#Welfare22 [National] Can we afford welfare devolution?

LightningMinion writes an article for [insert name of influential Scottish newspaper] with the above title

At First Minister’s Questions the First Minister u/comped said that “at this time I do not think that the devolution of welfare would be a financially feasible choice for Scotland.” When asked by Scottish Labour whether he could produce any evidence proving his claim, comped said “I do not have the numbers in front of me at the moment” so I have decided to investigate his claim to see if Scotland can afford welfare devolution.

According to the most recent budget passed by Westminster, in the 2022-23 fiscal year spending on welfare is forecast to be £439 209 000 000 or roughly £439 billion. Assuming that the devolution of welfare to Scotland is carried out in a similar manner to Wales, then out of this £439 bn of spending, roughly £84.7 bn of spending covers the areas which would be devolved to Scotland.

If we assume that the proportion of the UK’s welfare budget which is spent on Scotland is the same as the proportion of the UK population which lives in Scotland, then roughly 10% of this £84.7 bn includes Scottish welfare spending, which equates to £8.47 bn. Therefore, I estimate that welfare devolution will require the Scottish government’s budget to increase by roughly £8.47 billion.

The next task is to calculate by how much Scotland’s block grant would increase due to the devolution of welfare powers.

Under the rules of the F4, the block grant Scotland receives is calculated by the Barnett formula. The Barnett formula determines the block grants by multiplying the funding a Westminster government department receives by a population factor (the number of people living in Scotland divided by the number of people that live in the UK) and a comparability factor (the proportion of spending in the department which is devolved to Scotland).

For Scotland, the population factor is roughly 10% and the comparability factor is currently 1.4% for Work and Pensions. Under welfare devolution, this would increase to the same factor Wales has: 19.3%. This would lead to the block grant increasing by £8.087 bn.

You might notice that this is less than the cost of welfare devolution by roughly £400 million and it might seem like I have just proven Comped’s point. However, as I will explain in the next paragraphs, this £400 mn difference doesn’t mean that welfare devolution is unaffordable.

Comped did technically say that Scotland cannot afford to fund welfare devolution without spending cuts or tax rises. However, this a political decision and it is almost certainly possible to make minor and affordable changes to our income tax regime to fund welfare devolution.

To demonstrate that such tax increases are possible, I have calculated multiple possible ways of raising enough money to plug this £400 million gap. For the sake of clarity, I have included a table below showing the current tax rates (copied from u/rea-wakey’s Scottish Budget):

​

Scottish Income Tax Band	Income thresholds	Rate
Personal allowance	£0 to £21,499	0%
Scottish Lower Rate	£21,500 to £49,999	16%
Scottish Basic Rate	£50,000 to £99,999	23%
Scottish Additional Rate	£100,000 to £149,999	30%
Scottish Higher Rate	£150,000 -	50%

Some possible changes to income tax are:

• Increasing the Higher Rate from 50% to 57%
• Increasing the Additional Rate from 30% to 40%
• Increasing all rates except the Basic Rate by 1%, with the Basic Rate being increased by 2%
• Changing the income thresholds for the same tax rates to the following thresholds inspired by the Westminster Equality Budget:
  • Lower Rate: 21 500 - 49 999 (so no change)
  • Basic Rate: 50 000 - 79 999
  • Additional Rate: 80 000 - 129 999
  • Higher Rate: 130 000 and above

All of these changes would raise roughly £400 mn.

What change to Scotland’s income tax regime would be the most appropriate is a matter of debate and almost certainly will be when the Scottish Government’s budget is read. However, the point of this article isn’t to decide how income tax should be changed. Instead, it is to point out that we can make changes to our income tax regime which we most definitely can afford in order to pay for the devolution of welfare powers. And by calculating 4 possible changes to our income tax regime, 2 of which only affect higher earners and none of which affect the lowest earners, I believe that I have sufficiently demonstrated this.

Therefore, Scotland can, without a doubt, afford the devolution of welfare powers.

However, these calculations rest on a pretty big assumption: that the F4 system will continue to calculate Scotland’s block grant. And with F4 renegotiations having been agreed to by both the Westminster and Scottish governments, it is far from certain that this assumption is correct: it is entirely possible that the F4 talks will agree to finally replacing the unfair and dysfunctioning Barnett formula and instead coming up with a genuinely fair funding formula. This might therefore mean that the devolution of welfare is paid for entirely by the consequential increase to the block grant and no tax rises are therefore required. However, even if tax increases are needed, I have proven that it is possible to make totally affordable adjustments to our income tax regime to fund the devolution of welfare powers.

The discussion about the F4 links nicely to the final point I’d like to make in this article.

The second Rose budget changed the way that English local governments are funded in order to increase their financial autonomy, with these changes essentially amounting to an accounting change. Despite this, under the Barnett formula, Scotland’s block grant would need to fall by £2.86 bn. The result of this fall would be that the Scottish government has £2.86 bn less to spend and needs to cut spending, raise taxes and/or implement austerity to cope with this fall. In the Second Rose Government we recognised that this situation was not ideal and so the Treasury offered to give Scotland an HCLG Compensation Fund worth £2.86 bn to ensure that the funding.

How did the First Minister and the then Finance Secretary u/Tommy2Boys react to this solution to Scotland’s financial woes? The pair have repeatedly called their government one of “fiscal responsibility” throughout the term so surely they chose the fiscally responsible option and accepted this HCLG Compensation Fund? No, they did not due to fearing doing so would breach the F4. Instead, they chose to sell out Scotland due to an ideological attachment to the F4, an agreement which states that it is not legally binding and which specifically states that the Westminster government “shall reserve the right to introduce non-barnett additions to funding in the devolved administrations, including on devolved competencies. The F4 has agreed that this should not be done in usual circumstances and should only be done if necessary.” This situation almost definitely qualifies as such a situation and therefore accepting this HCLG Compensation Fund almost certainly is not a breach of the F4.

The government did, however, accept a much smaller HCLG Compensation Fund of £697 mn. Although, the then Finance Secretary didn’t accept this due to the change in the block grant: he accepted it as he found it unfair that the Welsh Government should receive compensation funding due to the effects of HS2.

The Scottish Government forcing the funding they receive from Westminster to be cut by £1.4 bn therefore shows that their mantra is the exact opposite of fiscal responsibility: they are champions of fiscal irresponsibility fuelled by an ideological belief in austerity politics.

Yes, the same First Minister who is opposing welfare devolution because of unproven claims that it’s unaffordable is leading a government which is fiscally irresponsible. I would suggest he researches what the definition of “hypocrisy” is.