Withdrawing Agreement

“Diplomacy is the art of letting someone else have your way.” – Sir David Frost

I was preparing this week to talk about the “Meaningful Vote” in the House of Commons which would have ratified or rejected Theresa May’s woefully inadequate Brexit deal.

A parody timeline of the Brexit negotiations. An incomprehensible tangle of flow lines point to scenarios such as "We're screwed", "Bring back Nick Clegg" and "Jacob Rees-Mogg as PM".

But things have progressed somewhat since I started planning that post. In a direction not necessarily to the advantage of the UK government. Theresa May, Strong and Stable, took her deal from the table.  She started into the face of the humiliation of losing a vote possibly by a triple digit majority and ran away to try to renegotiate with the EU – who have already said that renegotiation is not possible. If it turns out that they were not entirely solid on that principle, then they’ll surely exact a high price for any changes.

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We (Still) Need To Talk About: Budget Underspends

“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 am, of course, talking about the perennial “Scottish Government Underspend” story.

A screengrab of the Herald article on the budget underspend. Headline "SNP government budget underspend almost £500 million"

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.

  1. 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.
  2. This year the “underspend” is “almost £500 million” (actually, the article later says that it’s £453 million).
  3. But the Scottish Budget is pretty much fixed annually.
  4. And the Scottish Government has extremely limited borrowing powers for revenue – £600 million per year, £1.75 million maximum.
  5. 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.
  6. 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.

An excerpt from an Audit Scotland report detailing the

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.

A bar chart of Scottish budget underspends since devolution. There is a clear trend downwards from the 2000-2001 high of £718 million down to the 2017-18 low of £66 million.

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.

The underspend bar chart converted to percentages of the total budget. From 4% in 2000-2001 to 0.21% in 2017-18

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.

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We Need To Talk About: The Growth Commission Report

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.

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(Source: Eurostat)

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unDemocracy

“I think it would be a good idea” – Apocrypha attributed to M. Gandhi on his being asked what he thought of Western civilisation.

The UK Government’s handling of Brexit continues to be veer somewhere between being a shambles and a criminally negligent disaster.

From its position on customs which remains something like “We have no idea what we want and we’re damn sure we’re not going to lift a finger to plan for it.”

Through its tearing away from anything even remotely connected to the EU – including Euratom (which means good luck running a nuclear power plant or obtaining a medical radiological), the Gallileo satellite system (to which the British response was a petulant “We’ll build our own…somehow”) and fundamental human rights which protect us all from the whims of governments that act a bit like the current UK one does.

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Having a Laff

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.

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The Scottish Budget 2017

“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.

Budget image

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.

tax plans.png

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.

Chart

Impact Percent

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.

Block Grant change 2017

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.

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Senatus Populusque Caledoniae

(Apologies if my scant Latin has mangled that translation. If someone corrects it, I’ll see about writing it out 100 times on the walls of the Palace.)

It seems that all news is canceled this week. All of it. There’s nothing happening. Our state broadcaster (which is totally unlike other state broadcasters in that when it promotes its state’s national interests, this is a good thing and not the most hideous evil to ever despoil the airwaves) has told us that the only thing of note happening anywhere is that someone is marrying someone with Magic Blood.

it-e1511864823786.png

This is to be a ceremony that we’ll all proudly take part in, by which they mean that we are to pay for it, despite not even being invited to the party. We’re not even getting a day off work because that would apparently cost too much.

Those in power are definitely not going to use this event to sneak out the devastating news that benefits are to be frozen again this year – that’s effectively a 3% cut after adjusting for inflation. I’m certain that they’ll be bending all effects towards sorting the gaping holes in the UK VAT system which allows more than £1 billion to be evaded every year.

They absolutely wouldn’t be cutting HMRC’s budget by £400 million per year RIGHT before the UK is going to leave the largest Customs Union in the world, would they?. They certainly would be breaking ground on all the new checkpoints and infrastructure that are going to be needed. The department should be awash with capital spending in preparation, shouldn’t it?

HMRC.png

They certainly wouldn’t big up their having done some furiously detailed groundwork on the impact of Brexit when they hadn’t actually done any such thing and were just hoping that no-one would ask to read them…till they did.

The UK has some seriously skewed priorities and it goes from the bottom right to the top of the structure of governance. Scotland needs to have a good, hard discussion about what role it plays in all of this.

The Scottish Parliament already has a far fairer voting system than the one used for UK elections (despite the comparative complexity of the former) but should we take the step of becoming an independent country then we’ll have to have a think about some other levels of government too.

I’ve already said a fair amount about the state of Scotland’s local government so today I’d like to look at what we’d want to do ABOVE the level of the present Scottish Parliament.

For instance, we may well decide to create an Upper House to scrutinise legislation but what we absolutely shouldn’t do is copy the UK method of stuffing it full of Lords and paying them to sleep off their hard day of…doing what ever they do for £300 a day.

Image result for house of lords sleeping foulkes

Far better would be a Citizen’s Assembly. Think of it as Jury Duty writ large. We’ve already decided that the best way to determine if someone has transgressed our laws is by a jury of randomly selected citizens so we could easily set up a method by which randomly selected citizens can determine if the laws themselves are just, fair and easily understood.

And for above that? How do we represent the nation of Scotland to the world?

If you had asked me in 2014, I would have said that I didn’t really mind too much and was pretty content with the Scotland’s Future plan of keeping the monarchy in the same way that Canada and Australia have.

But I’ve shifted somewhat since then. I’m not sure I’d really welcome the appointment of a Governor General as Scotland’s nominal Head of State nor am I completely clear on what duties they would actually have in practice. The First Minister already does most of the Head-of-State meet-and-greet stuff when folk come to Scotland and it seems a little strange for that to stop.

Nor do I want a restored and separate Scottish monarchy. Again, I’ve no time for someone to tell me what to do by dint of their divine appointment or Magic Blood even if Scotland does maintain a tradition of the Scottish Monarch being subordinate to the people of Scotland. Nor should a country professing to be a democracy pride itself on  its locking citizens out from ever obtaining any governmental office even in theory.

So, if we choose to have an official Head of State separate to the First Minister then it’ll have to be an elected President and that seems straightforward enough to arrange.

Though we still need to have that discussion about what we want them to DO. As said, the First Minister already does most of the Head of State meet-and-greet stuff when folk come to Scotland so we’re faced with the choice of either actually empowering our Head of State and giving them executive controls like the power to veto laws, sign their own legislative orders or other such powers (i.e. similar to the President of the USA) or we continue to have a head of state with a ceremonial role but little actual power.

And as I think on it…whilst I think it would be an upheaval too far to actually empower a Head of State, I don’t think I feel so enthused about swapping an unelected but powerless leader with an elected but still powerless leader. It just doesn’t feel as if it’s a decision rooted in the practical. On the other hand, I’m somewhat nudged by the argument that a Head of State separate from the government may be able to say and do some things without constraint by that government (though it’s noted that our current monarch maintains a “strict” rule against saying anything at all unless they think they can get away with it).

But maybe I’m wrong.

So help me out here. What would you want from a Head of State of an independent Scotland? How would someone gain that position? And what kind of person would you expect to see in the role?

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