Scottish independence: Higher taxes or bigger cuts

AN INDEPENDENT Scotland could undo “poorly designed” reforms to Britain’s welfare state, but would have to pay for a more generous system with higher taxes or bigger cuts to spending elsewhere, a major report says today.

By TOM PETERKIN Wednesday, 31st July 2013, 2:05 pm

Child and working tax credits cost Scots £2.2bn last year. Picture: Reuters

The detailed paper by the Institute of Fiscal Studies (IFS) says that a Yes vote next year – or greater devolution of welfare – would allow the country to reverse controversial UK changes, such as the benefits cap and cuts to child benefit, which it criticises for being badly conceived.

But it warns that, with Scotland’s population set to age more rapidly than Britain’s as a whole, a Scottish-only benefits system will gradually become more expensive to pay for than the UK’s.

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Current benefit spending in Scotland comes to £3,238 per person per year, compared to £3,176 in Great Britain, the paper finds, with the gap expected to widen further over the coming decades.

Consequently, it concludes that a more generous system of welfare, as envisaged for Scotland by the SNP, “could not be sustained in the long term without discretionary tax rises or further cuts to spending on public services.”

The report comes after SNP ministers pledged earlier this year to scrap the “bedroom tax” for housing benefit claimants in the first year after independence, and provide better guarantees on pensioners’ income.

But the pro-UK parties last night said the SNP now had to explain how they intended to pay for an increasingly costly system of benefits, given the report’s conclusions.

David Phillips, a senior research economist at the IFS, and the author of the report, said: “Looking ahead, independence – or further devolution – would provide Scotland with an opportunity to design its own benefits system to reflect the priorities of the Scottish people.

It would also need to adapt it to the fact that Scotland’s population is projected to age faster than the rest of the UK.”

Today’s report finds that £17.2 billion was spent on benefits in Scotland in 2011-12, about 30 per cent of all government spending, with the largest sums coming from the state pension (£6bn), child and working tax credits (£2.2bn) and disability living allowance/attendance allowance (£1.9bn).

The cost per head of disability benefits in Scotland was more than 20 per cent higher per head than down south, reflecting the country’s poorer health profile. However, spending on housing benefit was much lower, reflecting the lower cost of rent.

The report also shows that the impact of recent benefit cuts was marginally lower in Scotland than in the UK as a whole. Between 2010 and 2015, household income was estimated to have fallen by 1.6 per cent compared to 1.7 per cent for the UK.

The paper argues that some recent benefit reforms have not been “particularly well thought out”, and says an independent Scotland could examine changing them.

But no reform would be cost-free, it says, noting that major change – such as making benefits more closely related to contributions – would either create a large number of losers, or else involve a massive increase in overall spending, if the government decided to keep a benefit “floor”.

SNP finance secretary John Swinney last night focused on the paper’s criticism of the UK welfare state.

He said a one-size-fits-all policy was wrong and a future Scottish Government would “put in place welfare policies that meet Scotland’s needs”.

However, Scottish Labour’s William Bain MP, said: “The report is clear: the SNP talk lots about how they would run welfare differently after 2016, but such reform would be difficult.”

‘Nation’s wealth’ would meet the pensions bill, insists Swinney

The SNP would use “the wealth of Scotland” to fund its pension commitments if it becomes independent, according to finance secretary John Swinney.

The Better Together campaign has said Scotland is heading for a “pensions time-bomb”, and challenged Mr Swinney to explain how he will fund pensions in a country where the number of elderly is rising faster than elsewhere.

EU cross-Border pensions regulations could also force UK pension providers to eliminate their funding shortfalls immediately if Scotland separates, according to unionists.

Speaking at an event at General Register House, where Scotland’s population statistics are compiled, Mr Swinney said Scotland has experienced an “encouraging” spike in its birth rate in recent years.

Social protection also drains less money from the Scottish budget than the UK, said Mr Swinney, who vowed pensions will be “properly and fully funded” under independence.