Implications for Scotland of abolishing the two-child limit

FRASER OF ALLANDER BUDGET PREVIEW

One of the key decisions that UK Ministers will be making ahead of Rachel Reeves announcing the Budget later this month is what to do about the two-child limit (write Fraser of Allander Institute’s SPENCER THOMPSON and HANNAH RANDOLPH).

This policy, which limits Universal Credit to the first two children in a family, has been widely criticised for driving up child poverty rates. And given that the UK Government has pledged to reduce child poverty, with the publication of its child poverty strategy expected sometime around the Budget, the pressure is on to abolish the policy.

The Scottish Government has committed to mitigate the two-child limit by introducing a new benefit, the Two-Child Limit Payment (TCLP). If the two-child limit is abolished, this payment would no longer be needed, freeing up resource for the Scottish Government. The First Minister has pledged that the savings would be spent on additional measures to tackle child poverty, which he has stated is the Scottish Government’s top priority.

How much would the Scottish Government save?

The Scottish Fiscal Commission has forecast the TCLP will cost £155m in 2026-27. This represents the amount that the Scottish Government will directly save if the two-child limit is abolished.

There would however be some offsetting costs to the Scottish Government, coming through two main channels. First, removing the two-child limit would push more families onto the Benefit Cap – unless this was also abolished – which the Scottish Government mitigates through Discretionary Housing Payments.

And second, it would bring more families onto Universal Credit, namely those whose incomes are just too high to be entitled with the two-child limit in place.

These families would in turn become eligible for devolved benefits that are linked to receipt of Universal Credit, including the Scottish Child Payment, raising spend on these benefits.

We estimate that these spillovers would amount to around £34m in 2026-27.

Whether this cost is met from within the £155m pot or counted separately is a political question. The fiscal context, which will become even more challenging if the UK Government chooses to raise income tax in the rest of the UK, may encourage the former choice. But this would likely be seen by campaigners as penny pinching at a time when urgent, ambitious action is needed to tackle child poverty.

Even with the two-child limit abolished, we would still be a long way off meeting the statutory child poverty targets in 2030 – and these are approaching quickly, with the final Delivery Plan due in March.

How could the savings be spent?

If the spillover costs from the abolition of the two-child limit (£34m) were funded from within the TCLP budget (£155m), that would leave £121m to be spent on other policies. We have modelled the child poverty impacts of five illustrative policy options, all of which we estimate will cost about this much in 2026-27 assuming no changes in behaviour or administrative costs. Clearly, a £155m policy could go further than a £121m one, so this represents a conservative scenario.

Impacts of policy options on relative child poverty after housing costs, 2026-27

Option	Raising the Scottish Child Payment to…	…and…	… would reduce child poverty by about…
1	£35	–	1ppt
2	£31	extending Scottish Child Payment from children under 16 to include dependents aged 16-19	1ppt
3	£34	increasing Best Start Grants and Best Start Foods by the same proportion	1ppt
4	£30	extending universal Free School Meals from P1-P5 to include P6-P7	–
5	£34	increasing the maximum discount on water and sewerage charges from 35% to 100% for families with children	1ppt

Source: FAI modelling using UKMOD.
Notes: Dash indicates that impact is too small to report. Scottish Child Payment is currently projected to be about £28 per child per week in 2026/27. Free School Meals count as income for purposes of measuring poverty. Technical details of modelling available on request.

The impacts of these policies would be over and above the impacts of the two-child limit being abolished, which we estimate to be around 1 percentage point in 2026-27. All else equal, each of the options would reduce relative child poverty after housing costs by a further 1 percentage point in 2026-27, representing an additional 10,000 children who would be kept out of poverty.

The exception is Option 4: extending universal Free School Meals to all primary school students would not have a measurable impact on aggregate child poverty levels, even when coupled with an increase to Scottish Child Payment of around £2 per child per week.

Although most of the policies are similar in terms of their aggregate impacts, under the surface there are some important differences:

Option 1 is the simplest, but does involve steepening the so-called ‘cliff edge’, whereby households lose their entire Scottish Child Payment award if their incomes increase beyond the point at which they are entitled to Universal Credit – which could incentivise them to forego opportunities to earn more. This option also increases Scottish Child Payment for recipients who are not in poverty, including those kept out of poverty by the payment at its current rate.
Option 2 is arguably preferrable in these respects, since it extends Scottish Child Payment to families who are not currently eligible while also benefitting many multi-child families who currently are, with the overall cliff edge not steepening as much. However, it does favour older children, when families with young children have been identified as a priority group.
Option 3 targets younger children specifically – Best Start Foods is available until the child turns three, while Best Start Grants are paid to children at various points until the child starts school. This option would also channel some of the TCLP savings into one-off grants as opposed to recurring payments, which may be less distortionary when it comes to work incentives even though they have similar eligibility criteria as the Scottish Child Payment. By the same token, their one-off, targeted nature limits their direct impacts on overall levels of child poverty.
Option 4 removes a cliff edge of sorts in the form of the means test for Free School Meals that applies to children in Primary 6 and 7, who are typically between 10 and 11 years old. Although this policy would benefit some households that lie just above current eligibility, it would primarily benefit those with higher incomes. On the other hand, the distributional impacts would depend on take-up, and there could be wider benefits such as a reduction in stigma.
Finally, Option 5 is unique in featuring a gradient across households – both because discounts on water and sewerage charges are proportionately linked to Council Tax Reduction, which tapers with income, and because these charges themselves vary by council tax band. Other changes to Council Tax Reduction would also be possible, but these will tend to extend entitlement to higher-income households rather than just benefitting current recipients, most of whom already receive a 100% reduction.

These are by no means the only options available, but they highlight some of the factors that the Scottish Government will need to weigh up when reallocating the TCLP budget, along with the potential impacts of doing so, in a scenario where the two-child limit is abolished.

Time will tell

Whether or not that that scenario will transpire remains unclear. It is possible that the UK Government will take an intermediate approach by relaxing the two-child limit in some way without abolishing it entirely – for example by exempting certain groups, moving to a three-child limit, or introducing a taper.

Mitigating the remainder of the limit would cost less than the planned TCLP – meaning there would still be some savings – but may require more time to be designed and implemented. It is also possible that the Budget will include a commitment to eventually abolish the two-child limit, but not in the coming year, meaning the TCLP would be needed temporarily.

For now, all eyes are on Rachel Reeves – but the focus will quickly turn to the Scottish Government. Keep an eye on our website and social media for more analysis of the UK and Scottish Budgets over the next few months!

Hospitality employers “need policies to support fair work practices”

The Fraser of Allander Institute and the Poverty Alliance, as part of Serving the Future, published a policy briefing earlier this week which says policy changes are needed to support the hospitality industry and to improve pay and conditions for workers.

The briefing says that struggling hospitality workers would benefit from increased fair work practices in the industry. But many employers are hindered by “factors beyond their control” in the implementation of fair work.

These include gaps in transport and childcare provision, which create barriers to work for their staff, along with the impacts of the COVID-19 pandemic, the UK’s withdrawal from the EU and the more recent cost of living crisis.

Hospitality workers face higher than average risks of experiencing in-work poverty. A third of workers spoken to by researchers were on zero-hour contracts, or had no contract at all, while the workers’ median hourly pay rate was under the low pay threshold of £11.58.

The policy briefing, produced by Serving the Future, makes a series of recommendations for Government action, including:

Promoting greater collaboration between government and the hospitality and tourism industry
investing in sustainable and community-led tourism
better and more consistent information for employers on best practice, training and development opportunities, legislation and policy changes
greater support for training and development.

The Research forms part of Serving the Future, a project which has been working directly with employers and people with experience of low-paid work in the hospitality sector to identify changes that could be made by employers and policy and systems-wide changes to address in-work poverty in Scotland.

Fair work is defined by the Scottish Government as “secure employment with fair pay and conditions, where workers are heard and represented, treated with respect and have opportunities to progress.”

Hospitality is a significant part of Scotland’s economy, comprising around 3% of Scotland’s GDP and, before the pandemic, accounted for 8% of its jobs.

Chirsty McFadyen, a Knowledge Exchange Associate with the Fraser of Allander Institute, said: “Our research shows that hospitality employers often want to do the right thing by their employees, but they don’t always feel supported by policy to do so.

“If we are to meet the 2030 child poverty targets, the Scottish Government has a role to play in ensuring that housing, childcare and transport policy support the industry and its workers.”

Dr Laura Robertson, research manager with the Poverty Alliance, said: “Low pay and job insecurity have a big impact on households in Scotland.

“A lack of affordable, accessible childcare and housing, alongside continued high costs of living, is also preventing families from being lifted out of in-work poverty.

“The Serving the Future project shows key challenges facing households working in the hospitality sector in Scotland and that both employers and policy makers have a key role in tackling poverty in Scotland.”

There was widespread concern among workers about a lack of effective regulation and oversight of the hospitality sector, leading to an absence of clear standards which allowed exploitation and unfair practices to persist.

Staff shortages were leading to many workers taking on extra hours and duties, creating burnout, stress, and deterioration in work-life balance. This was sometimes the result of a practice known as ‘clopens,’ or late closing and early opening.

One worker said: “Sometimes I could finish at twelve at night and be in at ten the next day. That’s very common, as well, like ‘clopens.’ I think they shouldn’t be legal.”

The researchers also identify opportunities in proposals in the UK Government’s Employment Rights Bill, which include: a right to a contract with guaranteed hours; a requirement for employers to consult with employee representatives on tipping and gratuity policies, and the creation of a Fair Work Agency with powers to investigate and take action against businesses that do not comply with the law.

Proposals based on the Fair Work Convention’s Hospitality Inquiry were also highlighted in the policy brief.

The Serving the Future project is funded by The Robertson Trust.

You can find the Policy briefing here:

https://www.servingthefuture.scot/blog/report/serving-the-future-policy-briefing

And the Tourism & Hospitality toolkit here:

www.tourismhospitalitytoolkit.co.uk

2025 Spending Review: the spending rollercoaster is well and truly back

FRASER OF ALLANDER INSTITUTE ANALYSIS

This week, Rachel Reeves announced in the House of Commons the outcome of the Spending Review for both resource and capital budgets across departments and devolved administrations (write MAIRI SPOWAGE and JOAO SOUSA).

It was a speech long on detail about many capital projects, but much of the lead was buried. In our preview last week, we noted that the envelope set out in the Spring Statement promised to be a reversal of Robert Chote’s 2015 quip about a ‘rollercoaster ride’: largesse in the short-run, followed by pretty steep subsequent cuts in real (and in some cases cash) terms in future years.

Capital spending brought forward, with defence the big winner

Not only has that proved to be the case on day-to-day spending (more on that below), but capital budgets have got in on the act.

If we exclude financial transactions – which are lending to the private sector rather than capital investment by the government – the profile of capital spending has been brought forward even further. We are now looking at a one-off boost to investment budgets of 6% in real-terms next year, followed by falls in each year.

Chart 1: Annual real-terms growth in capital budgets excluding financial transactions

Source: HM Treasury

In fact, the figures only get starker once we take into account that so much of the boost to investment is on defence. Non-defence capital spending falls by -0.9% a year in real terms going forward, meaning it’s nearly 4% lower by 2029-30 than this year.

This pattern is broadly reflected in the Barnett consequentials for Scotland. The Scottish capital block grant increases by £0.6 billion (7.7% in real terms) next year, but then fall back to below 2025-26 levels by the end of the decade.

One big risk to this plan is whether the capacity will be available to deliver all these capital projects at once. Major projects already have a habit of seeing larger cost increases than foreseen, and bringing so much capital spending forward could cause prices of inputs and labour increase to eat up the additional budgets – something to keep an eye out for in the coming months.

The pattern is similar on day-to-day spending, though less dramatic

Here too the pattern is for bigger spending increases in the short-run. The big exception is the NHS in England, which sees a nearly flat 3% boost in real terms, and which generates significant Barnett consequentials. Budgets other than health, schools and defence see a relatively healthy 1.4% increase next year, but this is followed by 1.5% and 1.1% falls in each subsequent year, meaning that their budgets are 1.2% lower in real terms by 2028-29 than this year.

The UK Government will no doubt argue that its efficiency drive will make it possible to do this while not cutting services, but we’ll reserve judgement on that. Similar initiatives in the past have had disappointing results; this one may well succeed, but it will have to buck the trend of history to do so, which would be no mean feat.

Chart 2: Annual real-terms growth in resource budgets

Source: HM Treasury, FAI analysis

What does this mean for the Scottish Government?

On the day-to-day spending side, funding grows at an average of 0.8% a year after accounting for inflation. This is slightly below the average for overall resource spending, so a bit less than we thought it might in our preview blog – largely because schools in England have done less well than we expected.

This allocation is also slightly lower than what the Scottish Fiscal Commission included in their outlook just a couple of weeks ago. The capital allocation is also less generous than the SFC had predicted, although there is an increase the financial transactions allocation.

Table 1: Comparison between block grants and SR 2025 and

Block grant (£bn)	2025-26	2026-27	2027-28	2028-29	2029-30
Resource
SR 2025 allocation	41.5	42.7	43.8	45.0
SFC forecast (May 2025)	41.6	42.9	44.3	45.6
Difference	-0.1	-0.2	-0.5	-0.6
Capital
SR 2025 allocation	6.3	6.9	6.7	6.8	6.7
SFC forecast (May 2025)	6.3	6.6	7.0	7.0	7.1
Difference	0.0	0.3	-0.3	-0.2	-0.4
FTs
SR 2025 allocation	0.2	0.2	0.3	0.3	0.4
SFC forecast (May 2025)	0.2	0.2	0.2	0.2	0.2
Difference	0.0	0.0	0.1	0.1	0.2

Source: HM Treasury, Scottish Fiscal Commission, FAI analysis

We have seen some Labour MPs and MSPs describing this event as increasing the block grant by £9.1 billion over the Spending Review period. While it is true that Barnett consequentials add up to this figure (across different periods for resource and capital), this doesn’t seem like a particularly transparent or helpful way of describing the changes. It essentially assumes that no additional funding would have been made available for the Scottish Government in cash terms relative to that in 2025-26 – which is not a credible baseline.

A much more insightful – though perhaps less cheery – conclusion from looking at the SFC’s forecast is that by 2028-29, funding will be £0.7 billion lower than their central estimate published on 29 May.

What about other spending in Scotland?

There were some additional announcements that will affect Scotland, though not through the funding of the Scottish Government. Clearly defence manufacturing – a significant part of which will happen in Scotland – will benefit, as will the investments in science in Edinburgh and in carbon capture and storage in Aberdeenshire. There was also an additional growth deal for Falkirk and Grangemouth.

GB Energy funding was also included in this Spending Review, although it seems that much of it will be in the form of financial transactions – although we’ll await confirmation of this. Nonetheless, if it serves to create additional investment by the private sector, it will benefit the areas where those investments take place.

How important will this Spending Review turn out to be?

As we discussed last week, spending reviews tend to be big processes across departments, but not necessarily of setting the stance of fiscal policy. As a reminder, today’s announcement nearly fully stuck to the totals set out in March.

But the track record of spending reviews constraining public spending is much less clear, as chart 3 shows. Successive UK governments have topped up budgets between SRs, so that the totals and allocations laid out today may bear less resemblance to what will happen than you might think.

Chart 3: Breakdown of difference between planned and actual real-terms increases in spending during SR periods

Source: HM Treasury, OBR, FAI calculations

Of course, there is a lot more detail now that before the SR was conducted. It’s as if we’ve upgraded from a compass (totals and spending assumption prior to the SR) to a sat-nav. But just because we have a more detailed route doesn’t necessarily mean we know the actual route we will take – especially if unexpected obstacles arise in the future.

Nonetheless, the Scottish Government now has a baseline to work from. Clearly it’s not that different a baseline from what the SFC produced a few weeks ago (especially in the next couple of years), so one might wonder if the Medium-Term Financial Strategy could have been produced then after all.

Nonetheless, we look forward to seeing how this SR is reflected in the MTFS and the new Fiscal Sustainability Delivery Plan in two weeks’ time.

Fraser of Allander: A look ahead to the Programme for Government

Recently, John Swinney announced that he would bring the 2025-26 Programme for Government to 6^th May, which will situate the PfG exactly one year before the Holyrood election in May 2026 ((writes Fraser of Allander Institute’s MAIRI SPOWAGE)..

Normally, the Programme for Government is the annual opportunity for the Scottish Government to set out its policy priorities and the legislation it plans to pass in the coming year. This is usually published just after the return from the Summer recess, setting out both political statements and policy priorities but also (importantly) the legislation that the Government wishes to progress during the parliamentary year.

The First Minister has said he is bringing the statement forward to “enable a full year of delivery” before the Holyrood election.

The PfG that was set out in September was the first opportunity for John Swinney and Kate Forbes to set out their agenda since taking the leadership in Spring 2024. Our thoughts at the time are here – but broadly we welcomed the clear statement of the government’s prioritisation and what they would put first (tackling child poverty) above all else. Whether the government’s spending and policy decisions have actually been consistent with that may be a matter for debate.

Given the relatively short time that have elapsed since John Swinney’s first PfG as FM, there will be significant scrutiny of the document published on the 6^th May – how have the policy priorities changed? What was promised in September which has now been sidelined in the run up to the election? And, given the limited legislative time left between now and March, what legislation has a realistic chance of making it through before the parliamentary session comes to an end.

Look out for our analysis on 6^th May on the PfG!

Further fiscal fun in May

The PfG won’t be the last opportunity fo the Scottish Government to set out policy priorities.

On the fiscal side, the SG will publish the Medium-Term financial Strategy (MTFS) on 29^th May. This will be accompanied by new forecasts from the Scottish Fiscal Commission, and is the SFC’s opportunity to produce forecasts that are consistent with the OBR forecasts that were produced alongside the Spring Statement in March.

In terms of the forecasts, we can expect (probably) that the view of the SFC on growth prospects for this year are likely to have worsened. The OBR in their forecasts in March cut growth for 2025 from 2% to 1%, and a number of independent forecasters have cut the forecast for the UK significantly. This is because of the impact of global uncertainty and turmoil, but also due to policy decisions by the UK Government such as the employer national Insurance increase.

The MTFS itself aims to focus on the longer-term sustainability of Scotland’s public finances and support a strategic approach to financial planning. The publication of this document alongside the Spring forecast is supposed to support the year round budgeting process in Holyrood, allowing the pre-budget scrutiny of committees in the Summer and Autumn to be based on up to date and meaningful information.

However, the MTFS to date has not really been successful in achieving these aims. It appears to be a strategic document, but has more often than not felt like a political statement, more aimed at managing expectations of what might be funded than in setting out a credible central scenario.

One of the issues with the MTFS is that there is no detail on how the spending projections contained within it are arrived at, and therefore it is impossible to scrutinise the priority of each and how realistic they are. When we come to try and understand the net fiscal position, we are often unable to reconcile the MTFS with any in-year spending changes. This throws into question its usefulness as a document. It is also why it has largely been abandoned by those scrutinising the Scottish Government – especially when it has not always been published when it was due.

See our commentary on the last version of this published in May 2023.

In addition to the MTFS, The Scottish Government said it will publish a Fiscal Sustainability Delivery Plan alongside the MTFS 2025 for the first time. The Government say this will support fiscal transparency and a foundation for longer-term financial planning, and announced this in the Autumn in the run up to a debate about fiscal sustainability in the Scottish Parliament.

We can all be cynical about additional plans and strategies being produced by the government (especially given what John Swinney said in May 2024 after taking power about taking action rather than writing more strategy documents). Particularly in this case though it’s unclear why a different document is needed.

The MTFS is supposed to address fiscal sustainability, and the fact that the Scottish Government is creating a separate one casts doubt on the usefulness and the seriousness with which the SG treats the MTFS – and therefore how seriously we should treat it.

However, let’s see what it contains, and we will analyse the contents in detail when it is produced on 29^th May. We would expect that it will say something about pay and the size and shape of the public sector in Scotland. Given that around half of Scottish Government current spending is on pay, any long-term-focussed document that does not have a specific view on the size of employment and rate of growth in payroll over a number of years cannot be regarded as credible.

We understand there are also other documents that are likely to come over the summer, such as a plan for Public Service Reform, and a plan for a shift to prevention, particularly on public health.

The issues on pay and public sector size are very relevant to Public Service Reform as well as fiscal sustainability, as it is likely that we will have to drive reform which delivers more productive public services with fewer people than work in the public sector today.

Tariffs: Fraser of Allander explainer

Despite was the US President says, tariff is – at least among economists – far from the most beautiful word in the English language. But it’s certainly the word of the week, and has been resurrected from the doldrums of interest in seemingly no time (writes Fraser of Allander Institute’s JOAO SOUSA).

What even is a tariff?

What we usually call a tariff is a tax on the importation of a good into a jurisdiction. The tax itself is called a customs duty in the National Accounts, and can be levied either as a specific (certain amount per unit) or ad valorem (that is, as a percentage of the price). The duty is payable on clearing customs and therefore payable on entering a territory legally for consumption, final or intermediate, and depends on two things: the good in question and its provenance.

A trade tariff is also the name of the overall regime: for example, see this link for the UK’s set of tariffs for each good from each jurisdiction.

What do economists know about tariffs?

Generally, tariffs are by themselves quite bad for the whole of the economy and for consumers. International trade allows countries to focus on what they have comparative advantage in, which means they can sell those goods (and services) abroad and import other countries’ goods that are produced more efficiently than otherwise would be the case.

Importantly, this is true even if a country is more efficient at producing all goods than others. This was the important contribution of David Ricardo in the 1810s, and focusses on the fact that not focussing on those more productive goods and services has an opportunity cost. So the system as a whole produces more and allows for higher consumption in all countries if they focus on their respective relative strengths.

Of course, the world is a lot more complicated than Ricardo’s original two-factor model. But even now – over two hundred years after On the Principles of Political Economy and Taxation – there is broad agreement that countries tend towards specialising in their comparative advantages and that in turns results in higher living standards.

Even some of the more nuanced views of the effects of globalisation and trade which have emerged in the last decade and a half, such as David Autor’s, is unequivocal about both the overall positive effect of trade on global welfare and on the US as a whole. His argument about the ripple effects on the US of China’s rise and entry into the global trade focusses on both the sectoral and geographical concentration of negative effects.

Who wins and who loses?

Imposing tariffs or increasing them has the opposite effect of trade liberalisation. It will increase prices somewhat to consumers: the extent to which it does will depend on how responsive consumers are to price and how much domestic production can satisfy any pent-up demand.

But most consumer goods which are imported are likely to see significant price rises, especially because of how large the increase in tariffs is. So US consumers as a whole will lose out.

Domestic firms producing goods in competition to those normally imported are the main winners in the short-run, at the expense of consumers, as they will pick up some of the lost international activity.

But the extent to which they gain will be tempered by their ability to source factors of productions, particularly intermediate goods, many of which will come from abroad and be therefore subject to tariffs. Their costs might well go up, which could negate many of their potential gains.

The US federal government will also gain some direct revenue, although imports will likely decline significantly, undercutting some of that increased revenue. The increase in prices is likely to slow economic growth in the US, both because of the hit to real household income and because the Federal Reserve will likely act to curb inflation. It’s possible that overall tax revenues will fall, even if tariff revenues increase.

Across the world, trade will slow down, especially with news of retaliatory tariffs. A general slowdown in trade is bad news for economic growth, and that is the overwhelming channel through which the shock will propagate worldwide. In the long run, slower growth far outweighs any other effect, and means that the world is less efficient at producing goods and services, leading to lower living standards across the globe.

Are there any sensible reasons for increasing tariffs?

The US President’s rationale for imposing trade restrictions is based on the fact that the US runs a trade deficit, and therefore is being taken advantage of.

This obviously makes no economic sense. A nation is not a firm, and so any analogy is misguided. Imports allow US consumers to benefit from more and cheaper goods, and enhances their living standards.

There is no macroeconomic reason to aim for a trade balance or surplus. This is a mercantilist idea that became discredited in the 18^th century.

That is to say nothing of the complete fallacy of division being implied by the Trump Administration, which appears to believe that the not only should the US run a trade surplus as a whole, but that it should do so with every country.

This is a preposterous idea, based on no coherent economic theory. It wouldn’t make sense even if one thought a trade surplus made sense to aim for. Which, to reiterate, it doesn’t. People derive utility from consuming goods and services, not from selling them.

The current account – which includes the trade deficit, but also other flows of funds such as investment – can and does matter. But it matters especially for smaller countries which cannot borrow in their own currency and may need hard currency. In those cases, tariffs can be an emergency measure to discourage imports.

Of course, this doesn’t apply to the US in any sense. The US dollar is the anchor currency of the world system, and that has allowed it to run large current account deficits for decades.

Tariffs have historically been used to protect nascent domestic industries from foreign competition. The history of their success is patchy, but the rationale is understandable if a sector is building up its capacity and would be initially inefficient, but could serve as a way of increasing innovation and growth in the future if it gets enough scale.

While this is an oft-cited reason, the dynamic problems are easy to see. Protection from foreign competition disincentivises domestic efficiency, and so the policy might fail as a way to drive competitiveness in the long run. There is also a danger of enhancing the power of firms benefitting from it, who will have a strong incentive to lobby for tariffs to be maintained – therefore improving their position at the expense of consumers.

Targeted tariffs can also be used as anti-dumping measures. The idea is that countries might try to subsidise their exporters – either for economic or other reasons, such as geopolitics – to drive out other countries’ manufacturers from the market.

This is essentially an argument against excessive market power, especially when it comes from countries with state-subsidised or controlled monopolies, and interacts with strategically important sectors such as military supplies.

For example, the European Union and the US have often used these against Chinese steel, arguing that there is an interest in maintaining domestic capability for security reasons. In the long run, however, it’s doubtful whether these tariffs are effective at achieving their aims if the difference in production costs is too large.

There’s also an argument that they could have been useful as a temporary tool to ease the transition to a world where China was entering the global trade system. In this view, tariffs could have slowed down exposure to cheaply made goods that almost overnight made whole industries uncompetitive in certain places in the US and across the Western world. But even if we think this might have been a good idea – and as we’ll explore later – it’s hard to see doing it now being enough to reverse what has happened.

How big an increase in tariffs is this, and what precedent is there?

It’s pretty big. The Yale Budget Lab calculates that the effective tariff rate will now be around 22.5%, up from 2.6% in 2023.

That would mean an 857% increase in the level of tariffs. The actual figures might be somewhat different because there might be some substitution towards lower tariff countries, but make no mistake: this is the largest relative increase in tariffs in a single year in the history of the United States, and will likely bring tariffs to levels not seen since Teddy Roosevelt’s presidency – higher, for example, than in the aftermath of the Smoot-Hawley tariffs of the early 1930s.

Chart: Effective tariff rates for the United States over its history

Source: US Bureau of the Census, US Bureau of Economic Analysis, Yale Budget Lab, FAI analysis

The US might be seen as a bastion of free trade, but that’s only true relatively recently. Tariffs were the main source of government revenue before the federal income tax was introduced in the 1910s, and as such were both a vehicle for trade policy and an important source of funds for military emergencies.

The War of 1812 in particular stands out as a time when it served that dual purpose, raising revenues to fight the UK and acting as a punitive measure for UK-originated goods. With the effective rate reaching over 60% of all imported goods (excluding gold and silver), it is still the high watermark for tariffs in US history.

The following decades saw a see-saw of trade policy. The Northeast of the US was much more protectionist, as it had a larger manufacturing base; Southerners, which sold so much of their cotton (produced using slave labour) to the UK, were much keener on lower tariffs to maintain good relationships with Britain.

After the American Civil War – when tariffs were hiked to provide revenue – the US protected many of its growing industries by maintaining tariffs high. This was followed by a further hike in 1890 by the newly Republican-dominated US Congress, which no longer used the fig-leaf of nascent industry protection – it was straight up shielding of industry from foreign competition.

After a gradual decline in tariffs under Woodrow Wilson, the US reacted back with the unmitigated disaster of the Smoot-Hawley tariffs of 1930. It was meant to shield the US from the worst of the Great Depression, but it did nothing of the sort. It increased unemployment, propagated the banking crisis and unleashed protectionism across the world and ensured the crisis was deeper and lasted for longer.

Since the end of the Second World War, the US has been moving – as has most of the world – to lower tariffs as part of the World Trade Organisation’s (WTO) predecessor, the General Agreement on Tariffs and Trade – until now. There have been sporadic increases on specific goods, but the effective tariff rate for the US has fallen from 10.9% in 1946 to 2.6% in 2023. The US federal government has also diversified its tax base, and customs duties are a minor contributor to its revenues.

Will this lead to reshoring? Structural change is not a two-way street

International trade generates quite diffuse benefits – lower prices and higher diversity of goods available, with each beneficiary getting a small boost which becomes very large when aggregated for a whole country.

But the losses are generally concentrated among those industries which have the most competition from abroad. If those are also heavily concentrated in the same places, and if workers find it hard to move and retrain, the quality of jobs they can find leaves their prospects heavily damaged. All these have been true in the US, with rural Appalachia and being significantly hard hit.

It’s probably true that economists were too sanguine about the effect that trade would have on totemic industries and on particular places. Looking back, a big bang of opening in one go in response to China joining the WTO might well have been the wrong way to manage the transition, and David Autor compellingly argues that it has probably contributed to the political make-up of today’s United States.

But as he says, the transition has happened – it won’t be undone, and it can’t be anyway. As we know full well in the UK as well, structural transformation is not a reversible process – all we can do is look forward to what can be done to manage things given where we are rather than row it back.

Broad-based tariffs are particularly badly suited to respond to sectoral effects. But even so, at the margin, there might be some new jobs in manufacturing in the US if some foreign producers’ goods are made uncompetitive by the new level of tariffs. But these are likely to be small in number, and may well be negative on net once we account for the effect of lower economic growth – particularly if it has an upward effect on the Federal Reserve’s policy interest rate. And it will hurt all American consumers.

The US is now a high-wage, service-based economy. Manufacturing is not what it was in the 1960s, and its competitiveness is on high-value added, high-skilled jobs. This will not bring back high-quality jobs for those without university degrees or return Rust Belt cities to their former glory – that moment has passed, and a new course must be charted. If only solutions were as easy as rolling back time.

To retaliate or not to retaliate – that’s the question

The UK Government appears to have breathed a sigh of relief, with the UK being hit with only the ‘baseline’ 10% tariff. Other countries and trade blocs have had higher tariffs imposed on goods from them, and have immediately retaliated.

Retaliation is not an economic decision; it’s a political one. To impose tariffs is to harm one’s domestic consumers (and voters), and so as an economic strategy by itself it makes little sense. But it can make sense from a political perspective if a country thinks it can force those imposing the initial tariff to think again, especially if producers who sell to those markets can yield significant influence.

One can see the attractiveness of retaliation, but it’s hard to see – at least for the moment – how retaliation might make the prospects of a lower tariff right now any better. But non-retaliation is a stance that politicians can find difficult to maintain, and therefore it wouldn’t be shocking if the UK Government changed tack.

Mostly, though, this is bad news for the Chancellor of the Exchequer

Rachel Reeves eked out as much headroom as she could in last week’s Spring Statement by cutting departmental spending and disability benefit. But her decisions – both last week and in the Autumn Budget – meant that she left herself no room for growth to be downgraded, or else her ‘iron-clad’ fiscal rules would be broken.

The main effect of the Trump tariffs and subsequent retaliations will be – as we discussed earlier – a retrenchment in global trade, which will in turn reduce economic growth globally. Across the world, less trade means less efficient production processes, and therefore lower output and/or higher prices for the same goods.

And that has substantial implications for an open economy like the UK. As the Office for Budget Responsibility highlighted in their scenario analysis, this sort of tariffs on a permanent basis would wipe out her fine-tuned headroom and would force her to tighten fiscal policy again if she wants to comply with her fiscal rules.

The Chancellor’s best hope, then, is that these tariffs turn out to be as short-lived as Trump Steaks.

João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute.

Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK’s public finances and on the effect of economic developments and fiscal policy on the UK’s medium-term outlook.

Fraser of Allander Institute downgrades growth forecasts

‘the picture is still one of subdued growth‘

Economic and business conditions in early 2025 showed limited improvement, as firms across Scotland brace for upcoming cost pressures.

This is according to the latest Economic Commentary from the Fraser of Allander Institute at the University of Strathclyde, which covers the latest data on the UK and Scottish economies.

The Institute’s economists have downgraded their growth forecast for 2025 and 2026 to reflect economic conditions in both the UK and the world economy. The Fraser of Allander now expects growth in 2025 to be similar to growth in 2024 at 0.9%, before increasing to 1.1% in 2026.

While GDP in Scotland and the UK grew over 2024, and inflation has continued to ease, the outlook among businesses remains pessimistic.

Inflation fell unexpectedly fell to 2.8% in February, offering some relief to households and policymakers. However, services inflation remains high at 5%, meaning the Bank of England is likely to remain cautious in cutting interest rates over 2025.

The easing of inflation comes just ahead of changes to the UK’s employers National Insurance system, which came into effect as of April. These increases are expected to raise costs for employers and are already weighing on business sentiment.

New data from the Fraser of Allander Institute’s Scottish Business Monitor shows that 94% of firms expect cost pressures to increase in the first half of 2025, with three in four businesses highlighting National Insurance changes as a significant concern.

Professor Mairi Spowage, Director of the Institute, said: “Economic conditions in 2025 are turbulent and uncertain, and are likely to remain so throughout the year. Therefore, the picture is still one of subdued growth. Many of the challenges businesses faced in 2024 – from rising costs to policy uncertainty – have not gone away.

“Added pressures from National Insurance changes and geopolitical instability risk dampening confidence and growth further. These tax changes will start to hit businesses next week, with many scaling back plans for workforce expansion and recruitment as a result.”

Alongside its regular economic analysis, this quarter’s commentary also includes a detailed look at Scotland’s disability and carer benefits system, exploring how many people are receiving support and how much this is expected to cost over time. Spending on these benefits is projected to nearly double between 2020-21 and 2029-30, adding further pressure to Scotland’s fiscal outlook.

The commentary also reflects on the UK Chancellor’s Spring Statement, which contained significant fiscal policy announcements despite efforts to downplay its importance. Cuts to departmental budgets and reforms to disability benefits signal tougher times ahead for devolved budgets.

João Sousa, Deputy Director of the Institute, said: “The Spring Statement had clear implications for Scotland. Although there is a modest short-term funding increase, the medium-term outlook is significantly more challenging, with Holyrood’s budget for day-to-day spending expected to be nearly £900 million worse off by 2029-30.

“We’ll learn more about what this means for Scotland when the Scottish Fiscal Commission publishes its next forecast in May, but it’s certain to be another significant pressure on the Scottish Government’s desk.

“The Chancellor has staked all her credibility on meeting her fiscal rules, but the buffer remains very small against the many risks encircling the UK economy, including those from global trade shocks. If any of those materialise, then we might be back in a similar position in the Autumn.”

You can see the full commentary here.

Child Poverty: A step in the right direction

FRASER OF ALLANDER INSTITUTE ANALYSIS

This week, the Scottish Government released headline child poverty statistics for 2023-24. The big headline is: we’ve missed the interim child poverty targets. But what does that mean? And what comes next (write Fraser of Allander Institute’s HANNAH RANDOLPH, EMMA CONGREVE and CHIRSTY McFADYEN)?

What do the new statistics say?

First, our usual note on the data: poverty rates are usually presented as a three-year average. The pandemic interrupted data collection, so any period including 2020-21 is actually a two-year average omitting that year – although the latest data point is back to a true three-year average. The interim and final child poverty targets set out in legislation are single-year rates, though, so we needed to hit 18% relative poverty in 2023-24 to meet the interim targets.

Without further ado, the new child poverty statistics are compared to the corresponding interim targets in Table 1 below.

Table 1: Child poverty rates and interim targets

	Three-year rate		Single-year rate		Interim target by 2023/24
	2020-23	2021-24	2022/23	2023/24	Interim target by 2023/24
Relative poverty	24	23	26	22	18
Absolute poverty	21	20	23	17	14
Low income and material deprivation	—	—	12	9	8
Persistent poverty	—	—	17	23	8

Source: Scottish Government
Notes: The questions on material deprivation changed in 2023/24, so single-year rates are not directly comparable and a three-year rate for 2021-24 has not been calculated. Rates of persistent poverty are calculated for 2018-22 and 2019-23; someone is counted as in persistent poverty in 2019-23 if they were in poverty for three or more of the four years in that period.

In sum, three of the four main measures of child poverty have fallen since last year – but not by enough to meet any of the interim targets.

How close were we to meeting the targets?

The measure of combined low income and material deprivation came closest to meeting the interim target, 9% vs. an 8% target. The relative and absolute poverty measures came in 4 and 3 percentage points above the targets, respectively (see Chart 1). It’s fair to note that the confidence intervals around these measures are relatively wide due to data limitations.

Chart 1: Relative and absolute poverty after housing costs, 2015/16 – 2023/24

Two trend lines showing relatively stable relative and absolute child poverty rates in Scotland form 2015/16 to 2023/24.

Source: Scottish Government
Notes: Three-year rates for periods including 2020/21 are two-year averages omitting 2020/21. The single-year rate for 2020/21 is not shown.

It’s promising that these three measures also fell from last year. The fourth measure, persistent poverty, is based on a different survey and can be relatively volatile.

Nevertheless, it’s concerning that persistent poverty, representing the proportion of children who live in relative poverty for three or more of the last four years, has risen from 17% to 23%. The rate is much higher than the interim target of 8%. However, there may be data issues driving at least part of the change – there’s potentially a lot to unpack there.

Have policies like the Scottish Child Payment made a difference?

The new data for 2023/24 represent the first year when all children under 16 in households receiving qualifying benefits got £25 per week for the full year.

As a reminder:

The Scottish Child Payment (SCP) was introduced for children under 6 in eligible households at £10 per week in February 2021;
The amount increased to £20 per week, per child in November 2021;
A system of bridging payments was introduced in 2022 for children under 16; and
Eligibility was extended to children under 16 and the payment was increased to £25 per week, per child in November 2022.

There has been some discussion of whether or not the Family Resources Survey (the survey Scotland’s child poverty statistics are based on) was accurately capturing receipt of SCP. There have been updates to the data methodology, and we’re confident that SCP is accurately represented in this year’s data. Read more on this issue here.

The new statistics today show a fall in relative and absolute poverty since last year. But it’s difficult to say what would have happened to child poverty rates in the absence of SCP; the most straightforward way to tell is to compare trends in child poverty across Scotland and the rest of the UK, where SCP is not available (see Chart 2).

Chart 2: Relative child poverty trends, Scotland vs. UK

Two trend lines showing relative child poverty in Scotland and the UK, where Scotland's rate is below that of the UK.

Source: Scottish Government and DWP
Notes: All rates are single-year statistics. The single-year rates for 2020/21 are not shown.

With this year’s data, we see an indication that the trend in child poverty rates since SCP was introduced may have started to diverge – but only time will tell.

The Scottish Government has also released new modelling this morning updating the estimated impact of different policies on child poverty in future years. Previous modelling from last year estimated the impact of measures like the Scottish Child Payment through this year; today’s modelling extends this period to 2029/30.

The new modelling estimates that the SCP will reduce relative child poverty by 4 percentage points in 2025/26 compared to what it would have been without it. This is slightly larger than, but similar to, JRF’s estimate of 3 percentage points.

The modelling also includes estimates of the impact of different welfare reforms at the UK level. The UK Government is due to come out with their plan to tackle child poverty in the coming months, and it will be worth watching to see what they build into their plans and how they will affect Scotland.

We expect to put a blog post out next week talking through recent modelling of potential policies, both with devolved and reserved powers. Stay tuned – and in the meantime, check out our report on a few policy packages that could meet the 2030/31 targets.

What happens next?

It’s not set out in the legislation what happens if the interim targets are not met.

Regardless, we now expect attentions to turn to the 2030/31 targets. The targets are:

Less than 10% of children in relative poverty;
Less than 5% of children in absolute poverty;
Less than 5% of children in combined low income and material deprivation; and
Less than 5% of children in persistent poverty.

No big policy changes have gone into effect in the last couple of years – so we don’t expect to see a big step change in next year’s statistics (for 2024/25) either.

In December, the Scottish Government announced that they would mitigate the UK-level two-child limit on Universal Credit from 2026/27 (or sooner if possible).

Recent estimates show that mitigation could reduce child poverty by between one and two percentage points.

That leaves a long way to go to the 2030 targets. The Scottish Government has a number of levers available to them, but may be constrained by a tough fiscal environment. They will also have to respond to choices made by the UK Government, such as the recent cuts to disability benefits.

We’ll be looking out for the final child poverty delivery plan, which will be published next spring and will hopefully lay out the Government’s plans to reach the targets. There will also be a lot to dig into as next year’s Holyrood elections approach and different parties set out their plans to meet the targets in their manifestos.

To read more about potential policy packages to meet the 2030 targets, check out our latest modelling report here.

Pathways to Work? Health and disability Green Paper analysis

Welfare Green Paper: what we know and what we don’t know

Work and Pension Secretary Liz Kendall made a statement to the House of Commons yesterday outlining the main areas of ‘Pathways to Work”, the UK Government’s Green Paper that has been in the rumour mill for weeks. The statement contained some well trailed announcements and some new details, although there are also still some significant gaps in our understanding (writes FRASER of ALLANDER INSTITUTE team).

PIP will not be frozen, but eligibility will be restricted

The Secretary of State’s headline announcement was in line with news over the weekend, which suggested that rates will not be frozen. Instead, the criteria for getting the daily living element of the Personal Independence Payment (PIP) will be raised, with a minimum of four points on one daily living activity.

The Green Paper in this section is heavily focussed on the ‘sustainability’ of the disability benefits system, and on needing to make the system more ‘pro-work.’ It’s worth noting, however, that work status is unrelated to being in receipt of disability benefits, which are designed to address the additional costs of living with a disability, whether or not someone is in work.

Sustainability too is a nebulous concept in this space. But while it makes sense to talk about sustainability of the public finances as a whole, it is not immediately clear that a growing area of spending is necessarily unsustainable, especially when responding to a clear need in society. The Government has choices – for example, to raise taxes or to cut other areas of spending. So far from being a macroeconomic imperative, to focus on disability benefits seems clearly a political choice.

There is little in the way of details of how much the UK Government intends to save in the Green Paper, but the Secretary of State mentioned the much bandied about £5bn by 2029-30 that it intends to include in the OBR forecast. We do not know how much of this figure will be generated from PIP rather than other changes.

What we now know is that the whole of the spending reductions on PIP will come from the lower end of the average award, as it is being driven through the raising the bar for claiming. But that also means that all else equal, even more people will lose access to the benefit. A quick calculation suggests that for every £1bn a year saved, it could mean around a quarter of a million fewer people receiving PIP, which would be a huge change.

Work capability assessment scrapped from 2028

This is a significant change, and one for which consequences in Scotland are still unknown. At the moment, the work capability assessment (WCA) is used to assess fitness for work. From 2028, the assessment for PIP will instead be used as the basis for universal credit (UC) elements related to health conditions.

This creates an issue in Scotland, because Social Security Scotland runs its own (different) assessment for Adult Disability Payment (ADP), which is the devolved equivalent of PIP. But UC is a reserved benefit administered by DWP, and that means that potential claimants in Scotland would not have access to the PIP assessment that would be used for determining eligibility for health-related UC elements. And with the PIP assessment being tightened, it will be likely further out of step with ADP.

We’ll have to wait and see what solution there will be to this – the Green Paper merely states that “consideration will be needed.” But this is an important issue that requires action on the part of both UK and Scottish departments to ensure access by claimants to this is maintained. It highlights a broader issue of the interaction between the benefits systems which is likely to be put under further strain as systems evolve separately in Scotland.

On a broader point, these proposed changes come at a time when people in receipt of Employment and Support Allowance are due to be migrated to UC by the end of 2026. Our research with people with learning disabilities showed that many are already really concerned about the upcoming changes, and these will be further changes to an already complex system. It will be crucial to clearly communicate all the changes, particularly in accessible formats.

UC rates to be rebalanced, and access to health elements restricted for those under 22

The Secretary of State also announced a big change in the relative levels of the standard and health elements of UC. The health element of UC – which is paid on top of the standard allowance – will be frozen in cash terms for the rest of the decade for those already in receipt of it, and new claims will be paid at around half the current rate (£50/week compared with the current £97/week). Alongside this, the UK Government says it will uprate the UC standard allowance by more than inflation (6% in 2026-27).

The health element of UC will also be tightened in several ways. One is that claimants will be expected to have “much more active engagement and support” in relation to work. The other large change proposed is the consultation on delaying access to the health element of UC until potential claimants are 22, with the justification being the lower likelihood of those in receipt of that element being in employment as well as the fact that those under 22 will be covered by the Youth Guarantee of employment support, training or an apprenticeship.

We note, however, that employability is an area of devolved competence, and indeed a similar scheme already exists in Scotland.

A consultation on a new ‘unemployment insurance’

The UK Government is consulting on an interesting proposal for a unified ‘unemployment insurance’ benefit, which would replace both contribution-based Jobseeker’s Allowance and Employment and Support Allowance with a single, time-limited entitlement. This is a step more in the direction of most European systems, in which contributory systems provide a much higher level of income replacement than UC, although for a limited period of time. The proposed rate is much higher than contributory JSA, which has never been a big part of the welfare system in the UK.

Higher income replacement systems are the basis of highly successful active labour market policy systems such as the Danish ‘flexicurity’ approach, and which could help smooth out cliff-edges in the labour market and incentivise retraining, but this proposal – while probably a good idea – falls well short of that kind of system. In any case, it’s also purely consultative – and as it might well cost money on net (at least in the short run), we wait to see if anything will come of this.

‘Right to try’ – a welcome development

One of the measures mentioned in the Green Paper that could have a big positive impact is the announcement of legislation to guarantee that simply starting work will not lead to a reassessment or award review. The fact that this can happen at the moment is acts as a barrier to entering employment, especially if people want to work but are unsure if it will be a good fit for their situation as they might have to reapply for benefits subsequently.

Our research with people with learning disabilities indicates that this ‘right to try’ approach might work well, as the binary ‘can work/can’t work’ doesn’t fit well for them. Many people want to work and just need the right support – so we are hopeful that some of these changes will provide just that.

We know very little about how most of the announcements will affect Scotland

PIP is being replaced in Scotland with ADP, and migration is expected to be concluded this year. None of the announcements therefore affect Scottish claimants of ADP, but they do affect the finances of the Scottish Government. As we discussed last week, the Scottish Government’s block grant adjustment is based on the projected expenditure in England and Wales, and therefore a tightening of access to PIP will (all else equal) make the Scottish Budget worse off. It is then the Scottish Government’s decision to move in lockstep or to find the additional funds from other sources.

Because the Green Paper has no costings for how much of the £5bn a year in savings comes from PIP, it’s impossible for us to say how much this will mean for the Scottish Government’s Budget. But the ready-reckoner we provided last time out – showing an effect of £90-115m for every £1bn reduction in PIP spending by the UK Government – still applies.

As we discussed before, the use of the PIP assessment for health-related UC claims is problematic in the absence of any further action, as this is not available in Scotland and the systems are diverging. The UK Government’s Green Paper says this will require “consideration”, but this is a pretty substantial change that we hope will be solved in good time. Given the proposal is for this to be done from April 2026, it is fairly urgent to get this resolved.

Employability support is a devolved area, but the UK Government says it will include an additional £1 billion to create a guarantee of personalised employment, health and skills support. Given that, we’d expect Barnett consequentials to flow from this, but the Green Paper does not explicitly state that – we’ll wait to see if there are news on this.

The restrictions on health-related UC claims for under 22s will apply in Scotland, as it’s a reserved benefit. Notwithstanding the issues with the PIP/ADP assessment compatibility, this is an area where there has certainly been growth in the past few years: in December 2024, 11,300 people aged 16-21 were in receipt of the health element of UC, compared with 4,600 in December 2019.

This gives us a first glimpse of the amount of people that might be affected by this change if it were to be introduced.

Green Paper delivers tiny income gains for up to four million households, at cost of major income losses for those who are too ill to work or no longer qualify for disability benefit support, says RESOLUTION FOUNDATION

The Health and Disability Green Paper will boost Universal Credit (UC) support for up to four million families without any health conditions or disability by around £3 a week. But these tiny gains are overshadowed by reforms that risk causing major income losses for those who are too ill to work, or those who no longer qualify for disability benefits, the Resolution Foundation said yesterday (Tuesday).

The Green Paper today sets out major reforms on entrances into the benefits system, entitlements within the system, and exits into work that aim to cut spending by £5 billion a year by the end of the decade, and change how people interact with the system.

The main savings are to be achieved through restricting entitlement to PIP – a benefit that is paid regardless of whether someone is in work, to compensate for the additional costs of being disabled.

The Foundation says that if the Government plans to save £5 billion from restricting PIP by making it harder to qualify for the ‘daily living’ component, this would mean between 800,000 and 1.2 million people losing support of between £4,200 and £6,300 per year by 2029-30.

With seven-in-ten PIP claimants living in families in the poorest half of the income distribution, these losses will be heavily concentrated among lower-income households. This looks like a short-term ‘scored’ savings exercise, rather than a long-term reform, says the Foundation, given that Ministers have also said they will look again at how PIP is assessed in the future.

Further savings are to be achieved by cutting the level of the health-related LWCRA element within UC, which is currently claimed by 1.6 million people. The proposed cuts are focused on young people (aged 16-21), who may no longer be eligible for any extra support, and those who fall ill in the future, as their additional support will be halved, from £97 per week in 2024-25 to £50 per week in 2026-27.

Reinvesting some of the cuts to health-related UC into boosting the basic award for UC (which, at around £3 more per week, is roughly a sixth of the temporary £20 a week uplift to UC during the pandemic), and greater support for the newly unemployed should benefit up to four million families who don’t receive health-related UC.

Reducing the financial gap between health-related and basic UC should reduce the incentive for people to claim incapacity benefits (which, for a single adult, is over twice as much as basic UC at present). Along with the additional employment support provided to people on UC, the Government hopes this will boost employment, although figures will not be available until the Office for Budget Responsibility publishes its spring forecast next week.

Louise Murphy, Senior Economist at the Resolution Foundation, said: “The package of measures announced in today’s Green Paper should encourage more people into work. But any living standards gains risk being completely over-shadowed by the scale of income losses faced by those who will receive reduced or no support at all – irrespective of whether they’re able to work.

“Around one million people are potentially at risk of losing support from tighter restrictions on PIP, while young people and those who fall ill in the future will lose support from a huge scaling back of incapacity benefits.

“The irony of this Health and Disability Green Paper is that the main beneficiaries are those without health problems or a disability. And while it includes some sensible reforms, too many of the proposals have been driven by the need for short-term savings to meet fiscal rules, rather than long-term reform.The result risks being a major income shock for millions of low-income households.”

Money and Mental Health Policy Institute: Response to government welfare green paper

The government has published its welfare green paper, which outlines its proposals to reform the welfare system.

In particular, the green paper sets out plans to make it harder for people to qualify for Personal Independence Payments (PIP) — a benefit which people with disabilities and long-term ill-health can claim to help cover the extra costs associated with their disability, and which is not connected to work. In addition, people aged under 22 will not be able to qualify for the health top-up element of Universal Credit.

The government has also announced £1bn additional funding for personalised employment support to help people with disabilities move into work, and that people receiving benefits will be given a “right to try” work without losing their benefits entitlement.

Commenting on the proposals, Helen Undy, Chief Executive of the Money and Mental Health Policy Institute, said: “PIP is an absolute lifeline for thousands of people with mental health problems. It can be the difference between being able to afford basic things like a phone to call your crisis team or help to clean your home, or living in disarray and increasing isolation.

“Making it harder to access will jeopardise people’s financial security and cause serious distress, which won’t set up people to go back into work and to thrive.

“These changes will mean that needing help to wash or get dressed because of your mental health wouldn’t be enough to qualify for PIP.

“The government says it will ensure people with ‘genuine need’ aren’t affected, but we’re really concerned that these new reforms will take us further back to the days when people with mental health problems were treated as less worthy of help than those with physical health issues.

“The new ‘right to try’ a job without losing the benefits is welcome, as is the funding for personalised employment support for people with disabilities or health conditions. But introducing these measures alongside cuts to PIP and stopping young people from getting incapacity benefits will do more harm than good.

“It is a short sighted approach that will have a devastating impact on many people’s finances and mental health, and we urge the government to rethink these plans.”

Fraser of Allander analysis: The welfare bill under pressure

We have heard this week that the UK Government Chancellor Rachel Reeves intends to make cuts to the welfare bill to bring UK Government borrowing down in line with her fiscal rules ahead of the next OBR forecasts due at the end of the month (writes Fraser of Allander Institute’s EMMA CONGREVE).

Reports state that the axe is likely to fall on health and disability related benefits for working age people.

Here we produce a bit of an explainer to get people up to speed on the benefits in scope and what has been happening in recent years.

Which benefits could be in line for cuts?

There are two types of benefits in Great Britain (benefits in Northern Ireland are arranged differently) that working age people with disabilities and ill health can claim.

Incapacity Benefits

The first type is an income replacement benefit that tops up income for families where the disability or health condition limits their ability to work, commonly referred to as incapacity benefits. They are means tested so that the amount you receive depends on your household income and reduces as income (e.g. from a partner’s earnings) rises.

Chart: Caseload of incapacity benefits for working age adults, Scotland

Notes: Universal credit and ESA exclude those in the assessment phase in line with OBR Welfare Trends Report analysis. Northern Ireland not included.

Sources: DWP, ONS

Universal Credit (UC) has been slowly replacing Employment and Support Allowance (ESA) for this group of people since 2018 so the reduction in ESA over time reflects migration over to UC rather than a change in disability/health status.

Disability Benefits

The second type of support for those with disabilities and ill health comes from payments to cover additional costs, for example due to reduced mobility, and are commonly referred to as disability benefits. They are not means tested and people do work whilst they are on these benefits.

In Scotland this type of benefit is now devolved, with Adult Disability Payment (ADP) slowly replacing Personal Independent Payment (PIP). PIP itself was a replacement for Disability Living Allowance (DLA) which no longer takes new applications and has a caseload that is reducing over time.

Chart: Caseload of disability benefits for working age adults, Scotland

Note: Adult Disability Payment started to replace PIP in Scotland from 2022. In England and Wales, PIP remains the main payment.

Source: DWP, ONS, Social Security Scotland

Which benefits are devolved?

Incapacity benefits (UC and ESA) are reserved benefits which means they largely operate in the same way across Great Britian, with the cost of the benefit in Scotland met by the UK Government. Any cuts made by the UK Government would apply in Scotland.

Disability benefits (PIP. SDA and ADP) are devolved, and there are differences in how the benefits operate in Scotland. The Scottish Government meets the costs of the benefit. To offset this, an amount is paid from the UK Government in the block grant, equivalent to the UK Government’s spending in Scotland if the benefits hadn’t been devolved and if spending had grown at the same per capita rate as in England and Wales.

The Scottish Government has to find additional money if expenditure on Scotland starts to diverge from the rest of GB trend due to policy changes (or perhaps, if our population gets relatively sicker).

Any cuts to PIP or SDA made by the UK Government would not apply in Scotland, but the block grant from UK Government would fall. If the Scottish Government did not replicate the cuts, they would have to find additional money from elsewhere in the Scottish Budget to offset the fall.

What has changed since the pandemic and has it been the same in Scotland as the rest of Great Britain?

As the above charts show, the caseload (the number of people claiming these benefits) has been rising steadily in recent years for both these benefits across GB and is forecast to continue to do so.

The caseload in Scotland has long been higher than in England and Wales due to a higher prevalence of people with disabilities and long-term health conditions.

In recent years, incapacity benefits caseload growth has been slower (49% in Scotland compared to 59% in rGB between May 2019 and August 2024) but due to different levels of population growth caseload per capita (which is the caseload measure shown in the charts) has been slightly higher in Scotland (7% to 11% of working age population compared to 5 % to 8% for rGB).

For disability benefits, the introduction of Adult Disability Payment makes it difficult to compare like-with-like. Although eligibility has remained broadly the same, the application process has been made more accessible and this appears to have led to an increase in people applying following its introduction.

For more detail on this, see this paper from our sister organisation the Scottish Health Equity Research Unit (SHERU). It’s also possible that some people in Scotland delayed making a PIP application to DWP in anticipation of ADP opening for applications.

This may help to explain why, since 2019, the growth in the caseload in Scotland has been only slightly higher than rGB (63% increase in Scotland between May 2019 and Aug 2024 compared to 61% for rGB). In per-capita terms, due to lower population growth in Scotland, the growth has been a bit more significant (increase from 8% of the working age population to 14% in Scotland between May 2019 and Aug 2024, compared to 6% to 9% for rGB).

Do we know why rates have increased?

There are many theories as to why rates have increased but, for a number of reasons, it has been difficult to fully evidence exactly what is going on.

We know from IFS research that rates have increased more in Great Britain than they have in other countries. The IFS also looked at entry and exit rates for disability benefits England and Wales and concluded that around 2/3 of the increase is due to people starting claims and 1/3 is due to fewer people ending their claim.

There are likely to be a number of intersecting factors. We summarise some of these issues below but overall emphasise that we don’t fully know the extent to which these interact.

The working age population is getting older

On average, people’s health deteriorates as they age. With falling birth rates there are currently proportionally fewer younger working age people than older working age people. Coupled with this, pension age changes mean that more older people have become classified as ‘working age’ in recent years. The Resolution Foundation have calculated that an ageing working age population accounts for 1/5 of the rise in caseloads for health-related benefits since the pandemic.

The increases for younger people are concerning but the biggest impact on expenditure would come from tackling ill-health and disability in older age groups

For disability benefits, the growth has been highest in the older working age population, with then broadly comparable rises across other age groups. For incapacity benefits, after the 55-64 age group the second largest rise has come from 25-34 year olds. Growth in the number of young people out of work due to disability and ill health are concerning and needs attention, but if rates are going to come down, focussing on the older generation is key. Whilst we can’t fully attribute the rise to longer waiting times in the NHS, this is likely to be part of the explanation.

Some of the rise may be due to people struggling financially and needing to maximise benefit income

This rise in benefit caseloads has coincided with relatively high rates of inflation and the ‘cost of living crisis’. People struggling financially may have been more likely to make claims during this period compared to previous years when they did not feel they needed the extra income.

There is also some suggestion that people may have switched the type of claim they make for out-of-work benefits to benefit so they can receive a higher level of payment for disability and ill-health related claims. The fact that they are successful in these claims means that people are simply claiming what they are entitled to rather than somehow ‘gaming the system’.

Mental health related claims have grown, but so have claims related to other conditions

The largest absolute rise in claims for disability benefits has been related to mental health conditions, but across Great Britain, there have been rises in a range of physical conditions too (see IFS and SHERU work on this linked above). The extent to which this is due to an increased prevalence of health conditions versus an increased likelihood to claim a health-related benefit is difficult to disentangle.

There has been a rise in the in-work population reporting a disability as well and it may be that people are becoming more comfortable with disclosing mental health conditions. This could mean that people with multiple health conditions are more comfortable with citing mental health as their primary condition in benefit claims now than was previously the case.

We don’t know how much is due to long-covid or longer-term impacts of the pandemic

The extent of available data frustrates efforts to pin down the emergence of new or worsened conditions due to the pandemic and how this has changed people’s financial circumstances (for example, ability to work).

Issues with the official Labour Force Survey have limited the usefulness of the data collected there on reasons for ill health and inactivity (see SHERU blog on this issue here) and qualitative research that is able to produce more in-depth insights usually can’t be scaled up to population level.

As more longitudinal data is made available that tracks people through the period, alongside progress towards more routine data linkage of health records to other administrative data sources such as tax records, we might be able to get a better picture of the intersecting factors that have changed people’s health, benefit and work status in recent years.

What happens next?

The Spring Statement is due on the 26^th March. When we know what the proposals are, we’ll be able to unpick what this will mean for people in Scotland and for Scottish Government budgets.

Whilst cuts to welfare spending may help in the short term, longer term solutions are tied up with efforts to improve both living standards and the ability of public services to support people further upstream (for example, through the NHS and employability services) which can reduce their need to recourse to the social security system.

Any decision to make cuts could come with fiscal risks. Cutting benefits for people already experiencing ill health and disability could make their conditions worse and increase demand for public services and/or lead to longer-term reliance on non-health related benefits.

A recent BBC verify article also provides a note of caution: reducing spending on the welfare bill is historically difficult and estimates of savings are often not achieved.

As well as looking at the details of the cuts, we’ll be looking at what the OBR say regarding their effectiveness of cutting UK Government spending with a keen eye.

New toolkit to support workers and businesses in hospitality sector

An exciting new toolkit aimed at supporting workers and businesses within Scotland’s hospitality sector has been launched.

The Tourism and Hospitality toolkit is aimed at supporting the growth and success of Scotland’s hospitality sector by providing a one-stop shop with the tools and resources businesses and employees need to thrive.

The toolkit was created based on findings from Serving the Future, a three-year project by the University of Strathclyde’s Fraser of Allander Institute and The Poverty Alliance, which focused on addressing and preventing in-work poverty in the hospitality sector.

It has also been shaped by industry experts and key players such as Skills Development Scotland, Scotland’s Tourism & Hospitality Industry Leadership Group, and industry charity Springboard.

The toolkit will provide support to the sector on key areas such as training and development, achieving net zero, recruitment and retention, and fair work. Employees will be able to access information on their rights at work, education and training, visa sponsorship and immigration, and more links to support when working in hospitality.

Kelly Johnstone, Chief Operations Officer of Springboard said: “Our mission with this toolkit is to support the growth and success of Scotland’s hospitality sector so both employers and employees can thrive.

“The toolkit brings together expert advice and practical solutions into one accessible platform to help the hospitality industry excel.

“Case studies included in the toolkit from Serving the Future highlight good practice which is already happening in Scotland – we hope many more businesses and employees can benefit from accessing this information.”

Dr Laura Robertson, research manager at The Poverty Alliance, which is a partner in Serving the Future said: “We know that low-pay and job insecurity have a big impact on households in Scotland.

“We hope this toolkit will empower businesses and workers to strengthen fair work and living wages in the hospitality sector. Scotland has signed up to legal child poverty targets and we know that making positive change in the world of work can contribute to reaching them. We are excited to see how the toolkit does that.”

Chirsty McFadyen, economist at the Fraser of Allander Institute and lead investigator on Serving the Future said: “We feel very privileged as a research team to have been let into the hospitality industry with such a warm welcome.

“Few research projects have worked with both employers and employees to create sustainable solutions in the way that Serving the Future has.

“We are keen to continue building the relationships we’ve gained from this work, and we’re looking forward to seeing the industry’s reaction to the toolkit.”

The toolkit includes a feedback form so that that businesses and employees can reflect on the usefulness of the information available.

The team behind the website will be evaluating responses and adapting the content throughout 2025.