Impact of reserved benefit policies on expenditure in Scotland: analysis

Presents analysis on the estimated impact on reserved benefit expenditure of a) retaining the £20 per-week uplift to Universal Credit and Working Tax Credit, and b) removing the Benefit Cap and the two-child limit and reinstating the family element.

In April 2020, the UK Government increased the main rates of Universal Credit and Working Tax Credit by the equivalent of £20 per week to mitigate the economic effects of Covid-19. The uplift was originally due to be withdrawn in April 2021, but has since been extended to September 2021, with recipients of Working Tax Credit receiving a one-off payment of £500 to cover the additional six months.

This note presents an estimate of the additional expenditure on reserved benefits which would result by 2023/24 if the £20 uplift were retained on a permanent basis. The note also considers the impact of reversing a set of historical welfare reforms, namely the benefit cap, the two-child limit, and the removal of the family element of Universal Credit and Child Tax Credits. Background on these policies can be found in the 2019 Annual Report on Welfare Reform.

The methodology underlying this analysis is equivalent to the Scottish Government report on the impacts of withdrawing emergency benefit measures published in November 2020. However, whereas that report included the impacts of reinstating the Minimum Income Floor (MIF), which is used to limit Universal Credit payments for self-employed workers who report low incomes, for the purposes of this modelling we assume that the MIF will be reinstated by 2023/24. Furthermore, our model has been updated to take into account the latest policy announcements and forecasts, including the extension of the uplift beyond April 2021. The figures will continue to be updated as new policy decisions are made and new forecasts and data become available.

The increases in reserved expenditure which would result from reversing either the planned removal of the £20 uplift or the welfare reforms listed above provide an indication of the direct costs of mitigating these policies. However, the estimates do not include the costs of designing and delivering the relevant mitigation policies, which are likely to be substantial. Nor do they include devolved policies such as Scottish Child Payment, Best Start Grant, and Council Tax Reduction. The costs of these policies could be expected to increase, as more people would be in receipt of the reserved benefits which qualify households to be eligible for these policies.

For example, a family with more than two children which previously earned too much to qualify for Universal Credit may qualify if the £20 uplift was retained or if the two-child limit was abolished, because the level of earnings at which their Universal Credit award tapers to zero would be higher. The family would then also become eligible for the Scottish Child Payment.

On the other hand, the welfare reforms modelled here are already partially mitigated by policies such as Discretionary Housing Payments. The additional expenditure on devolved benefit payments which would be needed to fully mitigate these reforms would therefore be somewhat less than the additional expenditure on reserved benefit payments which would result from reversing the reforms. For example, around £3.6 million was spent on Discretionary Housing Payments in 2020/21 to mitigate the benefit cap.

The table below sets out the estimated increase in expenditure on working-age reserved benefits resulting from two separate policy scenarios: a) retaining the £20 uplift; and b) abolishing the benefit cap and the two-child limit and reinstating the family element. The combined effect of these scenarios is also presented. As noted above, these figures only include reserved benefits (i.e. they do not include devolved benefits) and only include benefit expenditure (i.e. they do not include any other forms of expenditure).

Estimated change in annual expenditure on reserved benefits in Scotland, 2023/24

Retain the £20 uplift +£461m
Abolish the benefit cap and the two-child limit and reinstate the family element  +£116m
Retain the £20 uplift and abolish the benefit cap and the two-child limit and reinstate the family element  +£586m

Source: UKMOD simulation

The table shows that retaining the £20 uplift would increase expenditure on reserved benefits in Scotland by an estimated £461 million per year in 2023/24, whereas reversing the set of historical reforms would lead to an increase of £116 million. Meanwhile, implementing both of these scenarios at once would increase reserved expenditure by an estimated £586 million per year.

The impact of the combined scenario is more than the sum of its parts due to the interactions between the respective policies. For example, the impact of retaining the £20 uplift is limited by the fact that the benefit cap prevents some households from receiving the uplift. Conversely, the impact of abolishing the benefit cap is lower without the £20 uplift in place, because the total amount withheld by the cap is lower. If these scenarios occur simultaneously, their combined impact therefore multiplies.

The estimated increase in reserved benefit expenditure which would result from retaining the £20 uplift is approximately four times as high as the increase which would result from reversing the set of historical reforms. Accordingly, the cost of mitigating these reforms would be approximately one-quarter the cost of mitigating the removal of the uplift. This reflects the fact that the historical reforms considered here apply almost exclusively to households with children, whereas the £20 uplift applies to all claimants of Universal Credit and Working Tax Credit, including households without children. In fact, the majority of households on Universal Credit do not have children.

The impact of all of these policies – and thus the costs of mitigation – will rise over time. For example, because the benefit cap is frozen while other benefits are linked to inflation, the amount of expenditure which it withholds increases over time, all else equal. Meanwhile, the two-child limit only applies to children born on or after 6 April 2017 and will therefore affect an increasingly large proportion of families on benefits each year.

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