Welfare bill would bring tax hike after UK split

Scots would face tax rises to pay for the country’s growing welfare bill if it became independent, a report has warned.

The benefits system costs relatively more in Scotland than in the rest of the UK, because there is a higher proportion of pensioners and people on disability pay, according to economist Professor David Bell.

And a big increase is looming as more Scots live into retirement, pushing up the pensions bill in the decades ahead. Prof Bell warned taxes would have to go up to fund this under independence or if Holyrood is given full fiscal control under a devo-max style arrangement – unless there is an unlikely return to the strong economic growth seen before the banking crash.

The welfare system has become a key battleground in the independence debate.

Nationalists claim Holyrood could protect against the worst impact of benefits cuts being imposed by the UK coalition, such as the “bedroom tax”. Finance secretary John Swinney insisted earlier this month there would be no need to raise taxes after independence.

But Prof Bell’s new paper looking at spending on welfare in Scotland seems to be at odds with that claim.

“If Scotland acquires new fiscal responsibilities, including control over welfare benefits, there will be a need to raise revenues to meet the increased costs of state pensions,” he said.

“These will have to be derived from the economic activity of the working-age population.”

The number of pensioners in Scotland is expected to increase by 80 per cent between 2010 and 2060 and this poses a “particular challenge for Scotland”, according to Prof Bell.

“Meeting the costs of welfare entitlements for older people will require a return to consistent patterns of economic growth if increases in the tax burden are to be avoided,” he said.

Payments on welfare and state pensions in Scotland totalled £15.6 billion in 2010-11, with councils spending a further £5.2bn on support for groups such as older people, children and the homeless.

Overall spending on “social protection” – welfare benefits and state pensions – was higher in Scotland than in the UK as a whole, at £3,972 per head of population, compared with £3,658.

The higher spending north of the Border is because there is a higher proportion of pensioners and disabled people in the population.

Prof Bell said: “Scotland has lower income, more working-age people with no skills, a higher unemployment rate, higher proportions of older people and lone parents in the population and higher levels of disability.”

He also said no clear vision of a Scottish welfare system under either independence or an enhanced devolution settlement had yet been set out. He said: “While supporters of increases in the powers of the Scottish Government, including full independence, have indicated a desire to take greater control over the welfare budget, what has been lacking is a clear, costed vision of what that ‘Scottish welfare system’ might comprise.

“There are opportunities to improve the operation of the welfare system, but there are also constraints which few of the advocates of increased powers seem willing to acknowledge.”

First Minister Alex Salmond said in a keynote speech last year that reforms and cuts in the welfare system under the coalition served to “exemplify” why Scotland needed control over this policy area. His deputy, Nicola Sturgeon, said recently that control over these areas would allow Holyrood to create a system that was “reflective of Scottish values”.

Prof Bell said benefit payments played “a vital role in supporting the incomes of types of household” – such as pensioners – who often have “limited alternative sources of income”. This would make it hard for Holyrood to make “significant alterations” to the existing set-up.

Nationalist MSP Annabelle Ewing, who sits on Holyrood’s welfare committee, yesterday attacked the proposed “bedroom tax” which will see social housing residents with an empty room forced to move or pay extra under welfare reforms.

She said: “People in Scotland should not be paying the price for Westminster’s detachment from reality and their failure with this move only shows why decisions on taxes and welfare should be made in Scotland by people who understand the impact such a policy will have.”

But Labour infrastructure spokesman Richard Baker said the SNP had to learn “basic economic principles”. He said: “You can’t promise Scandinavian levels of public services funded by American levels of taxation.

“Professor Bell highlights the need to significantly grow Scotland’s economy in the years ahead. It therefore seems mad to go for separation, which will put up barriers to trade between Scotland and the rest of the United Kingdom – our biggest trading partner.”

Tory MSP Murdo Fraser, who is convener of Holyrood’s economy committee, said: “We have asked the SNP to reveal its ten-year plan to pay for universal free services, and it has repeatedly refused to do so. This Scottish Government cannot keep promising the world and expecting the public to simply swallow it.”

A Scottish Government spokesman claimed figures had shown 40 per cent of Scottish tax revenues were spent on social protection, compared with 42 per cent for the UK as a whole.

“With a lesser share of Scotland’s tax revenues needed to support welfare and pensions than across the rest of the UK, Scotland is in a stronger position to support our pensions and welfare system than the UK as a whole,” he said.