Yesterday’s one of the Scottish Government’s working groups reported its recommendations.
On the basis of the fact that much but not all of the processing of UK welfare payments for Scotland is done in Scotland and that 20% of UK pension payments are processed here, the working group proposes that it would be in the interests of both countries to continue to share this administration system from a formal independence in 2016 for at least four years to 2020.
The Scottish Government described the proposal as ‘sensible’ and immediately accepted it. The UK Government’s Scottish Secretary described the proposal as ‘not credible’.
The positives in this situation are that an independent Scotland:
- would save recruiting costs to service welfare administration since staff and expertise already exist
- would save set up costs since the offices and equipment are already there
- would mean no immediate risk of transition glitches in much of Scotland’s welfare payments.
Deputy First Minister Nicola Sturgeon made the announcement of the working group’s recommendations and reassured Scots that this would mean so seamless a transition in welfare payments that no one would notice any difference.
The problem here was that under repeated questioning, Ms Sturgeon had to admit that this had not yet been discussed with the UK government, so it is far from being a certain transition arrangement.
The UK scenario
It does, though, underline the fact that a decision in September 2014 by Scotland to separate from the Union will compel the continuing UK to suffer costs it would not otherwise incur.
Given that the UK has complex work to do in supporting the return to growth of its economy, such transition costs and the accompanying upheavals will be untimely and unwelcome – but that would be of no great concern to Scotland.
It does mean that the continuing UK will not be in a position to do anything but look after its own interests first – that is its duty to its continuing electorate.
So, should the proposed arrangements seem to the UK to be cost effective in its own interests, this proposal would be agreed. However:
- The UK owns the software and the databases.
- It has its own welfare processing establishments which handle an unspecified volume and type of payments to Scots.
- It processes 80% of its own pension payments already – which means that it has the systems in place for the remaining 20% and needs only some more staff to cover that extra work.
- It will have job losses in the demerger of other administrative systems.
- It has to be questionable that the continuing UK would wish to leave 20% of its pension processing in the hands of what would be a foreign country and one with a lot on its hands.
It would arguably be in the interests of the continuing UK to execute the demerger of welfare processing as soon as possible. Jobs lost in other demerged administrative areas could be switched to fill the additional need at welfare.
Where that decision would mean job losses in Scotland in welfare administration – a matter which the Deputy First Minister avoided answering on Newsnight Scotland last night - this would nevertheless not present Scotland with any difficulty.
One certain outcome of independence is that Scotland would require a vastly swollen public sector to replicate the systems we currently share as a member of the UK. So jobs lost in welfare would immediately be replaced in a variety of other new public sector employment.
The downside here is that although employment in this sector would grow substantially, so would the proportion of Scotland’s budget spent on economically unproductive services.
Sharing welfare administration – the problems
The cost of this proposal for both countries would be a serious limitation on introducing changes to welfare policy in a shared system.
Recoding the software to apply different criteria and rates to recipients in each country would be far from simple and would almost certainly produce serial errors.
The expert academic view, from engaged staff at Edinburgh and Stirling universities on Newsnight last night, is that a shared system could carry on for a while but that any changes to the welfare regimes made by either country could not seriously be substantive and would be no more than marginal.
This negates until 2020 at least the introduction of the promised additional and enhanced benefits promised by the Scottish Government.
Sharing would equally limit the continuing UK’s latitude to change its welfare policy – and with this area a current subject of reform at Westminster, that limitation would a substantial obstruction to UK agreement to this proposal.
The serious problem, which would have to be implemented and in operation from Day 1, would be the recoding of the IT system to draw the costs of the actual welfare payments from the two paymasters involved, because each would, of course, pay their own way.
This factor might also impact on the decision by the continuing UK to engage in the proposed temporary part-share or not. The additional costs of this recoding to divert, record and total up payments to one paymaster or the other and the attendant risks of destabilising the operation of the system – all for a short term transition – might not seem worthwhile.
Paying for welfare
It is important to keep distinct the administration of welfare systems and the capacity to pay for the benefits they distribute.
Yesterday, the Deputy First Minister insisted that Scotland would find its welfare costs more bearable than would the UK because we have a lower ratio of welfare costs to Gross Domestic Product [GDP] – our national earnings.
This is correct but marginal.
The 2011 figures show that the GDP of the UK a whole was £1,509.6 BN. The Scottish Government’s estimate of what an independent Scotland’s GDP would have been in 2011 was £124 BN – or £150 BN, after including Scotland’s share of UK extra-regio activity and Scotland’s share of UK oil and gas revenues.
Assuming that the true Scottish GDP for 2011 would therefore have been the higher figure of £150BN and with Scotland’s total spend on Welfare [£8.1 BN] and Pensions [£12.7BN] in that year of £20.8 BN, the ratio of welfare spend to GDP for Scotland in 2011 is 13.86%.
Subtracting from the UK 2011 GDP of £1,509.6BN the Scottish Government’s estimated Scottish share of extra-regio activity [£3 BN] and of oil and gas revenues for that year [£23 BN] – a total of £26 BN, produces a UK-minus-Scotland 2011 GDP of £1,483.6.
Then, subtracting Scotland’s 2011 total spend of £20.8 BN on Welfare and Pensions from the UK overall total spend of £232.9 BN in these categories – leaving a UK-minus-Scotland total spend of £212.1 BN – produces a ratio of welfare spend to GDP of 14.29% – as opposed to Scotland’s 13.86%.
Welfare and pensions spend as proportion of annual budget
The other issue is the ratio of the total welfare and pensions spend to total budget.
Here in 2011, the total UK public spending budget was £689.2 BN. Scotland’s total budget was £53.1 BN. This leaves a UK-minus-Scotland total budget at £636.1 BN.
In 2011 the total UK spend on Pensions and Welfare was £232.9 BN. Scotland’s alone was £20.8 BN. This leaves a UK-minus-Scotland total spend on this sector of £212.1 BN.
The ratio of spend on Welfare and Pensions to total annual budget for the UK-minus-Scotland in 2011 is therefore 33.34%. For Scotland the ratio is 39.25%, a significantly higher percentage.
The expert opinion last night from the academics from Edinburgh University [Nicola McEwen] and Stirling [David Bell] was that Scotland would struggle to afford its welfare payments unless it could sustain significant economic growth.
With swollen public sector costs to sustain duplicated administrative systems across the spectrum, and with oil revenues [as we have recently shown] immediately swallowed up to pay the interest on our legitimate share of the national debt, driving and sustaining economic growth will be a considerable challenge.