It’s beginning to look a lot like GERSmas
It’s on the news, you know.
The size of the deficit, is all that matters to it
No deeper in shall the headlines go.
It’s beginning to look a lot like GERSmas
What will the numbers have in store?
To the rest of the UK, we compare ourselves today
It becomes a chore.
If a tax here is tweaked and everyone is freaked
imagine if they tried something more.
To reform all the land, make sure fracking stays banned
tax the rich till they’re sore.
But till we can then GERS we have and here it comes again.
It’s beginning to look a lot like GERSmas
Here, again, we go.
The fight about all the stats, the guesstimates and the facts
Where we stand I doubt we’ll ever know.
It’s beginning to look a lot like GERSmas
For calm, I shall now say.
Why don’t we have a truce, and not let Twitter run a loose
This GERSmas day….
“Journalism is what we need to make democracy work.” – Walter Cronkite
It’s that time of year again. Amazingly, despite the looming catastrophe that is Brexit, this week has been one of those “slow news” weeks. Of the kind that manage to get pages out of very minor things like essentially reprinting old stories with the numbers slightly updated.
I covered this before back in the early days of this blog (it remains the most read article on here so far – even excluding the annual reposts). Others, like Wings Over Scotland, have covered it pretty much every year since.
Here’s the short version though.
Opponents are complaining that the Scottish Government aren’t spending everything they’ve been given in the Block Grant or raised through taxes and are claiming that the Government are starving services of resources.
This year the “underspend” is “almost £500 million” (actually, the article later says that it’s £453 million).
But the Scottish Budget is pretty much fixed annually.
If it DID try to use them, you can bet that the same opponents would be raging at the thought of the Scottish Government going into debt.
The solution to avoid debt is to budget conservatively – if you had to set an ice-cream cone budget at the start of the year but your ice-cream purchases varied between 800 and 1,200 cones depending on weather – you’d need to budget for 1,200. If you only bought 800, then you’d have a 400 ice-cream cone underspend.
Without borrowing powers or an independent currency, budget underspends are an inevitable feature of the annual budget.
Though complicating the above point is that until 2006-07, Scottish Executive underspends were, in great part, retained by the UK Government. This was corrected after a negotiation between the UK Government and the then new SNP Scottish Government and the accumulated £1.5 billion was gradually fed into the budgets of the next several years.
Since then, underspend money gets carried over to next year’s budget (though, as that budget will have an underspend too it’s a bit of a moot point).
One thing often missed in the “Budget Underspend” headlines is the actual nature of the sum involved. It’s not all cash sitting in the bank. Some of it will be due to underspending due to less-than-projected spending items (like the ice-cream cone budget issue). Some of it will be due to projects coming in underbudget possibly due to good management, possibly due to currency or price fluctuations (if your ice-cream cones cost £1 in January but drop to £0.80 by June, you might underspend even if you still buy 1,200 cones).
But a good chunk of the underspend could be from things like depreciation of assets which can’t be spent on other things at all – even if the asset is sold (The metaphor gets a little strained here, but if your ice-cream cone is worth less as a half-eaten, melted pile than it was when you bought it fresh, it’s not as if you can sell the cone and pocket the difference in price).
Another thing often missing from these headlines is the inevitable revision afterwards – calculating National budgets down to the penny turns out to be quite tricky. If you remember last year’s headline that the government had underspent by £191 million, you probably missed the reporting that that figure was later revised down to only £85 million after final accounting adjustments were made.
Indeed, this year’s figures have ALREADY been revised downwards. Stripping out the non-cash items and money already budgeted for but not yet spent then it only leaves around £66 million to be spent on something else.
But £66 million is still a fair bit of money though isn’t it? Surely, the government could just, you know, budget better?
To answer that question we’d be best to do another thing that doesn’t really come across in reporting if one looks at the situation one headline at a time. Examine the trend.
To that end, I’ve spend a fair bit of time trawling through annual Consolidated Accounts to pull together the underspends from this and previous years. I managed to get back to the accounts for the year 2005-2006 before the trail gets fragmented. Before this point, the Scottish Executive accounts operated in a substantially different way (see the segment on Resource Accounting and Budgeting here). Underspends still happened, but comparing them like-for-like with years after 2004 may not be strictly fair. I also haven’t been able to locate the 2002-03 underspend at all.
As far as I can tell though and if the revision mentioned stands, this year’s underspend may well be the lowest since the start of devolution.
And if we compare the underspends to the budget as a whole we begin to see just how small a story this all becomes. The Scottish Government’s devolved budget is on the order of £32 billion. A £66 million underspend is about 0.21% of that budget – or about 18 hours worth of spending across the year.
Even the initial estimate of £453 million was about 1.4% of the total budget – if it really was all spendable cash, it’d be the equivalent of about five days worth of spending.
This is not to say that the budget underspend won’t become an issue. It was simplier back in the days when the bulk of the Scottish budget came from the block grant and tax powers were both limited and largely unused. Now, with divergent income tax rates and bands and an impossibly complex Fiscal Framework, there is a risk that the devolution settlement gets strained to breaking point. The David Hume institute has described it as an “interesting cocktail” of arrangements.
I don’t know what the future holds for this story. I could see a time, possibly as soon as next year, where the Scottish Government revenue budget slips from “underspend” to “overspend”. I already know what the reaction of the opponents will be if that happens.
I could hope that the media will up its game here and try to explain these issue in more detail than an attention grabbing headline.
Sadly, I can see my 2015 article just being reposted again in 2019.
If this is a discussion document – It’s time to start discussing it.
The Growth Commission’s long-awaited report is finally out and will surely take some time to fully digest. It has been described as a discussion document and a starting point for the revitalised case for independence; not the final word on SNP policy or national trajectory.
In many ways, the report covers ground now very familiar to campaigners in the independence debate. We’re all now quite familiar with the deep and systemic flaws of the UK’s economic system especially its regional inequality which, quite frankly, is embarrassing when compared to neighbouring countries in Europe.
There’s been an idea floating around recently – mostly pushed by the Lib Dems but floated elsewhere too – that the solution to NHS England’s current, catastrophic crisis is an additional income-linked tax (either a new tax or an addition to income tax or National Insurance) which would raise money specifically for health spending.
Queuing for bedspace in an English hospital
Other schemes have been suggested, like an addition to income tax to be spent on education. This idea of having a dedicated tax which raises revenue for a specific purpose is known as ‘hypothecation‘ and here is why it is a terrible idea.
Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may make you feel like you’re flying high at first, but it won’t take long before you feel the impact. – Barack Obama
Whenever we talk about national budgets, it doesn’t take long before someone mentions the “national deficit” and the “national debt”. Indeed, as I’ve noted in some of my commentary on GERS, sometimes it can seem like this is the only thing that makes it to the headlines at all. The almost unchallenged “wisdom” is that a government spending more than it raises in taxes is a terribly bad thing. It’ll leave future generations burdened with debt and, anyway, you wouldn’t run a household’s finances that way, would you?
This is a wisdom that has led us to Austerity and there is barely a politician out there who speaks for any other ideology. It’s not just the Tories. Corbyn’s team is at it, at least by degrees and even Nicola Sturgeon often speaks the same language when defending Scotland’s finances. (And, yes, I’ve used that same language in the past too. Life is about learning.)
Of course, the root of the obsession lies with the fact that the “national deficit” is something that seems quite close to the politicians and therefore it’s something that they should be “sorting out”. But maybe the economy is a bit less simple than this. Maybe, like the fable of the blind men appraising the elephant, one can get a false impression of the whole by getting too close to one detail.
“Why speculate when you can calculate?” – John Baez, American mathematical physicist
Last week saw the release of Common Weal’s latest policy paper, Scotland’s Data Desert, which examined the gaps in statistical data for Scotland and called for a Scottish Statistics Agency to help fill them.
We weren’t the only ones studying the problem of the dearth of data in Scotland. As part of a year-long program of research into this topic, we got involved with the Scottish Parliament’s Economy, Jobs and Fair Work Committee who had launched their own public consultation looking specifically at the state of economic data in Scotland.
Our response to that consultation led to us being invited to present evidence directly to the committee in September 2017.
The final report from the committee’s investigations was published a few days ago and we are very pleased to say that many of our recomendations have been accepted in the conclusions of the report.
The Sunday Times has published a hack-job of a piece attacking the Scottish Government’s proposed plans to change the rates and bands of income tax in Scotland.
They’ve clearly tried to use the Scottish Conservative’s current favourite economic soundbite, the Laffer Curve, to try to build their case that we should be cutting taxes and have sought out a quote from the originator of the idea to try to back it up.
The problem is, I’m not entirely sure that the paper really understands what this idea actually says about tax.
“70% of taxpayers get a tax cut as a result of yesterday’s budget” – Nicola Sturgeon
“One million Scots to pay more income tax than rest of UK” – The Scotsman
Yesterday saw the unveiling of the first draft of the Scottish budget for 2018-19. You can read the proposals by clicking here or on the graphic below.
My own brief comments have already been published via Common Weal and in The National but I wanted to expand on a few of the points here too.
Income Tax
Of course, this is the big headline grabbing policy change. Last year was the first year that Scotland had the power to adjust rates and bands of income tax and it used those powers then to not uplift the Higher Rate by inflation as was done in the rest of the UK. Cue howls of outrage from the Tories that for folk earning more than £44,000 per year, Scotland was now the “highest taxed part of the UK”.
This year, the Scottish government spend a good deal of time consulting with the other parties about their proposals for what to do next with income tax as well as offering several options of their own.
In the end, the government has written their budget around a plan which doesn’t quite look like any of the proposals brought up before. From next year, Scotland’s income tax bands will change from this
Income up to
Tax Rate
£11,500
0%
£43,000
20%
£150,000
40%
>£150,000
45%
to this
Income up to
Tax Rate
£11,850
0%
£13,850
19%
£24,000
20%
£44,273
21%
£150,000
41%
>£150,000
46%
Two new bands have been added – one “Starter Rate” on income between £11,850 and £13,850 which offers a 1% tax cut and one on income between £24,000 and £44,273 which offers a 1% tax rise compared to last year – and the Higher and Additional rates have been increased by 1%.
Folk online have been arguing about who will be better or worse off under this plan. The truth is, it depends on what you’re comparing to. You could compare to the Scottish tax rates last year. You could uplift the bands by inflation and leave the rates as they were last year or you could compare to the 2018-19 UK rates.
At my most cynical, I can see immediately that the comparison to the rest of the UK gives the Scottish Government a soundbite with which to counter the Tories. For folk earning less than £26,000 per year, Scotland now has the lowest income tax rate in the UK.
These changes are quite small though. Only about 1% up or down across the income scale. The overall changes are projected to bring in only about an extra £160 million per year and greater increases in the upper rates were ruled out for fears that those on higher incomes would leave Scotland or otherwise evade or avoid the tax increase. This idea is, of course, subject to a great deal of dispute by the various parties.
There is substantial evidence that tax does not cause a great deal of migration across borders. The rich are people with friends, families and connections to the place they live just as much as everyone else.
On the other hand, the frankly Byzantine tax code in the UK does make it easy to move money around so the experience of other states and countries may not reflect onto Scotland and the data about upper income tax flight in the UK is very limited (see from 50min in the video above and from 56min for information about Scotland). The bold might say that there’s only one way to find out…
Far more important than the actual revenue impact of the income tax changes is the willingness to change itself. Scotland now has a more progressive tax system than the rest of the UK and has now set a precedent for adjusting tax to suit the needs of Scotland rather than to just constantly look over the shoulder at what the UK is doing. It will be interesting to see how this idea beds in and develops in coming years.
It remains a shame that Scotland still can’t have a comprehensive discussion about taxation and we’re reduced to either lumping everything on income tax or tinkering around with the more minor devolved taxes. I’ve spoken at length about the Air Departure Tax but even I can’t work up much excitement about the prospect of radical change to the Aggregate Levy.
Public Sector Pay
There was a pleasant addition to the budget here. After years of pay being capped at 1%, public sector workers will be getting a pay increase of 3% if they earn less than £30,000 per year, 2% if they earn less than £80,000 per year and a flat increase of £1,600 if they earn more than that.
Of course, their taxes are likely to be changing too but only if said worker is earning in the region of £170,000 or more would the increase to their taxes exceed their pay rise (and I’m reasonably certain that there won’t be too many in that position).
This is welcome news although it should be tempered by the fact that inflation is now running at 3.1% and rising. This pay increase still represents a wage squeeze for public sector workers and doesn’t even begin to start undoing the damage caused by the years of the cap. This increase certainly isn’t news to be condemned but it’s still not much more than a short term salve.
Housing
The housing policies in the budget don’t seem to be making too many waves. There’s extra money for housing but a good deal of it seems to be aimed at the private market which has already been the recipient of substantial subsidy.
The proposal to cut the Land and Buildings Transaction Tax for first-time buyers is a major error of judgment. Unlike the divergence with the rest of the UK on income tax, this proposal is a mirroring of the UK policy. Under this cut, 80% of first-time buyers will no longer pay LBTT on properties priced below the threshold. At least they recognised the lower house prices in Scotland and set the threshold at £175,000 instead of the UK’s threshold of £300,000.
But the logic of the tax relief is similarly misplaced though. If you can afford a house at £175,000 without the tax relief, you can afford the house with it. But if you can’t afford the house at £175,000 then it’s very unlikely that a £600 discount is going to make any difference.
This means that there is absolutely no barrier at all to the seller increasing the price of the house by £600 and swallowing up the tax. This cut will merely cause £5 – £7 million per year worth of tax revenue to transfer to those who are selling property.
Regional Council Funding
When the UK budget came out last month and we were told by Westminster that the Scottish government was gaining money in the capital budget but losing it in the revenue budget but if the Scottish Government wanted to make up the different by raising taxes then it was absolutely free to either do so otherwise it could take responsibility for passing on the cuts.
Well, this same rhetoric appears to have been repeated from the Scottish Government with regard to our regional councils. Their revenue budgets will be frozen in cash terms but with inflation running at 3% this means quite a substantial real terms cut. In addition, the public sector pay increase will likely have to come out of that regional authority resource budget which will further increase pressure on councils. The have the “freedom” to increase council tax to make up the shortfall but it remains to be seen how many choose to do so, especially now with every council in Scotland governed by coalitions of various stripes.
This is the area where I expect most of the fighting to occur during the negotiations before the budget is actually voted on in Parliament next year. The SNP can’t pass it on their own. They’re going to need another party to either vote for it or at the very least abstain to get it through.
The Greens were fairly enthusiastic about the approach to income tax but have set this funding freeze as a red line against their support for the budget as a whole. I don’t believe the Lib Dems are any happier with it and with the Tories certain to oppose and Labour not much less so, there’s going to be a bit of trading required to gain enough support to pass the final bill. I wouldn’t be surprised if Derek Mackay has another rummage down the back of the sofa for some extra cash as he did last year.
One more radical solution would be to recognise that wealth inequality is far higher in Scotland than income inequality and that maybe it is time to explore news forms of local taxation like local land taxes or other taxes on wealth.
Scottish National Investment Bank
Now here is a real good news story. The SNIB is on its way! The first two year tranche of funding, totaling £340 million, has been included in this budget as has the planning and infrastructure to continue that funding beyond the first two years. The Common Weal plan called for the bank to be capitalised to a total of £2 billion over several years so this is a very good first step. If we were a fully sovereign nation with full control over monetary policy it would, of course, be trivial to fully capitalise this bank but we’re not and Scotland only has limited capital spending powers so we need to build up the funds over several years. This is fine though, the bank still needs to be set up and ramped into operation anyway.
The bank is still in the very early planning stages but discussions with the government about its design and the need for it to look out for the common good have been received very positively.
In the long term, this bank will be a major factor in supporting local economies and helping Scotland’s overall economy remain flexible and adaptable in a rapidly changing world. This, if we stick at it and do it right, could be the most transformational policy of the decade.
Conclusion
In terms of political maneuvering, this budget sent out many of the right signals. Increased progressiveness on taxes, more money for public sector workers, the start of better economic investment. They are all good moves and show a willingness for Scotland to not just be different from the rest of the UK but for Scotland to be Scotland without having to compare itself to the UK in the same way that the UK doesn’t constant compare itself to Ireland or France when setting budgets.
But, and it is a big but, many of changes aren’t themselves going to do all that much. A <1% change in take home pay isn’t going to save the day or break the bank for many folk.
As a stepping stone though? As a definite signal that Scotland is willing to be better? I’ll take that. Let’s try to build on it next year and beyond.
The Common Green 