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Scottish Economy

The Scottish Government’s response to the cost of living crisis – were there better tools for the job?

The Scottish Government announced its response to the cost of living crisis last week in parliament. Scottish households in council tax bands A to D, and all those who receive council tax reduction (CTR), will qualify for a £150 payment in April. This is a relatively quick and automatic to get money to households. However, the policy, which closely mirrors the UK government’s response in England, has been criticised for being insufficiently targeted at the lowest income households.

What is the evidence for this?

If we look at household income for those in Band A – D we can see that broadly, the payment will be progressive with more people at the lowest end of the income distribution receiving the payment than those at the top.

However, there are still a reasonable number of those at the top of the income distribution who will receive the £150 payment.

Chart 1 also shows an estimate of those in band E – H (red bars) who are on CTR who will receive the payment (dark grey bars). This is a modelled estimate using the IPPR tax-benefit model. Compared to administrative figures, we think it is likely to be a small underestimate. The light grey bars show the potential additional CTR Band E – H after the caseload is adjusted to broadly calibrate with administrative totals.

Chart 1: Estimate of people who will receive the £150 additional payment by income

What were the other options?

One option would have been to increase the amount that goes to those on Council Tax Reduction. This is more focussed on those at the very lowest end of the income distribution. This would have certainly been a more targeted way to get money to the poorest households and the payment amount could have been higher.

On the other hand, eligibility for CTR is quite narrow, and compared to the scheme that the SG have chosen, there are many people at the very bottom of the income distribution that would not have received anything through this route.

Chart 2 shows the comparison (CTR figures are modelled non-adjusted figures).

Chart 2: All band CTR vs scheme chosen by SG

Some have argued that the government could have increased existing devolved benefits, like the Scottish Child Payment or the Carers Allowance Supplement. But whilst increased payments via these methods could be administered relatively easily, only a small proportion of low-income households are eligible for them. The proportion will rise in future years schemes such as the Scottish Child Payment are rolled out further, and bridging payments could have been an option in the meantime. However, even these will fall short of reaching all those who would need the money, for example, adults with no children or older people not in receipt of disability or carer benefits.

The most effective way of getting financial support to low-income families is via the UK social security system (notably Universal/Pension Credit) at the UK level. The UK government chose not to use these channels to respond to the cost of living crisis.

In principle, the SG has the powers to do this itself – either administered through Social Security Scotland or by funding the DWP to provide a top-up to reserved benefits.

Chart 3 models a hypothetical means-tested benefit (broadly covering the Universal Credit caseload plus Pension Credit). This shows what a means-tested package could have delivered compared to the system that has been chosen.

Chart 3 – Hypothetical means-tested benefit vs scheme chosen by SG

 

This package is much better targeted, although it still reaches fewer people in the bottom deciles than the option chosen by the Scottish Government. This will be due to take-up and other limits on access to low-income benefits such as capital limits.

There is a legitimate question over whether the more universal approach, as chosen by the Scottish Government, has merit because the payment reaches those who may need the payment but do not interact with the benefit system. The trade-off that we can clearly see here is that the more universal approach means the payment also has to go to many who arguably do not need the payment. With unlimited funds, this trade-off may not be significant. In this case however, the expected ‘hit’ to households from rises in energy bills is much more than the £150 offered. A more targeted approach would have meant higher payments could have been offered to lower income households for the same, limited, budget available.

It is not clear whether funding DWP to provide a top up was considered. There may have been too many uncertainties over whether or when the DWP would be able to deliver this. Social Security Scotland currently does not have the infrastructure to allow a payment like this to be set up quickly and effectively.

Such a package is, therefore, off the table for this crisis. But what about the next crisis?

Scotland has the powers, but not the infrastructure to deliver payments to all low-income households is a limitation that needs careful consideration. The investment required to build a system ready to respond to crises like these is substantial. But without it there is a risk of perpetually being forced into ‘imperfect’ decisions.

 

Authors

Emma is a Knowledge Exchange Fellow at the Fraser of Allander Institute

Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.