it seems very unlikely that it will fully recoup its costs.

Table 2: Average level of weekly benefits income received by families with one or more children aged 2-4, Scotland 2010/11. Source: HBAI (Department for Work and Pensions)

An important point, not mentioned in Scotland’s Future, is that some 24,000 lone parents and 12,000 couples in Scotland already receive childcare support through the childcare element of Working Tax Credits. Essentially, this provides up to 70% of childcare costs (up to a maximum of £170 per week for one child) for low-income families working 16 hours or more per week (32 hours in combination for couples). The proposals in Scotland’s Future will make childcare support available for all families, including those working less than 16-hours per week (which is likely to improve work incentives for those not working at all). But, by being a non-means tested policy, the childcare proposals in Scotland’s Future may not be particularly progressive when compared to the status quo.

It might be argued that Scotland’s Future could have been more radical in identifying specific welfare proposals that align with its ambitious set of principles for the welfare system. Its aim however was not to set out a detailed manifesto (a future Scottish Government could un-do any of the fiscal proposals contained here), but merely to give some specific examples of policies that an independent Scotland could introduce within the context of a set of more general principles. In this respect, Scotland’s Future provides a much fuller starting point for debate in one of the fields likely to figure prominently in the coming months.