An independent Scottish state would face additional costs rising to nearly £1.55bn a year over the next 20 years, the equivalent of nearly £450 for every working-age person, according to the DWP.
A comprehensive 116-page analysis published by the DWP says Scotland faces a greater demographic challenge to pay for pensions than the rest of the UK. Pensioners make up 19.8 per cent of the population in Scotland compared to 19.2 per cent in the rest of the UK. By 2032, based on Office for National Statistics population projections, this gap will have doubled, with Scotland’s pensioners making up 22.0 per cent of its population compared with 20.8 per cent in the rest of the UK. The DWP argues the UK’s broad tax base will help to mitigate the challenges from an ageing population in the decades ahead.
The paper says benefit spending per head of population was £3,335 in Scotland in 2012/13, £60 or 2 per cent higher than for the UK. This works out at £17.7bn a year – £330m more than if spending per person was at average UK levels. Historically this difference has been greater – in 2002/03, spending per head in Scotland was 9 per cent above that in the UK – and it is likely to fluctuate again over time, says the DWP.
The DWP has also attacked the Scottish Government’s assertion that it would reserve judgement on increasing the State Pension age to 67. The DWP argues not going ahead with the increase would cost people in Scotland around £6bn between 2026/27 and 2035/36 in extra pension costs and could see around £9bn lost in terms of Gross Domestic Product as people leave the labour market earlier than they would otherwise have done.
It has also attacked the current Scottish Government’s proposal of a start level for the new single tier pension of £160 a week, matching the UK rate should this be higher. The DWP calculates that for every £1 additional increase in the starting level of the single tier pension, the extra cost in Scotland could be in the region of £50 million a year in around 20 years’ time.
The DWP says Scotland’s liabilities for public service pension liabilities could stand at £100bn, out of a total UK bill of around £1tr. It says there would also be increased administrative costs as an independent Scottish state would have to significantly expand the role of the Scottish Public Pensions Agency.
The DWP estimates its operating costs in Scotland to be around £720 million, representing 9.8 per cent of the total cost. As well as the yearly running costs an independent Scottish state would also have to develop a wholly new social security system so that it could deliver on the policy changes the current Scottish Government is committed to making, says the DWP, which argues the one-off costs of this would be in the hundreds of millions of pounds. It says one-off IT costs to develop a new system are estimated to be between £300m and £400m. On top of this there would be costs to develop new policy and pass legislation and for exiting existing contracts. There may also be a significant impact on the rest of the UK if all contracts need to be re-tendered says the DWP.
The DWP also argues that the infrastructure, including IT, to deliver the current services is highly complex, with complex benefit and pensions calculations based on pounds sterling. It argues the Scottish Government’s claim that it would seek to use UK systems for some years after independence would mean it would be unable to implement different policies through these systems.
The report says: “These are massive spending commitments by any standards. Such expenditure would normally require increases in taxes, cuts in pension and benefit payments, significant reductions in other areas of expenditure or need to be absorbed into a budget deficit.”