Counting the cost of Welfare Reform

One of the most significant outcomes of the Stormont House Agreement was an agreement to extend to Northern Ireland the reforms to the welfare system that have been introduced in Great Britain. These reforms were persistently blocked by Sinn Féin, who did not want to endorse what they termed “Tory cuts”. The Treasury has fined the Executive £114m in the current budget for failure to implement the reforms, but they now look as though they are going to be introduced. Relatively little has been discussed recently about how these reforms are likely to impact upon people receiving benefits, and what the implications might be for the wider economy. I wanted to analyse data for both Northern Ireland and Great Britain to see what the impact of welfare reform has been where it has been implemented, and what the impact might be in Northern Ireland post-implementation.

Disability Living Allowance

The biggest impact on Northern Ireland is likely to be from reform to DLA. It is proposed to replace DLA entirely, and replace it with a new benefit, Personal Independence Payment (PIP). That Northern Ireland has more DLA recipients per head of population is well known; 10.9% of the population receive the benefit, compared to a GB average of 5.23%. Of the 406 local authority areas in the UK by DLA (or PIP) recipients per head of population, all of the top five are in Northern Ireland, as are 13 of the top 20.

Top 20 DLA

Total annual DLA payments in Northern Ireland (at August 2014 recipient volumes) are approximately £944.4m. The criteria for PIP eligibility have been tightened significantly. From a statistical analysis of 180 cases, it was determined that fewer current DLA claimants will be eligible for PIPs, and that even though some people will have their payments increased, the overall effect that those who are eligible will receive less. From an analysis of 16,730 cases due to be reassessed in 2014/15, it was estimated that overall PIPs payments will be 27.6% lower than current DLA payments. Extrapolated to the entire DLA population, this would mean that PIPs payments would reduce to £683.9m, an overall reduction of £260.5m.

This is a significant amount of money to be withdrawn from the local economy, and the largest impact is going to be felt in communities in the west of Northern Ireland, which are the areas of Northern Ireland with the lowest disposable incomes per head. The consequences for inequality and the wider economy could be huge, especially in areas such as Strabane where currently over 15% of the population claim DLA.

DLA Distribution

The Bedroom Tax

Another key plank of welfare reform in Northern Ireland will be the introduction of the “Spare Room Reduction”, popularly known as the Bedroom Tax. This will reduce Housing Benefit in cases where there is more than one bedroom per couple or person in a household, with two children of the same gender under 16 expected to share a room, or two children of any gender expected to share a room if they are under 10. The policy has caused much controversy in Great Britain. It has been estimated that over half of those affected by the Bedroom Tax have went into arrears or further into arrears with their rent, and that the majority of those affected are disabled, as defined by the Disability Discrimination Act. There is likely to be a significant number of people affected by a reduction in benefits due to the migration from DLA to PIPs, who will also be affected by the Bedroom Tax.

It is difficult to forecast exactly what the impact of the Bedroom Tax will be in Northern Ireland. However, data is available for Great Britain, and it may be expected that the proportion of Housing Benefit claimants affected by the Bedroom Tax will be broadly similar to rates in Scotland.

Based on the latest available data, August 2014, 15% of Housing Benefit claimants in Scotland were affected by the reduction (the rate was 12.6% in Wales and 13.6% in the North East of England), of which 12.8% received the penalty for having one additional bedroom and 2.2% the penalty for having two or more additional bedrooms. In 2013, there were 166,437 recipients of Housing Benefit. Extrapolating of Scottish Bedroom Tax incidence rates to Northern Ireland would imply that 22,635 would have the one bedroom penalty (£8.25 per week), and 3,662 would have the two bedroom penalty (£14.70 per week).  If these figures did transpire, it would imply an overall reduction in Housing Benefit of £12.5m per year.

Tougher Benefit Sanctions

It is intended to introduce in Northern Ireland the tougher benefit sanctions regime that has been enacted in Great Britain, which will primarily affect those claiming Jobseeker’s Allowance (JSA). The regime has been criticized for being draconian, and a read of this Stupid Sanctions Tumblr makes for astonishing reading. This Scottish Government report states that, of the 111,090 claiming JSA in February 2014, 10,721 (9.7%) faced a sanction decision, and according to DWP data 5,643 faced an adverse sanction; 5,007 a “Low Level” or “Intermediate Level” sanction (losing four weeks of JSA in the first instance), and 636 were given a “High Level” failure (a loss of benefits for 13 weeks).

This is significantly harsher than the current JSA sanctions regime. Data on current JSA sanctions in Northern Ireland proved hard to find, but this FOI request discovered that there were 7,273 sanctions over a six month period for JSA, Income Support and Employment and Support Allowance (ESA). I have assumed that 95% of these sanctions pertained to JSA, which is the ratio in Scotland. If correct, then approximate 1,150 JSA claimants are sanctioned in any given month. This would imply that 2% of Northern Ireland JSA claimants are sanctioned in any given month, but in Scotland the figure is just over 5%, suggesting that there will be something in the order of a 150% increase in JSA sanctions under the new regime.

It is hard to estimate what the reduction in overall benefits payable will be under the new regime, but as a ballpark estimate, currently 6.5% of those claiming JSA in Northern Ireland have a nil rate. If these are all due to sanctions, then a 150% increase in sanctions would mean that there would be 9.75% reduction in JSA payments, which would mean a total annual reduction of £17.6m from current total JSA payments of £180.7m.

There will be those who have limited sympathy for those who will be affected by the cuts in benefits. The discussion around this issue has become highly polarized, and many people in Northern Ireland will have anecdotes of people who are claiming benefits, especially DLA, who they may not consider the most deserving. However, if you are a business owner in a town where a large proportion of your customers are on benefits, and benefits are slashed, then this is going to have a severe impact on your business. This could cause a cascade of business failure throughout the local economy. Cuts to benefits have economic impacts far beyond those who claim them.

There is a growing body of economic thought that says that monetary policy such as quantitative easing, where the government attempts to increase private sector spending by creating money and using it to buy bonds, exacerbate inequality and inhibit growth as money does not reach the parts of the economy that need it. If the government is serious about private-sector led, real economic growth in Northern Ireland, then perhaps it should start to think about how to get money into the pockets of the poorest, instead of trying to extract it.