Fraser of Allendar Institute – The NEN

Fraser of Allander Institute: the King’s Speech and the two-child benefit cap

As we highlighted in last week’s blog, we recently saw the state opening of Parliament at Westminster which allowed the new UK Government to set out their legislative programme (write MAIRI SPOWAGE and HANNAH RANDOLPH of Fraser of Allander Institute).

Along with a huge amount of pomp, ceremony and grand tradition, this is the first formal expression we have had of how the Labour manifesto will be turned into government policy and action.

The King’s Speech is focussed on legislative changes, so other areas where policy changes are likely be taken forward without legislative changes (perhaps through public service reforms, or simply changes in spending, such as health) always feature less prominently.

However, there were plenty of bills to examine – 40 bills were presented by the speech on 17^th July. This is the highest number of bills to be presented in a monarch’s speech for almost 20 years.

Which of these bills are relevant to Scotland?

The patchwork of devolution in the UK means that the extent to which these bills are relevant for Scotland is a complex picture. The chart below shows the spread, which demonstrates that in theory 22 of the bills are likely to impact upon legislation in Scotland.

Chart: Number of bills in the King’s Speech by territorial reach

Source: UKG

Digging into the detail of each of these bills shows that the impact on Scotland gets more complicated.

One of the UK wide bills is the National Wealth Fund, which will bring together some existing initiatives such as the UK Infrastructure Bank and the British Business Bank, as well as additional capitalisation of £7.3 billion over the course of the next parliament. As well as this additional public investment, the idea of bringing these different organisations together is to make the business support landscape simpler for businesses, to “create a single coherent offer for businesses and a compelling proposition for investors”.

Leaving aside the extent to which this level of extra investment will move the dial on investment overall, there is also a question whether this is going to actually simplify things for businesses in Scotland. Economic development is devolved, and we have a number of bodies that provide potential support, including the Scottish National Investment Bank and the three Enterprise Agencies.

A common complaint from businesses, particularly those with limited capacity, is the complex landscape for business support. Therefore it will be interesting to see the cross-governmental working (if any) on this to simplify things for businesses right across the UK.

Another key measure is on planning. The Planning and Infrastructure Bill proposed in the King’s speech “is expected to extend and apply to England and Wales. Some measures may also extend and apply to Scotland”. It is not clear from the explanatory notes to the King’s speech what this will actually mean for Scotland, although there is some mention of ensuring grid connections are available in a timely fashion (which would be a reserved issue in the energy infrastructure space) may well be the relevant point.

Again, the devil will be in the detail of the bill, and the extent of cross-governmental working, for us to understand how this could change things for businesses operating in Scotland.

The Crown Estates Bill does not apply to Scotland because it is devolved: but our understanding from the nots to the Bill that the provisions in the Bill for England, Wales and NI are essentially bringing in the same fiscal flexibilities that exist for the Crown Estate in Scotland.

The Hillsborough Law is the one which currently has an indeterminate territorial reach, and is one of the more vague bills included in the list of 40. This will “place a legal duty of candour on public servants and authorities” to “address the unacceptable defensive culture prevalent across too much of the public sector – highlighted by recent reports such as Bishop James Jones’s report into the experiences of the Hillsborough families and the recent Infected Blood Inquiry report”. This is fulfilling a manifesto commitment, but a concern could be that legislation to change culture may be ineffectual. This is in no way to belittle the catastrophic failures in the system that happened in these instances, just a question over whether this kind of law is the way to address it.

These are a few examples, but the detail of all the bills and crucially how they are implemented will be important to understand the actual impact on Scottish law, businesses and citizens.

Two child benefit limit causes first Labour rebellion

This week, we also saw the vote on the King’s speech – the first vote for the Labour Government, and, perhaps predictably given the size of their majority, the first rebellion from a few backbenchers.

The SNP laid a motion to amend the king’s speech to include the abolition of the two-child benefit limit. The amendment was voted down, but removing the two-child limit is now being widely debated particularly because seven Labour MPs voted for the amendment and have had the whip withdrawn. More broadly, it has drawn attention to what the new Labour government’s plans for an anti-poverty strategy might be.

The two-child limit applies to households with three or more children receiving Universal Credit or tax credits. Both give households additional amounts for the first and second child, but no further benefits or credits for the third or subsequent children. It does not impact on Child Benefit.

The two-child limit was introduced in 2017 and applies to any child born after 6 April 2017. As time goes on and a greater proportion of children fall into that category, more families are affected.

HMRC and DWP report that 440,000 households were affected as of April 2024, of which 26,000 are in Scotland.

Estimates from the Institute for Fiscal Studies show that the two-child limit currently costs affected households £3,400 per year, per child on average. This is likely one driver for a widening gap in poverty rates for families with one or two children versus those with more.

The Scottish Government has introduced a new benefit, the Scottish Child Payment, as part of their efforts to reduce child poverty. To what extent does the Scottish Child Payment mitigate the effects of the two-child limit in Scotland?

The Scottish Child Payment (SCP) is a £26.70 per week, per child under 16 benefit available to households in receipt of qualifying benefits like Universal Credit. SCP does not restrict the number of children in a household who can receive the benefit, nor does it have a lower amount for second and subsequent children.

SCP is therefore likely to mitigate the effect of the two-child limit on households in Scotland to some extent. Households receive about £1,400 per year for each eligible child from SCP, which does partially offset the £3,400 they might be able to claim for third and subsequent children in the absence of the two-child limit.

Chart 2: Child poverty rate by number of children in the household, Scotland

Source: Scottish Government and Department for Work and Pensions
Notes: Child poverty rates are averaged over three years of Family Resources Survey data. For the last three years, figures represent a two-year average excluding the 2020-21 data due to data collection issues associated with the Covid-19 pandemic.

The mitigation of SCP, plus other factors, may contribute to lower gaps between child poverty among children in households with 3+ children versus in households with fewer children (see chart).

The gap between poverty for children by family size has grown since about 2012-15 for the UK as a whole. Just over one in five (22%) of children in households with only one or two children were in poverty in 2020-23, compared to nearly one in two (44%) of children in households with more children.

In Scotland, however, there is slightly less of a gap, albeit one that has grown more in the last couple of years. 19% of children in households with 1-2 children live in poverty, compared to 38% of children in households with more children. Because some of the effects of the two-child limit are mitigated by SCP, removing the two-child limit might have less of an effect in Scotland than in the rest of the UK – but it would still have an impact.

The Scottish Government has estimated that about 10,000 children would be taken out of poverty in Scotland if the two-child limit were removed, many in households with 3+ children.

For context, that would reduce child poverty in Scotland by about 1pp. That’s on top of an estimated 60,000 kept out of poverty by the SCP in 2024-25.

What next for the two-child limit?

The Labour Leadership are sticking to the manifesto on which they were only recently elected: that they would like to remove the two-child limit in time, but that they do not think they are in a position to remove it just now due to the public finances.

The cost is estimated at about £3.4b per year in the long run, about 3% of the working-age benefit budget. So while fiscal responsibility is to be lauded, this would be a fairly minor policy change in fiscal terms in exchange for progress on child poverty at the UK level.

The cost of these increased benefits for households in Scotland would still fall on the UK Government rather than the Scottish Government, since Universal Credit and tax credits are both reserved.

Labour have also pointed out that removing the two-child limit is not a silver bullet, and that they want to take the time to develop a coherent anti-poverty strategy across different policy areas.

As usual, we hope that such a plan would be evidence-based. There may also be opportunities to learn from devolved policies like SCP that should be taken up by the new UK Government.

Beyond distraction, what else has been going on this week?

FRASER of ALLANDER INSTITUTE’s WEEKLY UPDATE

Scottish politics is of course a little up in the air at the moment, following the decision of the current First Minister to resign and high drama of the start of the leadership race (writes EMMA CONGREVE, Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute).

We’re yet to hear too much about the economic policy intentions of her successor, but with nominations closing today (Friday), we expect to hear much more about that in the week ahead.

Aside from the distractions of the SNP leadership contest, here are few other issues making the news this week:

UK – public finances

There was a larger than expected surplus in UK Public Sector Net Borrowing in January 2023. January is typically a year when there is a bump in tax revenues due to the self-assessment tax deadline and these were up £5.5 billion on the same time last year. Energy costs were also lower than expected with the government’s energy price subsidy coming in around £1 billion less than expected by the OBR.

Overall, in the financial year to January 2023, the public sector has borrowed around £30 billion less than the OBR were predicting back in November 2022. This does give some extra fiscal headroom for the UK Chancellor ahead of the upcoming UK Budget on the 15^th March, although we wouldn’t expect any big changes given the Chancellor’s stated preference for caution off the back of the turbulence caused by his predecessor.

Scotland – Scottish Budget

In Scotland, the Scottish Budget passed stage three. As we often find at this point in the budget process, there was a little more money to play with due to extra funding (£125 million) coming through the Barnett formula as a result of spending in devolved areas in Westminster. There was also confirmation of an additional £21 million to correct for an error in a previous allocation.

Extra money (£100 million) has been promised to local authorities to help with pay offers for non-teaching staff, which comes off the back of money last week (£123 million) for teaching staff. Creative Scotland also got a boost.

Scottish council’s are now starting to finalise their budgets for the year ahead, with positions on Council Tax increases understandably getting a lot of attention. Already, Orkney have confirmed an increase their Council Tax by 10% with councillors in Aberdeen being recommended by to do the same. Although the very lowest income households are protected from these increases by Council Tax Reduction, many who do face them will of course be concerned over what this means for their household finances.

ONS – financial vulnerability

This week, ONS published an article on groups of people experiencing some form of financial vulnerability who are most exposed to cost of living increases. Whilst the groups cited as being most vulnerable to cost of living increases are what we would expect to see (renters, young people, parents with dependent children, and low-income households) it is great to see ONS continuing to use their data and tools to pull out these insights.

Quantitative data from the ONS does play an important role in policy development, and having data pulled out like this will also help with monitoring the impact of policies to help financial vulnerable groups over time.

Is child poverty heading in the right direction?

FRASER of ALLENDAR INSTITUTE: – taking stock ahead of the second Tackling Child Poverty Delivery Plan

This month is a big month for tackling poverty in Scotland. It sees the publication of the Scottish Government’s second Tackling Child Poverty Delivery plan. March usually, however, also sees the publication of the official Poverty and Inequality statistics – the primary measures of success of action to reduce poverty. They should have given us the main poverty statistics for the first year of the covid pandemic, i.e. 2020/21.

That Scottish Government has warned, however, that the estimates will not be robust enough to be published as official statistics, due to issues with data collection during the pandemic, which means that they are unlikely to be able to tell us whether relative child poverty rose or fell in 2020/21.

Persistent poverty, which measures whether children have been in relative poverty in three out of the last four years are in persistent poverty uses a longitudinal survey (Understanding Society) which has been less affected by pandemic restrictions and will be released as normal on the 31^st March.

However, measures of relative and absolute child poverty, and measures of material deprivation, will effectively be void for 2020/21.

This gap in data is clearly problematic, particularly for those trying to understand the impact of the pandemic on people’s financial situations.

Looking over the long term however, 2020/21 would have no doubt been an outlier due to level of disruption and the impact of things like the furlough scheme and the temporary uplift to Universal Credit.

An important question (which future data will answer) is the extent the pandemic has permanently impacted financially on households, while for some the flux of 2020/21 will have been short-lived, for many it has added the challenges they already face and could have longer-term impacts.

It will be a number of years until we fully understand the long term scarring. In the meantime, as we discussed this time last year as we awaited 2019/20 data on incomes and poverty, pre-pandemic data is as good a benchmark as any to plan for future policy delivery as long as we bear in mind that there is more uncertainty than ever over these figures at the moment.

The second tackling child poverty delivery plan

Future policy delivery is exactly what the Scottish Government will be planning at the moment as they get ready to publish their second tackling child poverty delivery plan and a key part of this will be estimating the impact of measures in the first delivery plan, as well as the impact of announcements at UK Government level[i].

In the three years to 2019/20, relative child poverty was 24%. The continuing impact of the two child limit and the benefit cap are expected to exert upwards pressure on poverty, in the region of 1 to 2 percentage points by 2023/24.

However, there have been two major policy changes which should more than offset this upwards pressure. In the last year, we have seen the Scottish Government announce the doubling of the Scottish Child Payment to £20 a week and some significant changes made by the UK Government to Universal Credit to the work allowance and the rate at which the benefit is tapered away for those in work. Holding all else equal, these will have increased incomes for many low-income families with children, and therefore decreased poverty.

Our best estimate at the moment suggests that the Scottish Child Payment (£20 paid to all children under 16) will shift poverty downwards by 2 to 3 percentage points by 2023/24, with an additional downwards shift of 1 to 2 percentage points due to the changes to Universal Credit.

This implies that policy changes have put child poverty in Scotland on a downwards trajectory. However, even taking these into account, based on policies announced to date our modelling suggests that there is still likely to be a 3 – 4 percentage point gap between expected poverty in 2023/24 and the interim target of 18%.

There are other policy changes that may reinforce this further, for example, employability policies such as Fair Start Scotland and the rollout of 30 hours of free childcare to all 3- and 4-year olds that took place in August 2021 could help boost incomes by 2023/24 but even taking these into account, we are still likely to be above the target level unless new policies are announced.

After the tackling child poverty delivery plan has been announced we will be able to reassess these estimates.

Beyond relative poverty

Inflationary pressures are unlikely to impact the relative poverty measure too much, as long as the impact on incomes is reasonably spread through the income distribution, which seems likely given that neither social security levels nor wages look likely to keep up with inflation. That being said, the huge jump in energy prices will clearly impact on the spending power of low-income households in particular. It is worth remembering, though, that energy costs are not included in the relative poverty measure, even though they are a significant area of expenditure.

Relative child poverty is often referred to as the headline measure of child poverty, but it is only one of the measures specified in the Child Poverty (Scotland) Act 2017. The other measures, by design, provide greater insight into the impact of increases in the cost of basic goods and services.

Absolute poverty measures whether living standards for those in poverty are increasing over time. Large increases in the cost of living, both now and those expected in the future, will mean that meeting this target will be increasingly difficult. Meaning that while people’s incomes may improve relative to others, they will not see the same improvement in their standard of living. It will also impact on the material deprivation measure which measures whether or not people can afford basic goods and services.

Persistent poverty is based on a relative measure and therefore is also not likely to be impacted severely by inflationary pressures

Uncertainty still reigns, but meeting the 2030/31 targets will require new policy

Tackling child poverty is a long term aim of the Scottish Government, and by the time the final targets need to be met in 2030/31, the pandemic should be long behind us.

Work published by FAI, MMU and the Poverty Alliance earlier this year found that structural policies such as childcare, social security and employability programmes could make substantial inroads in meeting the 2030/31 targets, with potential for some significant economic benefits as a result. However, the cost implications of these kinds of policies are large.

To get to the 2030/31 targets, waiting until the next delivery plan in 2026 to do all the heavy lifting may be too late for the required development and implementation (the Scottish Child Payment was first announced under the guises of an income supplement 4 years ago).

Much, therefore, rests on the soon to be published Tackling Child Poverty Delivery Plan. While the 2030/31 targets are some time away, the required action to meet the targets is significant and will take time. We will be working with the Joseph Rowntree Foundation to assess the potential of the plan to meet these ambitions once it has been published.

Who pays the State Pension in an independent Scotland?

An article by the Fraser of Allander Institute

The latest skirmish in the economics of independence wars relates to the state pension. Specifically, which government would pay State Pensions in an independent Scotland. Ian Blackford maintains that the UK government will pay the State Pension to Scottish residents who qualify for a UK state pension through their pre-independence national insurance contributions (NICs).

But state pensions are not paid for from a “pot” that individuals build up during their working lives. Instead they are paid using money from today’s taxes and borrowing – a pay-as-you-go scheme. Since individuals have no ownership rights over their past contributions, the UK Government can change the qualifying rules for state pensions as its sees fit.

Recent and proposed increases in the qualifying retirement age are examples of it such rule-changes. The State Pension is simply a benefit that UK government could reduce, or even, in principle, eliminate.

This pay-as-you-go aspect might seem to negate any commitment of the UK government to pay the State Pension in an independent Scotland – even to pensioners who contributed NICs and other taxes to the UK government during their working lives.

The UK government could argue that the tax and NICs made by Scottish residents were used to pay for public services that they previously enjoyed. Under this view, the Scottish Government would become responsible for paying the state pensions of qualifying Scottish residents from its own revenues post-independence.

But this is not the whole story. UK government pays State Pensions to those who retire abroad (providing that they have made sufficient qualifying NICs). Therefore if the UK government pays the State Pension to an individual living in, say, France, it would seem inconsistent for it not to pay the State Pension to an individual with a similar NICs record living in an independent Scotland[i].

It is this point that the SNP is now using to argue that the responsibility for paying the State Pension in an independent Scotland – for those who have sufficient NI contributions – would fall to the UK government.

The UK government is likely to argue that succession – and the transfer of a significant share of the UK’s tax base to the Scottish government – constitutes an unprecedented change in circumstances that renders comparisons with the treatment of individuals under current state pension policy irrelevant. It would expect the Scottish government to make a reasonable contribution to the costs of the State Pension in Scotland.

The issue would therefore become a matter for wider negotiations around the division of assets and liabilities in general, and reciprocity agreements for social security more specifically.

The UK has social security agreements with many countries. These stipulate how state pensions will be calculated when individuals have made contributions in more than one country. Similar agreements between the UK and an independent Scotland will be necessary to deal with individuals retiring post-independence who have made NI contributions in both Scotland and the UK.

The UK had such agreements with EU countries before Brexit, and maintained similar arrangements in the Trade and Co-operation Agreement between the UK and EU. The UK also has social security agreements with other countries, including the US and Australia.

There would clearly be pressure on an independent Scotland to make such an agreement with the remaining UK. The absence of an agreement would be an impediment to cross-border trade with potentially harmful economic effects.

In the post-independence long run, as those who have paid NICs to the UK government die off, the cost of supporting the state pension in Scotland will unambiguously fall on the Scottish Government.

In the short run, the Scottish government might refuse to contribute to these costs, but if it did so, there would be implications for the broader settlement. This final agreement is impossible to anticipate though it is worth noting that there is no arbitration procedure for the break-up of a state, in which case the outcome will likely depend on which party has most to lose by a failure to agree.

In summary, the question of which government would be liable for the State Pension in an independent Scotland is both more complex and more uncertain than either ‘side’ might claim.

And it likely cannot be resolved in isolation from other questions.

[i] The question of citizenship in an independent Scotland is immaterial to this analysis. Under current state pension rules, it is NICs rather than citizenship that determines eligibility. Thus whether an individual in an independent Scotland has Scottish, UK or dual citizenship (or any other nationality) would not under current policy influence eligibility for the state pension.

The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.

This article first appeared in The Herald

New report highlights poverty target challenges

The Fraser of Allander Institute has tday published a new report, jointly authored with @MMUPolicyEval & @PovertyAlliance, that explores some of the challenges and opportunities that the Scottish Government faces in meeting its Child Poverty Targets:

Around 1 in 4 children in Scotland live in relative poverty. This means they live in a
household with an income 60% below the UK median income after housing costs
have been deducted.

Child poverty can have serious and lifelong impacts across a range of outcomes,
and the Scottish Government have stated their aim to reduce significantly the
incidence of child poverty. The Child Poverty (Scotland) Act 20172 includes a target
to reduce relative child poverty to 10% by 2030/31.

Meeting this target would represent an unprecedented reduction in child poverty to levels not seen in Scotland certainly since the early 1990s when the current statistical series began.

The purpose of the analysis in this report is to look at some of the large, national level, devolved policy levers that the Scottish Government could use to meet the
targets. We have focussed on childcare, employability programmes and social
security.

By analysing variations of these types of policies, and different combinations, this
analysis illustrates the scale of the impact on poverty and the associated costs and
benefits of different options.

We envisage that this will be helpful for policymakers and stakeholders who will be focused on developing actions for the next Tackling Child Poverty Delivery plan, due to be published by the Scottish Government by the end of March 2022.

Download a summary here.