Tax credit cuts and ‘defensive devolution’

The debate on devolution of welfare to Scotland has gone up another gear over the last week as the UK government published its amendments to the Scotland Bill that transfers new powers to the Edinburgh Parliament.

Though largely overlooked by the London-based media it’s been the subject of fierce debate in Scotland (between Labour and the SNP), which will run all the way to May’s Holyrood elections and beyond. To date, heat has been far more in evidence than light.

The main question concerns whether and how new powers permitting Holyrood to top-up welfare payments can be used to offset losses arising from cuts to tax credits (an issue I previewed in a recent post).  It is true, of course, that the scale of those losses is now up in the air given that the Chancellor is busy re-working his proposals. The Resolution Foundation have done an admirable job fisking various mitigation options, as well as highlighting alternative ways of finding the resources so as to avoid these cuts altogether.  Few people, however, expect the entirety of these cuts to disappear – and let’s not forget there are plenty of other welfare reductions, pre-dating those announced in the summer Budget, that will hit in future years.

It’s against this austere backdrop that last week the Scottish Secretary tabled his clauses on the new welfare top-up powers. So are we now wiser about how they might be used? Short answer: no.  I’ve seen nothing from the Scottish Office, DWP, the Scottish Government, opposition parties or indeed external think-tanks that fleshes out the implications of these powers, never mind a sketch of how they might work in practice (apologies if I’ve missed something). Given this, here are a few observations and questions.

New dynamic

Let’s start by noting the big shift in principle. At a time when working-age low income families in Scotland are going to face a new wave of hardship it’s now beyond dispute that the Scottish Government will now have powers to do something about it. Before I set out queries and caveats, let’s register both that this is a major shift from the 1998 devolution settlement, and also that none of us really knows where it will end up. What’s already clear from this week’s political back and forth between Labour and the SNP is that the debate has moved on from speculating about the alleged non-existence or limitations of the powers to the need to think urgently about their potential. That’s a new dynamic.

Second, there is a fundamental question of timing. Deep cuts to tax credits are due to kick in next April. It’s not clear when Scotland will have the powers, never mind agreement over the administrative machinery, in place to make some sort of off-setting payments – but that isn’t likely to be happening next spring.  That said, it might well be that some breathing space is created if the Chancellor seeks to navigate his way through the Autumn Statement by pushing back the pain by a few years (say, only imposing cuts on the flow of new tax credit claimants) and by clobbering Universal Credit (UC) more than the existing system.

A third, and head-hurtingly complex issue, concerns how any top-up payments would be assessed and administered. Recall that the nature of the impending losses will vary enormously from family to family depending on circumstance; and Scotland doesn’t currently have its own administrative agency to assess household eligibility or to make payments. Whilst tax credits still exist they will be administered by HMRC and we are as yet unclear as to its willingness to work on behalf of the Scottish Government to implement top up payments. HMRC would presumably want to negotiate a fee in return for any such role (it must, however, be technically possible to make some sort of Scottish variation given HMRC is currently embarking on using post-codes as part of the Scottish Rate of Income Tax due for 2017).

Top-ups and tapers

Even if HMRC is willing to co-operate, and a fee could be agreed, the next issue concerns the nature of ‘top up’ that would be permitted. For example, one of the big cuts coming down the road will be in the form of a higher ‘taper’ rate, meaning tax credits will get withdrawn more rapidly as earnings rise. The taper rate is, however, a reserved matter and there is no prospect of the UK government permitting HMRC to introduce a different ‘Scottish’ taper rate. That necessarily means that any ‘top-ups’ won’t – can’t – accurately reflect the pattern of tax credit losses.

As we move through this Parliament HMRC’s role comes to an end as tax credits are, in theory, replaced by UC which 700,000 Scottish households will rely on. It will be administered directly by DWP using real-time monthly data on household earnings – a system, let’s not forget, that will have taken the best part of a decade to create.  Again, we have no indication as yet as to DWP’s willingness to administer Scottish top-ups to reserved benefits on behalf of the Scottish Government. And just to make matters a bit more complex there will over the next four years be an increasing amount of ‘dual-running’, with some parts of Scotland moving to UC while others still use tax credits (hence the Scottish Government would simultaneously be relying on both HMRC and DWP).

Scotland can obviously create its own benefits agency. But even if it was minded to incur the significant cost of doing so, it isn’t going to happen quickly – it would take years before it was up and running. In the interim it could, perhaps, explore piggy backing on the role of local authorities to make new payments as councils already administer the council tax reduction scheme (a form of means-tested benefit) – but tax credits are very different benefits, and councils will be shedding their administrative role vis-à-vis housing benefit, so this feels like a huge stretch.

What we can say with some confidence is that if a deal can’t be struck with HMRC and DWP, and the Scotland Government has to go it alone, it will face an almighty trade-off between speed and accuracy. It might – might – just be possible to move swiftly and create, say, some sort of simple targeted Scottish family income supplement during at least some of the years when the cuts bite hardest. But this would inevitably rely on a infrastructure that will fall far short in terms of assessing complex variation in top ups, dealing with the flow of new claimants, or adjusting payments as circumstances alter. It will be messy.

A fourth issue, closely related to the question of administration, concerns the implications of top up payments for work-incentives (an issue I looked at in more detail in my earlier post). Recall that the key building blocks of UC – the taper rate and the work allowance – will remain reserved. This means that if the Scottish Parliament creates a payment which simply tops-ups the basic elements of UC – which at first glance appears the simplest thing to do – they would be boosting household incomes (for both the ‘in’ and ‘out’ of work) but denting work-incentives. An ugly design feature for a new welfare settlement.

Labour needs to gear up

The way to avoid this would be to allow Holyrood to top up the ‘work allowance’ within UC, thereby boosting both work incentives and incomes. This, however, appears to be completely off-limits (though I struggle to understand any principled objection to it, not least as DWP has already accepted that they will administer variation in the local housing allowance within UC on behalf of the Scottish Parliament).

Finally, there is a question about the treatment of any Scottish ‘top-up’ income in relation to means-tested benefits: will this extra ‘Scottish’ income be considered in UK assessments of households’ eligibility for tax credits and UC? The answer, following the spirit of the ‘no detriment’ principle established by the Smith Commission, must surely be ‘no’.  If not, we would end up in a perverse and politically volcanic situation: the Scottish Parliament raises taxes (or cuts spending elsewhere) to make a payment to poor families, which itself then adversely affects the eligibility of those same families to the very tax credits that are being topped up.  Presumably, therefore, any top-up payments will be treated in the same way as Child Benefit (and several other benefits) that are exempted from income-assessments. Presumably. Let’s just hope DWP and St Andrew’s House have kicked the tyres on this.

One upshot of all this is that the Scottish Government is going to be camped on politically tricky terrain: taking responsibility for raising resources amid austerity to pay for redistributive politics at the same time as moving at great speed to secure an efficient system to deliver welfare payments to a large number of vulnerable people facing severe income loss. No easy task.

Another implication is that Labour – now vigorously championing the use of the new powers – will strain to explain why their stated goal of fully reversing Westminster cuts couldn’t better be achieved via a fuller, cleaner, devolution of welfare which they have hitherto opposed.

The wider economic and political backdrop means we’re in the grip of a cycle of defensive devolution. Powers were transferred to Scotland in part due to the weak post-referendum position of the UK political parties. This triggered a debate on welfare in Scotland almost entirely centred on the question of how to deploy these powers in order to preserve the UK’s (imperfect) system which Westminster is energetically eroding. Devolution in pursuit of restoration. Given the context, a defensive posture is hardly surprising. The hope is that one day we can find our way to a more creative, less adversarial, phase of devolution on the question of welfare and more – in Scotland and elsewhere.

This article first appeared on Gavin Kelly’s blog and at Democratic Audit Scotland and is reproduced here with permission

“London march” by lizzie056 – CC BY 2.0

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