Economic impact of spending on social security - Technical note

Discussion

Whilst the analysis in this note has identified the potential for social security spending to have positive economic impacts in both the short and longer term, it has a number of limitations that should be borne in mind. Our approach does not consider the long term impact of policy changes on competitiveness, for example through changes to labour market incentives. It also does not consider the returns of alternative policies, such as infrastructure investment, which would have different demand and supply impacts. Our analysis focuses on modelling the impacts of additional spending aimed at reducing poverty and inequality.

As noted above, the fiscal multipliers analysis relies upon the assumption that the social security received is more likely to be spent than saved. This is supported by the latest evidence relating to the new social security programmes. The interim evaluation of the Scottish Child Payment^[2] shows that the payment has generally allowed parents and carers to spend money that they otherwise would not have spent. Additionally, the evaluation shows that recipients tended to spend the whole payment, with only a small number saying they tried to save some of the money. This suggests a higher than average propensity to consume, meaning that these households spend more and save less of their income.

Given that Social Security multipliers are estimated to be larger than those for other types of resource spending in the short term, particularly during an economic downturn, this type of spend can help stabilise the economy. This means that such spending does not just increase the income of affected households but can also provide short-term support to growth through an increase in aggregate expenditure.

In the longer term, sustained growth requires improvements in participation or productivity. Therefore it is important to complement spending on social security with policies which improve the supply-side of the Scottish economy.