Scotland referendum 2014: the impact of independence on social security

Given the importance of welfare, it is surprising that until recently little attention has been given to how an independent Scotland's welfare system would relate to that in the UK, and vice versa.  In the event of a Yes vote, the Scottish and UK Governments would have to address two main issues:

• How to deliver benefits, pensions and tax credits during the initial transitional period following independence, given existing unified systems and structures, and the fact that benefit claims may not be administered in the same territory in which they are made
• In the longer term, how the welfare systems of Scotland and the UK should deal with cross border matters, such as individuals moving from one territory to the other, and whether one country's benefits should be exportable to the other

Welfare provision in Great Britain is the responsibility of the UK Government. Social security is devolved in Northern Ireland, but the long-standing “parity principle” has so far ensured that, to all intents and purposes, a single system operates throughout the UK. 

A single, UK-wide system, it has been said, demonstrates a common “social citizenship.” There are also economic and practical benefits of a unified system: it allows the pooling of risks, facilitates free movement of people and delivers economies of scale.

Whatever spending decision an independent Scotland chose to make, welfare would inevitably remain the biggest single area of expenditure. 

In 2012-13 spending on social security benefits, tax credits and state pensions in Scotland totalled £17.7 billion - around 27% of all government spending in Scotland, and equivalent to just over 12% of Scottish GDP (assuming a geographical share of North Sea oil) or £3,336 per person.

In the UK as a whole, social security expenditure equated to just over 13% of GDP, or £3,274 per person.

Welfare during the transitional period

In the event of independence the respective governments might wish to pursue different welfare policies, but it is likely that there would be a transitional period where both would share the existing infrastructure for delivering benefits. This might limit the changes either government could make.

The UK Government has, for example, argued that reconfiguring the current system to meet the demands of two governments with different policies would introduce additional costs and risks and “would not be in the interests of the government of the continuing UK.” 

Moreover, it says that if an independent Scotland did not use sterling as its currency, any sharing of benefit systems would not be possible even for a transitional period.

The Scottish Government argues that any shared administration should last only until 2018 and should not delay implementation of its “priorities for change” from 2016. 

These include abolition of the underoccupation deduction from Housing Benefit, halting the rollout of Universal Credit and Personal Independence Payment to secure key changes to meet Scotland's needs, and linking benefit and tax credit increases to inflation.

The DWP's Scotland analysis says that while it is “highly unlikely” the UK would agree to share delivery services with an independent Scotland, since it is “hard to see how this would be beneficial to the continuing UK”, any sharing arrangement would require detailed negotiation.

The UK Government makes it clear that in any negotiations it would prioritise the needs of citizens in a future UK without Scotland, and the maintenance of an “effective, efficient and robust” system for delivering its welfare reform programme.

Scottish independence could have major implications for UK claimants.  The Scottish Government's Expert Working Group on Welfare found that, for working age and pensioner benefits, Scottish locations played a significant role in administering claims from the rest of the UK.

Relations in the longer term

Detailed consideration would have to be given to how the welfare systems of an independent Scotland and the UK should interact with each other beyond the transitional period. This could become more problematic over time, if policy decisions result in significant differences emerging between the two systems.

Key questions that would need to be resolved include who should be responsible for paying benefits to a person living in one state but working in the other, or when a person moves permanently from one state to the other.

Other issues include whether, and how, periods of employment, residence and contributions paid in one state should count towards entitlement to benefits and pensions in the other; and, whether and how responsibility for paying contributory pensions/benefits should be shared if someone has worked and paid taxes in both places.

The UK already has a number of reciprocal social security agreements with other countries which cover situations such as these. The agreements vary widely in scope, both in terms of the benefits covered and the persons to whom they apply.  In negotiating any agreement both the UK and Scotland would want to avoid creating incentives for cross-border movements that could be an undue burden.

EU rules could  provide a solution here. If an independent Scotland were to become part of the EU, the long-standing provisions in EU law on the co-ordination of social security for people moving between Member States would provide a “ready-made” solution to some of the problems around how the Scottish welfare system should interact with that of the UK, and with the systems in each country in the European Economic Area (EEA).

The co-ordination rules aim to ensure that people who choose to exercise the right of freedom of movement do not find themselves at a disadvantage in respect of social security benefits – e.g. if they should fall ill or become unemployed while working in another EEA state.

The Regulations do not guarantee a general right to benefit throughout the EEA; nor do they harmonise the social security systems of the member states.

A decision would also have to be made on whether an independent Scotland remained part of the Common Travel Area (CTA). This currently comprises the UK, the Republic of Ireland, the Channel Islands and the Isle of Man. By virtue of their country being part of the CTA, Irish citizens enjoy certain advantages over nationals of other EEA states with regard to access to certain UK benefits (as they satisfy the habitual residence test and have a “right to reside”).

Were Scotland to be excluded from the CTA, people moving between Scotland and the UK could find it more difficult to access benefits than people moving between the UK and Ireland.