Devolving Welfare: How well would Wales fare?

As the Scottish Government prepares for the devolution of eleven welfare benefits to Holyrood, Cian Sion and Guto Ifan from the Wales Fiscal Analysis team explore the fiscal implications of devolving similar powers to Wales.

This blog post summarises the findings of our recently-published report: Devolving Welfare: How well would Wales fare?

Which benefits and why now?

From April 2020, full responsibility for 11 welfare benefits currently administered by the Department for Work and Pensions (DWP) will sit with the Scottish Government. Among the benefits being devolved are ill-health and disability benefits (including Disability Living Allowance, Personal Independence Payment, and Attendance Allowance) and several miscellaneous, smaller benefits (including Cold Weather Payment, Discretionary Housing Payment and Winter Fuel Payment).

The Scottish Government has already made use of some of the additional powers conferred by the Scotland Act (2016) to top up the Carer’s Allowance award by £10 a week, introduce a new grant for young carers and giving Universal Credit claimants in Scotland the option of being paid fortnightly rather than monthly.

Meanwhile in Wales, the prospect of welfare devolution has — historically— been met with stern opposition. Those opposed to the idea have often stressed the potential financial shortfalls that would make welfare devolution unaffordable and risky. However, the current First Minister, Mark Drakeford has indicated that he is open to the idea. [1]

So, how would Wales fare if similar powers over welfare were devolved to Cardiff Bay?

Welsh spending on benefits devolved to Scotland

Whether the Welsh Treasury gains or loses out as a result of welfare devolution would depend on current levels of spending on benefits to be devolved, the details agreed in a future fiscal framework negotiated with the UK government, and how the caseload size and expenditure is projected to change relative to the English level in the future.

Let’s begin by looking at how much Wales currently spends on benefits devolved to Scotland and how this compares with England.

In 2017-18, identifiable Welsh expenditure on benefits being devolved to Scotland was £2.03 billion. On a per capita basis, Welsh spending on these benefits was 150% of the English level.

The fact that Wales spends more per person on these benefits than England is not in itself a barrier to devolution. If per person spending levels on these benefits were growing relatively faster in Wales compared to England, devolving these benefits might be problematic. However, this is not the case.

In fact, per capita spending on these benefits has fallen from 155% to 150% of the English level between 2010-11 and 2017-18. Per capita spending on Disability Living Allowance (DLA) and Personal Independence Payment (PIP) has fallen from 171% of the English level to 157% over the same period. Our future caseload projections suggest that we can expect this convergence in spending to continue.

The fiscal implications of welfare devolution

The devolution of benefits to the Welsh Government would require a transfer of funding from the UK government and an appropriate fiscal framework thereafter. The fiscal framework would outline the mechanism used to adjust the Block Grant.

However, not all Barnett formulas and funding arrangements are created equal. The precise method used for calculating the Block Grant Adjustment would have a big impact on the overall net effect of welfare devolution.

Under the simple Barnett formula (pre-2018), subsequent changes to the block grant would equate to a Welsh population share of changes in spending on S-benefits in England. An in-built property of the Barnett formula is that if spending is growing in England, it results in convergence in per person spending over time between England and Wales, a phenomenon infamously known as the Barnett Squeeze. [2]

As a result of the fiscal framework agreement of 2016, increments to the Welsh block grant triggered by the Barnett formula are now multiplied by a Needs-Based Factor (NBF) of 105%. This reduces but does not eliminate the effects of the Barnett Squeeze.

The Scottish and UK governments agreed on the Indexed Per Capita (IPC) method for adjusting the block grant to compensate for devolving welfare payments to Scotland. Under this method, if spending per person on S-benefits grows by 5%, then Wales’ block grant change for S-benefits would also grow by 5% per person. The IPC method does not therefore have the same convergence property as the Barnett formula, and Wales’ initial per person spending difference would essentially be ‘locked in’ after devolution. Under this method, the Welsh Government would not face the risk of convergence in relative funding but would still bear the risk and rewards of differential growth in needs.

Another method of determining changes to the Welsh block grant is the Comparable Model (CM). This method would mirror the arrangements agreed for adjusting the Welsh block grant to account for tax devolution. Under the CM method, a comparability factor would be determined to reflect the relative spending per person in Wales compared to England at the point of devolution

Using our own Welsh caseload projections and applying these to spending projections published by the Office for Budget Responsibility (OBR), we can calculate the overall net effect of devolving Disability Living Allowance (DLA), Personal Independence Payment (PIP), Carer’s Allowance (CA) and Attendance Allowance (AA) to Wales in 2018-19. [3]

If block grant changes were determined by the Barnett formula with a NBF of 105%, we project that the Welsh Treasury would be better off by an average of £13.8 million a year as a result of devolving these benefits.

Meanwhile, determining block grant changes using the Indexed Per Capita method (as in Scotland) or Comparable model, which is used for tax devolution, would result in a large projected surplus to the Welsh Treasury. By the end of 2023-24, this surplus would amount to around £200 million a year. This is in addition to any potential non-monetary value of having increased control over policy levers.

Depending on the terms of the negotiated fiscal framework, the Welsh Treasury could stand to significantly benefit from the devolution of welfare powers.

The Scottish Fiscal Framework means that there is precedent for the IPC method to be used when determining the block grant adjustment. But even if the simple Barnett Formula with NBF was in place, Wales would not be systemically worse-off as a result of devolving these benefits.

To devolve or not to devolve?

Of course, there are other considerations beside the fiscal sustainability of the proposal that ought to inform the decision of whether to devolve these powers or not. It is likely that many policy makers and third sector organisations would approach the idea of setting up a devolved welfare system with justifiable trepidation given the recent controversies surrounding the roll out of Universal Credit and Personal Independence Payments.

Nevertheless, depending on the terms of the negotiated fiscal framework, the Welsh Treasury could stand to significantly benefit from the devolution of welfare powers. The huge differences between each scenario show that much would hinge on negotiations with Westminster to ensure that Wales was given the best settlement. The precedent set by Scotland could form a key part of those discussions.

Notes

[1] http://record.assembly.wales/Plenary/5427#A48966
[2] The “Barnett Squeeze” is a term used to describe the phenomenon where per capita spending levels in England and Wales tend to converge over time under the present block grant arrangement. See, Poole & Ifan (2018) for more details.
[3] Collectively, spending on these four benefits represent just under 90% of total Welsh spending on benefits devolved to Scotland.