Part 2: Short-term
Over the next few years, there are a number of constraints that apply to the choice over some – but not all – key elements of the approach to uprating.
Evidence shows that using different indices to uprate benefits in line with inflation can affect the amount of money people receive. According to the uprating measures report, in July 2019, the Consumer Price Index (CPI) calculated inflation at 2.1%, the Consumer Price Index Owner Occupiers’ Housing Costs (CPIH) put it at 2.00% and the Retail Price Index at 2.8%.
Historically it appears that CPIH has been generally lower than the other two indices.
Thus, while the aim of uprating may be to have a neutral impact on the value of benefits, and there are complex technical debates to be had about the best way to achieve this, the impact of different indices on the amount of money people receive is far from neutral. Given that many are likely to be on low incomes, even a small difference can be significant. There must therefore be confidence, and supporting evidence, about the basis on which decisions on the appropriate uprating index are taken, to help alleviate any concern that decisions are just based on the desire to cut costs.
Recommendation 2: To instil confidence in decisions, now and in the future, concerning what the most appropriate uprating index is, it would be valuable if the Scottish Government could set out the factors on which they have been based, along with any supporting evidence.
We note the Scottish Government’s intention to adopt the Consumer Price Index (CPI) as its measure of inflation and understand that this is based on a number of factors. These include that this is the measure currently used by the Bank of England and the media, and by the UK Government for uprating social security benefits. It also meets international standards.
The Scottish Government has confirmed that its priority, reflecting the views of people using social security, is for the safe transfer of benefits. This requires Agency Agreements with DWP.
The uprating measures report states that, if a different uprating measure was agreed in the Scottish Parliament for existing claims that are administered by the DWP, this would be in breach of the Agency Agreement and would put in jeopardy the safe and secure transfer of benefits (see annex A for details of benefits covered by an Agency Agreement). The Agreement states that the Scottish Ministers cannot request changes to the DWP ‘business as usual’ procedures and processes. Therefore it seems that to deliver the priority of safe transfer, it will be necessary to adopt CPI until transfer is completed.
Perhaps the strongest argument for adopting CPI is that the alternatives of CPIH and RPI do not appear to be viable at the moment. While CPIH has been accepted by the ONS as the headline measure of inflation, it has an insufficient track record and there are no official forecasts available for it. Moreover, given that CPIH has tended to be lower than other indices, for the Scottish Government to adopt this while the UK Government retained CPI risks leading to lower awards in Scotland for comparable benefits in the UK.
The uprating measures report notes the Scottish Government’s view that RPI in its current form is not robust and has ceased to meet the required standards for designation as a national statistic. This does not seem to be disputed by Paul Johnson or the House of Lords Economic Affairs Committee. We note that they take different views10 about whether RPI could and should be adapted to make it fit for purpose. However, it appears that choices of a robust inflation measure to use for Scottish social security are limited at least for now, given the need to have a measure that meets technical standards.
Thus, while there are pragmatic reasons to adopt CPI for now, none of this is to say that CPI is the only or the best option in the longer-term. To understand even the short-term impact of doing so, it would be helpful to see forward, comparative projections in the form of an options appraisal to fully understand the potential costs of adopting each of the three uprating measures discussed. By ‘costs’, we mean the total cost of uprating all relevant benefits; the costs of uprating individual benefits; and the potential value of each relevant benefit to claimants. Calculating such costs may help to demonstrate whether adopting a particular measure would result in a loss to claimants, which is relevant to the social security principle on poverty reduction and to human rights on standards of living (discussed above).
Recommendation 3: CPI should be adopted in the short-term, but with scope to review it in the longer-term. Meanwhile, we invite the Scottish Government to actively monitor comparisons between CPI, CPIH and RPI and develop future projections.
The uprating measures report discusses options for adopting ‘forward-looking’ or ‘backward-looking’ approaches to indexation. The Scottish Government proposes to adopt the September CPI rate – a backward-looking approach.
The report notes the risks associated with adopting either forward- or backward-looking approaches. For example, where inflation becomes more volatile, there is a risk that a backward-looking measure on its own could fail to protect people at risk of poverty. A forward-looking approach could be very uncertain. With the question of the UK’s exit from the EU on the horizon, effects on the economy may be particularly hard to predict. Given such risks, it would be useful to understand whether the Scottish Government has undertaken contingency planning in the event that inflation levels become highly volatile in-year and, the September figure transpires to be significantly lower than the level a few months later. It would also be useful to understand whether the 2018 Act’s requirement to review inflation annually precludes an earlier review being undertaken should that be required.
Recommendation 4: The Scottish Government is invited to present plans to mitigate the adverse effects of volatile inflation on people receiving devolved benefits, should this occur.
The uprating measures report states that the Scottish Government is proposing to use CPI as the measure of inflation “for the foreseeable future”.
However, even in the relatively short term, there are clearly a number of possible developments that might suggest the need for a review of the Scottish Government’s approach. It is therefore important that these be actively monitored and publicly reported on.
Such potential developments include:
- Learning as CPIH gathers more of a track record and robust forecasts become possible and available.
- The ending of Agency agreements.
- Any change to the UK Government’s approach to uprating, such as a change of index or freeze of relevant reserved benefits, which may have direct and indirect implications for devolved benefits.
- Unforeseen and significant increases in the rate of inflation.
Recommendation 5: The Scottish Government is asked to clarify what is meant by using CPI for the ‘foreseeable future’ and to set out any triggers that would prompt a review of its approach to uprating, whether one-off or ongoing.
Section 78(1) of the 2018 Act provides that:
“the Scottish Ministers must bring forward legislation to replace any relevant figure prescribed in those regulations which is, in their opinion, materially below its inflation-adjusted level with a figure of at least that level (subject to any rounding they think appropriate).”
We are not clear what is meant by ‘materially below’. While it is up to Ministers to determine the relevant figure, there is merit in the basis for their ‘opinion’ and consequent decision-making being transparent and consistent, and in making clear any implications for the reduction of poverty.
Recommendation 6: We invite the Scottish Government to set out how it will define ‘materially below’ and the factors that will determine whether a figure is materially below its inflation-adjusted level.
Although the Scottish Government appears to be obliged to adopt the UK Government’s measure of inflation for now, there are some clear divergences in devolved and reserved social security policy and in other policy areas that may affect the income of benefit recipients. There is also scope for divergences in the Scottish and wider UK economies which might have a bearing on prices used to calculate inflation. It is not clear whether and how such policy divergences between the Scottish and UK Governments could influence the choice about which inflation measure to adopt, or perhaps even influence the content of the basket of goods that is used to calculate inflation. Longer term, were the Scottish Government to adopt a different approach to uprating, the interface between devolved and reserved benefits would need to be carefully monitored. This would be particularly important where it concerns benefits created using top-up powers, to ensure no unintended consequences arose and that the value of the top-up was maintained. It would be helpful to know whether longer-term planning and forecasting has been done, on different scenarios.
Recommendation 7: We would welcome analysis of the possible effects on the Scottish Government’s decision-making on uprating, should the UK and Scottish economies, relevant policies, and approaches to uprating continue to diverge.