Benefit devolution key issue for SFHA annual conference

Conference underway today (June 11) could be dominated by what ”highly risky” benefits devolution means to Scottish Government spending.

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SFHA gets its annual conference underway today (June 11) against a background of “very significant fiscal risk” to Scotland’s public finances identified in the mass devolution of social security benefits next year.

Among keynote speakers on Day One is Margarita Morrison, Area Director, DWP One Service Scotland, due to “share experience” of her first three months in the role and the stress the “importance of continued joint working with landlords.”

Latest forecasts from the Scottish Fiscal Commission see the devolution of an estimated £3.5bn in welfare expenditure as one of the biggest risks to Scottish public finances.

Last month, for instance, the Scottish Government announced an additional £80m over the next two years, to help councils deliver affordable homes across Scotland.

The extent of investment was intended to see councils sharing a total of £1.3bn to 2021 to help achieve the Scottish Government’s aim to deliver 50,000 affordable homes, with 35,000 available for social rent, by that date.

From April next year, the Scottish Government will become responsible for the payments for all the benefits being devolved.

Social security spending is harder to control than other areas of spending, being determined by the number of eligible people who apply for the benefit, all of whom must be paid.

The Scottish Government will have to meet this expenditure as it arises, even if it differs from the forecast used to set the budget initially, having already committed to changing the eligibility criteria and delivery arrangements for some of the devolved benefits – which include complex and high-volume disability payments.

“A social security budget of £3.5bn with the possibility of eligibility changes coming into that as it gets fully devolved is a sum of money with a high degree or risk,” Professor Alasdair Smith of the Scottish Fiscal Commission says.

Commission chief executive John Ireland said that he expected “some significant forecast error” in the £3.5bn estimate, which he described as “pretty uncertain”, while Commission chair Dame Susan Rice says the lack of historic data on which to base any estimates contributed to the lack of certainty.

“What makes this trickier is that forecasting the spend on new benefits to be administered in a distinctively Scottish way (is) by its nature much harder in the first few years when we don’t have an established baseline to work from,” she said.

The Scottish Government’s Budget is acknowledged as becoming more complicated as more tax and spending powers are being devolved to the Scottish Parliament meaning adjustments need to be made to account for the differences between the forecasts and the amounts actually raised from tax or spent on social security.

Together these factors create greater fiscal risks which will need to be managed using the existing limited borrowing and budget transfer powers.

To the Commission, the devolution of all remaining social security benefits from April 2020 means an increase both in the size of the Scottish Budget and in the fiscal risks to which it is exposed.

Next year will be the first time social security has presented such a risk given the £3.5bn the Commission estimates will be spent by the Scottish Government on social security – not including any additional expenditure for policy changes that may be introduced.

This forecast expenditure can be compared to the £447m forecast to be spent on social security in 2019-20.

Responsibility for the delivery of benefits transfers to the new Social Security Scotland with benefits reformed and delivery changed from the current DWP system.

The Commission acknowledges producing forecasts with a lack of historical data as well as uncertainty about implementation plans.

But a recent Audit Scotland report on social security devolution has already highlighted the challenges inherent in implementation.

An example is the Best Start Grant Pregnancy and Baby Payment launched by the Scottish Government in December last year.

The Scottish Government acknowledges  both take-up and resultant spending has been much higher than the initial forecast pitched the previous September – largely through the promotion of the benefit by social media.

Around 4,000 applications were received on Day One – as many as had forecast for the whole of 2018-19.

To the end of February this year 9,770 awards had been made.

Based on that evidence, the Commission has revised up our forecast of 2019-20 spending on another new grant called Best Start to £21m million – a 67% increase on the original £8m.

The Scottish Government plans to introduce two new payments for the Best Start Grant this year, as well as introduce two new benefits: Funeral Support Payment and Best Start Foods.

Start dates for these benefits will directly affect how much is spent in the financial year 2019-20; the later the introduction date the lower the spending.

In the absence of information on the start dates of the new benefits, the Commission assumed the June 1 start date, based on the Scottish Government’s commitment to deliver the new benefits by this summer.

The Scottish Budget has to be adjusted to account for the differences between the forecasts on which the original budget was based and the amounts actually raised from tax or spent on social security, referred to as outturn.

These adjustments are called reconciliations and the Scottish Block Grant is adjusted upwards in respect of devolved social security.

Block Grant Adjustments (BGAs) are initially based on Office for Budget Responsibility (OBR) forecasts of revenues or spending on the equivalent UK Government taxes or benefits.

Once the final UK Government revenues or spending are known, reconciliations are made to the Scottish Budget.

Both income tax and BGA reconciliations are playing an increasingly important role in determining the amount available for the Budget from year to year.

Each Budget will be affected by reconciliations relating to forecasts from each of the previous three years.

As such, the Commission is currently forecasting a series of large negative reconciliations for income tax over the next few years.

Latest estimates are that the Scottish Government will receive £229 million less in 2020-21, £608 million less in 2021-22, and £188 million less in 2022-23.

These are all acknowledged as slightly larger than the reconciliations forecast in the Commission’s December 2018 report, mainly because of increases in the BGA forecasts between the Autumn Budget 2018 and the Spring Statement 2019.

The actual size of the reconciliations will only be known once outturn data are available.

Negative reconciliations mean less money is available for future Scottish Budgets, with the Scottish Government able to manage some of this through borrowing or use of the Scotland Reserve.

However, the borrowing powers available to the Scottish Government and the rules about withdrawing funds from the Scotland Reserve mean that these will not cover all of the expected reconciliations.

The Scottish Government would have to adjust its spending plans or increase taxes, which the Commission warns must be “borne in mind” when formulating current policy.

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