Why does Scotland spend more on working age disability benefits?

Higher benefit spending in Scotland

The Institute of Fiscal Studies (IFS) recently published a paper comparing benefit spending levels in Scotland with those in the rest of Great Britain (rGB). For most benefits, the authors suggested that there are relatively small differences between Scotland and rGB in terms of spend per person, and what differences there are can be explained by demographic factors. For example, spending on old-age benefits is slightly higher in Scotland because of a higher proportion of older people, whereas spending on child benefits and tax credits is slightly lower because Scotland has a smaller proportion of children in its population.

When it comes to disability benefits however, the IFS paper shows that spending per person in Scotland is much higher than in rGB.  Part of this difference relates to the poorer health of Scots. However, it argues that spending on disability benefits in Scotland is high, even allowing for Scots’ relatively worse health status.

So if Scots claim more disability benefits than one would expect, given their state of health, why is this the case? In this blog, I look at the factors underlying the level of disability benefits claimed by the working age population in Scotland, focussing on Employment and Support Allowance (ESA), Incapacity Benefit (IB) and Severe Disablement Allowance (SDA) which are essentially benefits intended to replace loss of earnings. I do not consider Disability Living Allowance (DLA) which is intended to cover the additional costs associated with long-term disability or illness. All figures relate to 2011/12.

Spending on IB, ESA and SDA – the size of the Scottish ‘gap’

The total amount spent on IB, ESA and SDA in Scotland is £1.02 billion, equivalent to £307 per person of working age. In rGB, the amount spent on these benefits is £8.11 billion, equivalent to £232 per working age person. Thus spending on these benefits is 32% higher per adult in Scotland than rGB.

The higher expenditure per adult on these benefits is the outcome of both a higher rate of claims in Scotland, and higher average expenditure per claimant.

  • In Scotland 278,000 working age people claim IB, ESA or SDA, a claimant rate of 8.4%. In rGB, the equivalent rate is 6.6%. Thus the Scottish claimant rate for these benefits is 28% higher than rGB.
  • Expenditure per claimant is £3,649 in Scotland, compared to £3,545 in rGB. Thus expenditure per claimant is 2.9% higher in Scotland[i].

If Scotland exhibited the same claimant rate as rGB, and had the same level of expenditure per claimant as rGB, then its total spending on IB, ESA and SDA would be £773m, some £247m less than actual spending.

Explaining Scotland’s spending gap

Clearly, only a small part (12%) of this £247m ‘gap’ is explained by Scotland’s higher spending per claimant, with the rest attributable to the much higher proportion of claimants in Scotland.

Scotland’s higher claimant rate for ESA, IB and SDA is no doubt due in large part to the fact that its working age population is on average older and less healthy than the rGB population. Data from the Labour Force Survey (LFS) shows that 20.5% of working age Scots claim that they have a health problem which limits their activity compared to 18.5% in rGB. Controlling for Scotland’s slightly older population reduces this difference slightly to 1.5 percentage points. But, even controlling for age, Scots are more likely to say they have a larger selection of the 17 health problems identified in the LFS.

To what extent do these demographic and health factors adequately explain Scotland’s relatively higher claimant rate for disability benefits? One way to examine this is to use the individual-level data in the LFS to model the probability of a working age individual claiming either IB, ESA or SDA given their age and reported health. Table 1 shows the results of three such regressions, where the coefficients can be interpreted as marginal effects (i.e. the effect on the probability of claiming the benefit resulting from a unit change in the relevant variable). These effects are measured in percentage terms.

  • Regression 1 models the probability of an individual claiming IB, ESA or SDA as a function of a single variable – whether the individual is Scottish or not. The coefficient suggests that, without controlling for age or health, Scots are 1.09% more likely to claim one of these benefits than someone in rGB.
  • Regression 2 controls for age. The coefficient on the Scottish ‘dummy’ variable falls slightly to 0.9%, reflecting the fact that, adjusting the relationship to include the effects of Scotland’s older population, reduces the likelihood of a Scot claiming IB, ESA or SDA.
  • Regression 3 controls for age and two health status variables – whether the individual has an activity-limiting health problem, and the number of health problems that the individual says they have[ii]. In this regression, the Scottish variable falls substantially, implying that, for a given age and health status, Scots are only 0.186% more likely to claim IB, ESA or SDA than people in rGB.

Table 1: Influences on probability of claiming IB, ESA or SDA

Regression 1

Regression 2

Regression 3

Scottish

1.090%

0.901%

0.186%

Age

0.299%

0.103%

Age squared

-0.002%

-0.001%

Activity limiting health problem

8.515%

Number of health problems

0.405%

Pseudo-R2

0.0008

0.0295

0.3833

Notes: Dprobit regressions of benefit status on explanatory variables. In each regression, N=57,672 and all variables are significant at 0.001 level.

As we’ve seen, 12% of Scotland’s £247m spending gap is attributable to higher average payments per claimant. The results in Table 1 suggest that, of the remaining £218m gap, around 83% can be explained by the fact that Scotland’s working age population is on average older and less healthy than that of rGB.

A relatively small part (around £37m) of the gap remains unexplained by Scotland’s demographic and health status. There are a number of possible explanations for this increased likelihood of a Scot to claim. One is that benefit assessments are less stringently applied in Scotland; another is that if the Scots disabled are, on average, poorer than their rGB counterparts, they are less likely to be denied the benefits because they fail the relevant means test. Some claimants for means-tested benefits will meet the disability criteria but fail on the basis of their income or savings (the means test). (There is some evidence supporting this interpretation in that, if we model the probability of an individual claiming non means-tested DLA using the same set of explanatory variables as in Regression 3, we find the coefficient on the Scottish dummy is just 0.06%.)

Alternatively, the health status data might be biased if Scots systematically self-assess their health as being better, for a given objective health status, than individuals in rGB. Indeed, there is some evidence that this could happen, in that people self-assess their health relative to the people in the communities in which they live (implying that an individual in a health poor area is likely to rate their health as being better than if that same person lived in an area with better than average health).

A further possibility is that, for a given health condition, claimants stay on benefits longer in Scotland. This would increase the probability of observing a Scottish claimant in a cross-sectional survey. It is not possible to observe durations from a cross-sectional survey, so this issue cannot be resolved here.  Analysis of a use of a longitudinal household survey might aid such analysis but analysis of the Department for Work and Pensions administrative data would provide a definitive answer to this question.

Summary and looking to the future

The majority of Scotland’s higher per capita spending on working age disability benefits relative to rGB can be explained by the fact that working age Scots are less healthy and older on average than their counterparts in rGB. This highlights the important role that preventative health spending can play in reducing the welfare bill. For a given age and health status, Scots are slightly more likely to claim a disability benefit than people in rGB, but this only explains a small part of Scotland’s relatively higher spending on these benefits.

In the longer term, there are two pieces of potentially good news for Scotland.

  • The first is that Scotland’s health gap relative to rGB seems less of a problem among younger compared to older people. Column 1 of Table 2 shows that the likelihood of a Scot saying that they have an activity-limiting illness compared to someone in rGB is almost 3% higher among the 50-64 age group, 1.9% higher among 40 year olds, and just 0.5% among 18-39 year olds. It is not possible to disentangle age and cohort effects using the LFS, but assuming that the differentials do not rise as each cohort ages, then we would expect the Scottish claimant rate for illness and disability benefits to become closer to that in rGB over time.
  • The second is that the additional likelihood of Scots claiming disability benefits over and above what would be expected based on age and health status alone also seems to rise with age (Table 2, column 2). Again, this might suggest that this unexplained element of higher Scottish spending on illness benefits may also decline over time.

It is difficult to distinguish between age and cohort effects with a cross-sectional survey, but these pieces of evidence suggest that the incidence of disability claims among younger Scots, relative to those in rGB is not following the path of previous generations. This may reflect the declining importance of manual labour, particularly in the west of Scotland, which may have influenced relative rates of claims for disability benefits.

Table 2: Probability of a Scot having an illness, or claiming illness benefits, relative to people in rGB

Age category Probability of Scot having an activity-limiting illness, conditional on age, relative to rGB Probability of Scot claiming IB/ESA/SDA given age and health, relative to rGB
18-39

0.476%

0.064%

40-49

1.878%

0.171%

50-64

2.955%

0.386%


[i] This difference is due to expenditure per IB claimant being around 5% higher in Scotland than RGB, which is in turn a result of the fact that 5% more IB claimants receive ‘payment’ (as opposed to NI credits only). For ESA, 1% more Scottish claimants receive payment than in RGB, but this is compensated for by the fact that the average payment, of those receiving it, is 1% less in Scotland than RGB.

[ii] Instead of one explanatory variable for the number of health problems an individual has, we can alternatively run Regression 3 with 17 dummy variables to represent which of the 17 categories of health problem each individual has. Doing this reveals qualitatively similar results, although the coefficient on the Scottish dummy variable falls slightly further, to 0.167%.

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