Hansard

Tina Beatty and I have, for better or worse, gained a reputation as the go-to people on documenting the impact of welfare reforms, and I hope that that reputation is justified. We have done studies not only here in Scotland but in Northern Ireland, Wales and England. The study that I am presenting today is the fourth in a series, and it builds on the shoulders of the three previous studies. The first one, from way back in April 2013, was an attempt to document the financial losses across Scotland as a whole and in each of its 32 constituent local authority areas. The second report drove those estimates down to ward level for every ward in Scotland. The third report, which I came to the committee to talk about earlier this year, looked at the impact on different types of households. All those three reports tried to document what is actually happening and to quantify the impacts in terms of financial losses. The new study that I will talk about today takes everything on to a new level, because it asks whether welfare reform has resulted in higher employment and lower unemployment levels. It looks at the consequences, or results, of welfare reform. We are looking at the overall impact on the Scottish labour market. Welfare reform might have triggered some individuals to look for work who might not otherwise have done so but, if they find work, they will often displace other individuals in the search for jobs, and those other individuals will be unemployed instead. The study is an exercise in looking at the overall impact on the labour market: is the employment rate higher and the unemployment rate lower? It is also an exercise in tracing the cumulative impact of all the reforms—certainly all the reforms that were announced prior to the July 2015 budget. I will comment towards the end on the new round of reforms, but the study is about documenting what has happened so far. As far as we know, the study is the first attempt that anyone has made anywhere in the United Kingdom to look at the impacts of the welfare reforms on the labour market. Why does all this matter? It matters because the Westminster Government uses two main arguments to justify the reforms. The first is that they save the Treasury money and reduce the budget deficit. I will not take on that argument here today. The second argument is that welfare reform encourages out-of-work claimants to find work and in-work claimants to seek more hours or find higher-paid work. If there is no discernible positive impact on the labour market—if we cannot identify the positive impact on employment—the second argument that is used to justify welfare reform falls by the wayside. In the context of the wider political debate about welfare reform, that is an important point: if there is no evidence of a positive impact on the labour market, the justification can only be that it saves money. I will take a step backwards and go over some of the background and the numbers that were generated in the previous studies, to provide context for what comes later. I will start by looking at which reforms we are covering. I hope that the reforms are familiar to most committee members. My slide lists eight reforms that have impacted up here in Scotland. If this was an English audience, I would be talking about the bedroom tax and the changes in council tax benefit, too, but you have found mechanisms to avert the impact of those measures on claimants. Let us not forget that the welfare reforms have been happening simultaneously with other changes, too. There is more conditionality in the benefit system than there was a few years ago; sanctions are certainly being more widely applied, especially to unemployed claimants; and there are higher personal tax allowances, which increase the financial incentive for people to take up employment. A lot is going on. We are tracking the overall impact of all the changes. The estimates that we generated on the financial losses that arise from welfare reform are deeply rooted in the Treasury’s statistics. We start with the Treasury’s estimates of how much it expects to save. We use certain impact assessments that the Westminster Government produces and combine them with benefits data to trace through the impact on different areas and households. The figures that show the overall financial losses that arise from welfare reform are taken from the third of the previous reports. We have revised and updated the figures. When all the reforms come to fruition, the loss will be around £1.5 billion a year. I am going over the details just to refresh the memory of those who have heard this before and perhaps to bring up to speed the new committee members. We are certainly talking of very large financial losses. The loss In Scotland averages £440 per adult of working age. That is not per claimant—the figure spreads the financial loss across all adults between the ages of 16 and 64, whether or not they receive benefits. That gives the committee a feel for the magnitude of the losses. The figure is little different from the Great Britain average—it is less than the financial hit in Wales, northern England or London and much more than that in southern England. The figure would have been higher—by about £25 a head—if you had not successfully averted the impact of the bedroom tax and the council tax benefit reductions. I know that those losses have been borne by other public sector budgets rather than by welfare claimants. 10:15 The enormous variation in the financial losses across Scotland is important to the logic of what I will say about the impact on the labour market. It is hardly surprising that some places are hit harder than others, because we know that there are far more benefit claimants in some places than in others. The current slide shows our revised and updated estimates of the financial loss per adult of working age in each of Scotland’s 32 local authority areas. In Glasgow, which is up there at the top of the list, the loss is £580 on average per year per adult. Down at the bottom of the list is Shetland—there is a big variation. Members know their geography of Scotland just as I do—if not better than I do. To a large extent, that geography reflects the economic strength and wellbeing of different local economies. Those figures are important, because I will deploy them in tracing through the labour market impact. Given that the screens in the room are small, members probably cannot read the next slide, but its information is in the report, too. Here we ask whether we would expect each reform to increase the financial incentive to take up work. The first column shows a list of the reforms—we have broken down the child benefit reform into its two elements. The second column asks whether the changes increase the incentive to find work. The third column asks whether the changes increase the incentive to take on extra hours. The final column asks whether the incentive is big or small. I do not want to work my way right through the table but, in general terms, the answer is that the reforms increase the financial incentive to take up work or to increase hours of work. They do so to varying degrees; some reforms have a bigger impact than others. That is the theory, but what about the practice? How do we go about disentangling the impact on the labour market? The central problem that we face is that welfare reform is only one of several things that are happening simultaneously. Since 2012, the UK and Scottish economies have gone through something of an upturn. That upturn coincides with the implementation of the welfare reforms, which began to bite from around 2011-12. However, that does not necessarily mean that we can attribute the upturn in the economy simply to the welfare reforms—a lot of other things have been going on simultaneously. The key to our approach—this is central to understanding what we have done—is that we are looking at the big variation in the impact of the reforms from place to place. If the reforms are having an important impact on the labour market, it should be possible to observe a much bigger impact in places where the reforms hit hardest. We know that the reforms are hitting very hard in Glasgow and less hard in Shetland, so we should expect to observe a bigger impact in Glasgow than in Shetland, as the places are at the two ends of the spectrum. That is central to our approach. There are practical problems in operationalising all this. I flag up that you should not assume that everything that was initiated under the previous coalition Government in Westminster has been implemented—far from it. In fact, probably about 90 per cent of the financial losses that will arise from the changeover from disability living allowance to personal independence payments is still in the future. The reassessment of existing claimants begins only next month—that is when the big losses will kick in. Quite a lot of the financial losses to arise from the incapacity benefit reforms are still in the pipeline. There have been all sorts of delays in the work capability assessments and the appeals procedure. Those delays have in turn delayed the implementation of means testing of employment and support allowance for those in the work-related activity group. We have not thrown all the financial losses into the pot. We have had to reduce the financial losses to allow for things that are still in the pipeline. We have also taken out of the jigsaw the removal of child benefit from higher earners, which, to be frank, will probably not have a significant impact on employment or labour market participation. Most of those higher earners are already in work and nearly all of them are in full-time employment. At this stage, I will get into the numbers. I will show a series of scatter diagrams. Members probably cannot read all the detail on the screens, but it is in the report. I will carefully talk you through what the scatter diagrams do, as I am not sure how many people are used to dealing with them. On the horizontal axis, from right to left, on the first diagram is the financial loss per adult of working age that arises from the welfare reforms. The loss is adjusted to take out things that are still in the pipeline, so it includes just the things that had already happened by the end of last year. On the vertical axis is the out-of-work benefit claimant rate. It rolls together the numbers of all those who are out of work and on jobseekers allowance, incapacity benefit, employment and support allowance and income support as a lone parent. Each dot represents a Scottish local authority. We are looking at whether there is a relationship between the financial losses and the reduction in the out-of-work benefit claimant rate. We have taken the period from February 2011—that is about when the first of the coalition Government’s welfare reforms began to be implemented—through to November 2014. That was the latest data that we could get when we knocked up the report in June and July. There are some fancy numbers on the diagram that describe the statistical strength of the relationship; one is called an R2. The line is what we call a regression line. You do not need to be a statistician to see that on this graph there is a clear relationship. The bigger the financial loss that arises from welfare reform, the bigger the fall in the out-of-work benefit claimant rate. Immediately you might think, “Aha—here is evidence that the welfare reforms are working exactly as the Westminster Government thought they would work.” Wait a minute—let me go through the full logic and evidence. In the next slide, I have split the reduction in the out-of-work benefit claimant rate into its two main components: jobseekers allowance and employment and support allowance, which, you will remember, is the new incapacity benefit. As you will see, there is a relationship between the financial hit arising from welfare reform and the change in JSA numbers but no such relationship between the hit and the ESA numbers. In other words, the scale of the financial hit does not seem to have had any effect on the numbers of people on ESA. Intuitively, I find that a little surprising, given that ESA has been targeted much more than JSA by some of the welfare reforms. Even though large numbers of people who would have been able to claim incapacity benefit have lost eligibility for ESA, and even though ESA has become means tested for many claimants, there is no evidence of an impact on ESA. However, the numbers show a clear relationship between the reduction in JSA and the financial impact of welfare reform. The information comes from Department for Work and Pensions benefits statistics, which are rock solid and reliable, because the DWP accurately counts the number of people who are out of work and on different benefits. For some of the other labour market data, the statistics are not so good and are often based on sample surveys, particularly something called the labour force survey, which involves 80,000 people a year across the United Kingdom. For any one local authority area, the sample can be quite small and the data much less reliable. To get round the problem of dealing with the less reliable data in the labour force survey, we have had to group local authorities and pool observations to get bigger samples, and this is, for better or worse, the grouping that we have adopted. The areas in question are not quite functional economic areas, although they are closer to functional economic areas than individual local authorities are, but the main point is to group the 32 authorities into smaller numbers where we think that the data will be more reliable. The next slide shows through labour force survey data the relationship between a number of economic variables. At the top, we show the relationship between welfare reform financial losses and the change in the economic activity rate. The middle table refers to the employment rate—in other words, the share of all adults of working age in employment—and the bottom table shows what we call the International Labour Organization unemployment rate. That is not the same as the numbers on jobseekers allowance; it is a survey-based measure of unemployment that comes in much higher than the numbers on jobseekers allowance. The ILO unemployment rate is the basis of the headline unemployment statistics these days. When we hear that there are 1.8 million unemployed, it is the ILO unemployment figure that is quoted. These days, JSA unemployment is down around 800,000 or 900,000. If you look carefully at the graphs—and I know that it is difficult to look at them on the screen—you will see that the dots are scattered pretty much everywhere. A statistician could draw a regression line, but the R2 tells us that the relationships are very poor indeed. There is not much evidence of strong relationships between the change in the financial losses arising from welfare reforms and the change in any of those specific variables. The next slide illustrates another data set, the business register and employment survey, which is an account of the number of jobs in each area. In terms of statistical reliability, this data set comes midway between the rock-solid, good DWP benefit data and the rather ropy labour force survey statistics, so we have drawn up the tables on the basis of both. The top one has 32 dots on it to represent all the Scottish local authorities, and the bottom is based on the grouping that we have adopted, which brings local authorities into a dozen or so areas. The question that we are asking is: has there has been a bigger increase in the number of jobs in the areas where welfare reforms have hit hardest? As you can see, the dots are absolutely all over the place. There is no statistical relationship here, no matter whether we are looking at individual authorities or at groups of authorities. I know that I am getting a little bit technical and that this might take a little bit of time to digest, so I will stand back from the slides and talk about what all of this is actually telling us. It is telling us that bigger losses from welfare reform are indeed associated with bigger falls in the overall out-of-work claimant rate, but that applies only to JSA not to ESA and there is no observable relationship with labour market participation or employment rates and no relationship with employment growth. Although we are observing that, where welfare reforms have hit hardest, unemployment measured by JSA is falling fastest, we economists know something about what happens in economic upturns, and one of the things that we have observed over many years is that, in economic upturns, unemployment always tends to fall fastest in the areas that have the highest unemployment. There is convergence in unemployment rates. It is easier to have a big reduction in unemployment when the starting rate is 10 per cent than it is if the unemployment rate is already at 4 per cent. Halving the unemployment rate in an area of 10 per cent unemployment takes five percentage points off the rate, but in an area where the starting rate is only 4 per cent, that is not possible, because there are not five points to play with. 10:30 It is perfectly possible that what we are observing with the big reduction in jobseekers allowance in the areas where welfare reform has hit hard is not the impact of welfare reform but the effects of a normal economic upturn. To explore that, we have compared three different economic upturns. The set of graphs that compares the three upturns is important to the overall logic of our argument. All three upturns were associated with a similar reduction in the number of people who were out of work and claiming unemployment benefits. The top graph is the one that I showed earlier, which outlines the relationship between the upturn from 2011 to the end of 2014 and the financial losses arising from welfare reform. The period from February 1998 to November 2004 is a longer one, but unemployment fell by similar amounts from a similar level. During the period from August 1993 to August 1996, unemployment fell by similar amounts, although it did so from a much higher starting point. On the horizontal scale, we have in each instance put the financial losses arising from welfare reform in the 2011 to 2014 period. That is not to say that the things that happened in that decade had any impact on what happened in the 1990s; we have done that to ensure that each local authority is positioned on the same point on a left-to-right spectrum. Basically, we were asking whether we observed the same geography in the reduction in employment in the most recent upturn as we did in previous upturns, and the answer is an emphatic yes. A similar reduction in unemployment was observed in the areas of high unemployment that were recently hit hard by welfare reform as was observed in previous upturns when the welfare reforms were not happening. This set of graphs shows that it is impossible to attribute the big reduction in JSA unemployment in the hardest-hit areas to welfare reform; it says that the reduction is a normal feature of economic upturns rather than being a result of welfare reform. I will now approach the whole issue from a rather different angle, after which I will try to wrap everything up. One of the things that everybody out there in the world and certainly economists have been noting about the recession that we had in 2008 and the subsequent economic upturn is that employment has held up remarkably well. The graphs that I have just put up on screen show the trajectory of three different recessions. The dark line—the bottom one on the gross domestic product graph—represents the post-2008 recession, while the other two lines represent the recessions in the early 1980s and the early 1990s. The graphs show that, in the recession that we have just been through and the subsequent upturn, the fall in output was bigger than it was in previous recessions and the subsequent recovery has been slower in terms of GDP. By contrast, employment fell by less in the recent recession, and it has stayed surprisingly high. People who believe that welfare reform has been highly effective could use these figures to argue that what has really happened is that welfare reform has leaned heavily on people to look for work so employers have taken on lots of cheap labour instead of investing in plant and machinery, and that welfare reform therefore lies at the root of the resilience of employment during the recession and in the subsequent upturn. I will just briefly show you a figure for employment in Scotland, lest you were thinking that Scotland’s employment trajectory is any different from the UK average. The graph on the screen represents the trajectory since the start of the 2008 recession. The dark line represents the UK while the lighter blue line is Scotland and, as you will see, it has pretty much been tracking UK employment trends. Going back to the argument that those figures demonstrate the positive effects of welfare reform, I think that there is a problem in that respect. The welfare reforms kick in three to four years after the recession kicks in; in other words, they first kick in from quarters 12 to 16 after the start of the recession. The figures that I am showing you track GDP since the first quarter of 2008, but the coalition Government’s welfare reforms do not begin to come in until early 2011 or 12 quarters in. Those reforms, which include the bedroom tax, the council tax benefit changes in England et cetera, do not kick in until April 2013, which is the best part of 20 quarters after the start of the recession. If you look carefully at these graphs, you will see that employment started to hold up long before the welfare reforms kicked in, which means that it is very difficult to attribute the resilience of employment to the reforms. As you can see, employment has held up better during and after the recent recession, but as that started well before the coalition Government’s welfare reforms, it is difficult to attribute the extra jobs to welfare reform. If we bundle all of that together, what can we conclude? I have to conclude that on balance, taking all the statistics together, the evidence provides little support for the view that welfare reform is having an important and positive impact on the labour market in Scotland. In other words, the second argument that is advanced to justify welfare reform looks very, very shaky indeed. I will make some final remarks on the new cuts in welfare. Everything that we have looked at so far has been what has happened to date. We cannot monitor the impact of the new cuts because they have not begun yet, but they are coming. They include reductions in tax credits; a lower household benefit cap, particularly here in Scotland, now that the cap is really being brought down outside London; lower ESA payments for claimants in the work-related activity group, who will be placed on the same basis as JSA claimants; and a four-year freeze in most working-age benefits. As the chancellor George Osborne said in his budget in July, when all those reforms come to fruition there will be £12 billion a year of new savings. We would expect, on the basis of that saving across the UK as a whole, that further big losses to claimants in Scotland are in the pipeline. Given that we know that the figure for the pre-2015 reforms in the context of a saving to the Treasury is £18 billion across the United Kingdom, I would say that £1 billion a year is probably in the pipeline for you in Scotland. I also have to ask why the new cuts should have any greater positive impact on the labour market than the reforms that have happened so far, particularly given that a large proportion of them relate to tax credits and will therefore reduce the financial incentive for many individuals to take up work. At that point, I will stop. Thank you very much.