{"id":1878,"date":"2015-11-15T12:48:39","date_gmt":"2015-11-15T12:48:39","guid":{"rendered":"https:\/\/sceptical.scot\/staging\/?p=1878"},"modified":"2025-12-27T13:40:45","modified_gmt":"2025-12-27T13:40:45","slug":"tax-credit-cuts-and-defensive-devolution","status":"publish","type":"post","link":"https:\/\/sceptical.scot\/staging\/2015\/11\/tax-credit-cuts-and-defensive-devolution\/","title":{"rendered":"Tax credit cuts and ‘defensive devolution’"},"content":{"rendered":"\n

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.<\/strong><\/p>\n\n\n\n

Though largely overlooked by the London-based media it\u2019s been the subject of fierce debate in Scotland (between Labour and the SNP), which will run all the way to May\u2019s Holyrood elections and beyond. To date, heat has been far more in evidence than light.<\/p>\n\n\n\n

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<\/a>).  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<\/a>, 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 \u2013 and let\u2019s not forget there are plenty of other welfare reductions, pre-dating those announced in the summer Budget, that will hit in future years.<\/p>\n\n\n\n

It\u2019s 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\u2019ve 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\u2019ve missed something). Given this, here are a few observations and questions.<\/p>\n\n\n\n

New dynamic<\/h2>\n\n\n\n

Let\u2019s 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\u2019s now beyond dispute that the Scottish Government will now have powers to do something about it. Before I set out queries and caveats, let\u2019s 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\u2019s already clear from this week\u2019s 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\u2019s a new dynamic.<\/p>\n\n\n\n

Second, there is a fundamental question of timing. Deep cuts to tax credits are due to kick in next April. It\u2019s 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 \u2013 but that isn\u2019t 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.<\/p>\n\n\n\n

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\u2019t 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).<\/p>\n\n\n\n

Top-ups and tapers<\/h2>\n\n\n\n

Even if HMRC is willing to co-operate, and a fee could be agreed, the next issue concerns the nature of \u2018top up\u2019 that would be permitted. For example, one of the big cuts coming down the road will be in the form of a higher \u2018taper\u2019 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 \u2018Scottish\u2019 taper rate. That necessarily means that any \u2018top-ups\u2019 won\u2019t \u2013 can\u2019t \u2013 accurately reflect the pattern of tax credit losses.<\/p>\n\n\n\n

As we move through this Parliament HMRC\u2019s 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 \u2013 a system, let\u2019s not forget, that will have taken the best part of a decade to create.  Again, we have no indication as yet as to DWP\u2019s 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 \u2018dual-running\u2019, 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).<\/p>\n\n\n\n

Scotland can obviously create its own benefits agency. But even if it was minded to incur the significant cost of doing so, it isn\u2019t going to happen quickly \u2013 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) \u2013 but tax credits are very different benefits, and councils will be shedding their administrative role vis-\u00e0-vis housing benefit, so this feels like a huge stretch.<\/p>\n\n\n\n

What we can say with some confidence is that if a deal can\u2019t 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 \u2013 might \u2013 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.<\/p>\n\n\n\n

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 \u2013 the taper rate and the work allowance \u2013 will remain reserved. This means that if the Scottish Parliament creates a payment which simply tops-ups the basic elements of UC \u2013 which at first glance appears the simplest thing to do \u2013 they would be boosting household incomes (for both the \u2018in\u2019 and \u2018out\u2019 of work) but denting work-incentives. An ugly design feature for a new welfare settlement.<\/p>\n\n\n\n

Labour needs to gear up<\/h2>\n\n\n\n

The way to avoid this would be to allow Holyrood to top up the \u2018work allowance\u2019 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).<\/p>\n\n\n\n

Finally, there is a question about the treatment of any Scottish \u2018top-up\u2019 income in relation to means-tested benefits: will this extra \u2018Scottish\u2019 income be considered in UK assessments of households\u2019 eligibility for tax credits and UC? The answer, following the spirit of the \u2018no detriment\u2019 principle established by the Smith Commission, must surely be \u2018no\u2019.  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\u2019s just hope DWP and St Andrew\u2019s House have kicked the tyres on this.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Another implication is that Labour \u2013 now vigorously championing the use of the new powers \u2013 will strain to explain why their stated goal of fully reversing Westminster cuts couldn\u2019t better be achieved via a fuller, cleaner, devolution of welfare which they have hitherto opposed.<\/p>\n\n\n\n

The wider economic and political backdrop means we\u2019re 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\u2019s (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 \u2013 in Scotland and elsewhere.<\/p>\n\n\n\n

This article first appeared on Gavin Kelly’s blog<\/a> and at Democratic Audit Scotland<\/a> and is reproduced here with permission<\/em><\/p>\n\n\n\n

“London march”<\/a> by lizzie056 – <\/em>CC BY 2.0<\/p>\n","protected":false},"excerpt":{"rendered":"

The SNP\/Scottish Government and Labour now agree powers exist to restore, at least partially, tax credit cuts. But how can this be done without the administrative machinery in place? Full devolution of welfare powers would be a much better solution.<\/p>\n","protected":false},"author":68,"featured_media":1897,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[319],"tags":[],"class_list":["post-1878","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy"],"_links":{"self":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/1878","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/users\/68"}],"replies":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/comments?post=1878"}],"version-history":[{"count":1,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/1878\/revisions"}],"predecessor-version":[{"id":18179,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/1878\/revisions\/18179"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/media\/1897"}],"wp:attachment":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/media?parent=1878"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/categories?post=1878"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/tags?post=1878"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}