We Need To Talk About: Social Housing

“Before you can start building [houses] on any scale, every single industry in society has got to be organised and stimulated into production.” – Aneurin Bevan, 1946.

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Credit: The Heilan Coo

The inferno at Grenfell Tower has claimed many lives (as I write, the official estimate for people dead or missing and presumed dead is 58.), has likely wiped out entire families and will have irrevocably changed an entire community forever.

It’s still too early to be fully deconstructing the causes and blames of this disaster but a few things have become widely reported and will likely play into the debate in the months and years to come.

However the blaze started (early reports suggest a power surge igniting a fridge on the 4th floor) it appears that the flames spread rapidly up the insulating cladding on the outside of the building, engulfing the entire structure in minutes and trapping many inside.

It has also emerged that the cladding involved was the cheaper of two options provided by the supplier and of a construction which would be illegal in several countries including the US and Germany. The fire resistant version of the cladding appears to have cost fractionally more – just £2 per square metre, or £5,000 for the entire block of flats. Further, it appears that at least part of the motivation for the choice of cladding was to improve the appearance of the flats for the benefit of nearby luxury high rises.

The Grenfell Action Group has been warning of a catalogue or failures of construction, maintenance and accountability for years. And the complete failure of leadership in the wake of the disaster, especially from PM May, has been appalling. This interview by MP David Lammy, who lost a friend in the blaze, does much to exemplify the sense of frustration and anger felt by a community which justifiably feels betrayed and it is no wonder at all that protests have occurred (so far peacefully).

Of course, the building contractors will all tell us that they are not to blame as they met all applicable regulations. And they’d almost certainly be correct. This is the nature of the relationship between capitalism and government regulations. It will always be the case that companies will meet regulations by the barest minimum that cost allows and will always lobby for those regulations to be decreased if the cost of lobbying is lower than the savings due to the regulation cut (for, in this case, politics can be reduced to just another form of investment).

I’ve been particularly appalled by one article in Bloomberg which takes on the extreme libertarian approach to this stating that all fire regulations should be scrapped because in the perfect world of the libertarian, any regulation which increases cost is unacceptable. Instead, the people who lived in the tower should have rationally weighed the risks of living in the tower with that cost and, if they wanted to, could have moved to some (presumably more expensive) tower nearby which DID include the safety features.

I shouldn’t need to fully dismantle this worldview. The residents of Grenfell did not have the choice of a hypothetical “safe” building next door into which they could move. Even if they did, humans simply are not the machine-like “rational actors” demanded of libertarianism nor do they always have the perfect information required to make such a choice (Could you identify a flammable cladding from a non-flammable one? If the libertarian landlord tells you, could you completely trust them? Could you tell if they were lying? Without any regulations, how would you hold them accountable if they were?)

I have written before, in less tragic terms, on the need for regulations to go well above and beyond the bare minimum. It will be essential if we wish to meet our targets to reduce energy consumption (which will be good for the environment and save a lot of people a lot of money in heating costs). I now believe it’s time to go much further than this. The private sector will always be an anchor against attempts to increase decent housing stock (especially for the poor) and to get the UK’s housing price inflation under control. It’s time for the government to start intervening and build social housing again.

Unconstrained by the needs to seek profit, the government can apply its own regulations, well above the “legal minimum” if need be, and can do some proper planning to ensure that it’s not just housing that’s being built (this has long been the failure of many projects in the past such as the high rises and the out-of-town blocks such as Easterhouse in Glasgow). We need to think about the amenities and the jobs and all the other functions of a town which enables communities to thrive. Common Weal has recently published some proposals on how local areas can control their own land and ensure that their specific needs are addressed on their terms. We can’t keep treating housing as a commodity for the rich, constantly pushing folk to “climb the property ladder”, treating those who can’t to the slums and the land-baggers and simply abandoning them. We can’t keep segregating people and reinforcing the class and wealth divides  and then blaming those on the bottom end for “just not striving hard enough“.

This isn’t to say that high-rises don’t have their place – endless suburban sprawls constantly bite into farmland and wild spaces and often fail to engender any sense of community at all, not to mention the health and climate effects caused by having to drive to reach anything other than your own house and the extra costs of delivering services to low density populations. Smart Cities, well designed with these factors in mind, may be a major factor towards a sustainable future (and I say this as someone who lives in a rural area).

And these cities need a lot of work to build. From brickies and plumbers, through planners and designers, past educators and mentors, to the computer experts who’ll get the smart systems going and keep them running, there is vast potential to employ a lot of people in this enterprise and to inject a huge amount economic activity into the country (in a far more productive manner than the zero-hours “gig” jobs that we’re being fed currently). If Austerity is to be ended, this could be one way to do it. And we know it works because the UK has been through exactly this before. An economy shattered by war from without (rather than Austerity from within) was reconstructed in the 1940’s and 1950’s and is still looked back on fondly as one of the UK’s golden ages. Here’s Nye Bevan talking in 1946 about his plans and how he got them started.

 

“That’s all great”, you say. “But how much will it cost and how do you pay for it?”

Government debt.

Did that put a shiver up your spine? Then you’ve been indoctrinated by the most dangerous ideas of the 21st century. The idea that government debt is a terrible thing.

We’re living in an age where the UK government can borrow on a 30 year bond for 1.7%. Inflation is currently 2.9%. There has never been a better time to invest as right now the debt is (in real terms) cheaper than free!

Applied to the housing market, this could be a major game changer. Not withstanding the ability to directly target areas which badly need investment (preferably by allowing these areas to borrow themselves through a National Investment Bank), the advantages in cost to the occupier are significant.

Right now, a £90,000, 25 year mortgage on a 4% compound rate would cost you about £475 per month and you’d pay back £142,500 over the term. A mortgage based on a government bond at our 1.7% (simple interest, rather than compound) would pay back over the 25 years for a little over £425 per month and, as a particular advantage to the renter, that monthly rate could be fixed for the entire mortgage period (it needn’t even be uprated for inflation as the bond isn’t). Try asking your bank for a mortgage rate fixed beyond five years. Try asking them to predict what the interest rate will be on year six.

BoE Interest Rate Predictions

(The Bank of England can’t do it, and they’re the ones who SET the rates!)

One the debt is paid off, it could be up to the government to decide whether the house remains as a social house and the occupier continues to pay rent (thus subsidising other housing), continues to live in their home rent free for the remainder of their occupation (thus preserving communities long term), or allows them to purchase the house (which would require the government to replace stock in a way that wasn’t done under Right-To-Buy)

And, of course, you can adjust the numbers as required to ensure that everyone can afford a house, built to far higher standards than the private sector will supply, without the need to make obscene levels of profits while doing so and in a location and surrounded by the services required to make that house a home embedded in a community built by and for all of us.

We didn’t need the Grenfell tragedy to have this conversation. People have been speaking about it for years now. The systemic problems in the UK’s housing industry have been apparent and have been either ignored or actively encouraged for too long. Maybe it’s time we started listening and reassessing.

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We Need To Talk About: A Financial Transaction Tax

“We bailed out the City 10 years ago when the crash came, we poured hundreds of billions of pounds into it. Since then £100bn has been given out in bonuses in the City. So we are asking for a small contribution…to fund our public services.” – John McDonnell MP

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Last night, Labour announced one of their keynote policies ahead of the 2017 General Election. A financial transaction tax on the City of London. Time for a blog to outline just what in the name of Jim it actually is and what it’s supposed to do.

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We Need To Talk About: Defending Currencies

“Whenever politicians and rulers, from Nero onwards, interfere with monetary arrangements for political ends, disaster follow.” – John Chown, A History of Monetary Unions.

Currency remains one of the great potential uncertainties surrounding the debates about Scottish economics and independence. Last year I published the various options facing an independent Scotland along with the merits and demerits of each. Having selected as the preferred option an independent £Scot initially pegged to the Pound Sterling, Common Weal subsequently published a detailed plan on how precisely to go about making this currency a reality. Rather pleasingly, the news this week coming from the Scottish Government’s Growth Commission hints that they are looking at things from very much the same point of view as we have and may well be coming to the same conclusion.

The main lesson of discussion about currency options is that all of them have their disadvantages along with their advantages and one of the primary disadvantages of this option lies in the peg to Sterling, particularly if it is to be maintained beyond the transition and launch period of the new currency. There could be the potential for the international speculative market to mount an attack on the currency in order to knock it out of the peg (as infamously happened to the Sterling in 1992 when it was knocked out of the European Exchange Rate Mechanism). A discussion of the likelihood of this happening and how one can defend against it is therefore required.

As with many things of this nature, the detailed study of this kind of thing can run rather to the technical (the links there are made available for those who wish to study them) so I’ll attempt to break it down into something a little more accessible.

What Makes a Currency Vulnerable To Attack?

The entire purpose of a currency market is to allow that market to determine the most efficient price of the currency. This is generally only considered an attack when the currency is pegged to another. When the currency floats, a market driven price movement is considered the entire point of the exercise. This is part of the reason why “Black Wednesday” came close to bringing down the UK government whereas the 2016 Brexit devaluation was much less politically damaging despite being a larger depreciation in percentage terms.

So why attack a currency in the first place? There are multiple reasons but they essentially boil down to one. The peg is perceived as being “wrong” for the currency and the economy it supports. Either it is over or under valued. Usually it is the former as politicians tend to link a “strong” currency to national pride cases of undervaluation such as in China or Germany do exist (It should be noted that neither of these economies are under serious speculative attack at present).

Assuming an overvalued currency, the attack generally takes place by speculators “short selling”, or “shorting” the currency on the markets. To do this, they will borrow a great deal of the currency at the overvalued rate and sell it on the foreign exchange markets. This floods the markets with supply of the currency and depresses the price. The speculator can then buy back the currency he sold at the new lower price, pay off the loan and pocket the difference.

Before an attack happens though the speculators need to be sure of one of two things. Either A) The country under attack lacks the will to defend the currency peg or B) It lacks the tools to successfully defend against it. If the attack fails, then the speculators could be out of pocket to a very significant degree. Whilst George Soros infamously made off with £1bn in 1992, there are reports that he had to borrow some £6.5bn to do it. He was sure of his bet and it certainly paid off for him that time, but that’s still a big gamble to take and lose.

How to Defend a Currency

An attack can be defended in one of two ways (or a combination of both). First, the Central Bank can raise interest rates to discourage further borrowing of the currency (if interest payments on the loans exceed the expected gain, speculators will back off) and to encourage investors to start buying currency at the same rate as it’s being sold (so they can benefit from the increased returns on the interest). Or Secondly, the Central Bank can sell foreign reserves and buy their currency back themselves to limit supply and force the value back up. If they do this until the attackers themselves run out of the ability to borrow more of the target currency then the attackers give up and take the losses. (For an undervalued currency, the tools are used in the opposite direction as China is currently doing)

The third option is to consider both the economic and political situation and decide that if the currency really is mis-valued and that the political cost of unsuccessfully (or perhaps even successfully) defending the currency is too high then the defence simply isn’t viable. In this case the peg is dropped and the currency is intentionally allowed to revalue.

Herein lies the risk for Central Banks. The cost – which can take the form of higher interest rates, higher inflation, depleted national reserves, lower GDP and higher unemployment – of unsuccessfully defending the currency may be much higher than not defending it at all but not defending may carry a higher cost than a successful defence.

It is important to note that the failures to defend a currency are often higher profile than the successes which, by their nature, do not generate so many tabloid headlines or history books. At least one study has noted that of the 163 speculative attacks identified between 1960-2011, 42 were not defended against, 34 were defended unsuccessfully and 87 were successfully warded off.

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Charts from S. Rebelo, (2000)

To look at the 1992 Black Wednesday example caused when the GBP dropped out of the Exchange Rate Mechanism. The ERM (which was the precursor to the Euro) essentially pegged member currencies to the German Deutsche Mark. The value at which the GBP was pegged on entering – 2.9 DMK/GBP – was considered far too high and opened the road to the infamous speculative attack. The Bank of England responded by raising interest rates from 10% to 15% on the day of the attack and they sold £4bn worth of reserves (almost £8bn in 2017 pounds and about 1/3rd of what they had in reserve at the time). This turned out to be insufficient and the peg was eventually abandoned. The exchange rate fell to 2.413 DMK/GBP and the GBP fell out of the ERM. Papers released from within the BoE in the years since have mulled over the impacts and costs of their defence strategy, the causes of its failure and whether or not it was worth mounting in the first place.

Is Scotland Vulnerable?

So would this apply to Scotland in the event of our independence? There’s never a certainty with these things and the state of the international money markets are that size of one’s economy is probably no sure defence against all possible attacks (short of erecting massive capital controls and isolating Scotland from the global trade market, but this too carries its own consequences). However, I do believe that Scotland would be less vulnerable to a speculative attack than some may suppose for the following reasons.

First (and possibly most importantly): If we peg to Sterling then it’ll be on a 1:1 basis therefore will be at the same value that it is currently. To believe that the £Scot is over or under valued is to believe that the GBP is currently, right now, unsuitable for the Scottish economy which begs the question of why we’re even in a currency union with rUK. This may change post-independence as our economies diverge but in that case the question of whether or not to continue that 1:1 peg opens up. I personally think we’ll either float the £Scot or move to some kind of basket peg shortly after the three year transition and launch period but this is ultimately a political decision as well as an economic one and it may be that the option to move away from the Sterling peg is one debated and decided by the second independent Scottish Parliamentary elections. If a party wishes to hold to the Sterling peg (or any other) then it’ll be for them to determine if that’s a viable option and to convince voters of the same.

Second: We’re proposing to hold rather substantially more foreign reserves than the UK holds as a proportion of GDP. We’re looking initially at somewhere between £15bn-£40bn (Common Weal is currently working on a formal paper looking at how precisely we’d generate these reserves though I have spoken about it somewhat here) with options to use the normal tools available to normal, independent countries to adjust this amount as required. Combined with the lower available trading volume of being a smaller currency (one can only even potentially borrow as many £Scots as exist, especially if it is issued solely by the Central Bank) then this should be sufficient to hold off an attack or even just to display that we’d be willing to do so. Combined with tighter regulation and legislation on the financial industry Scotland should present itself to the world as a country upheld by its strong and reliable approach to fiscal and monetary policy.

Third: Interest rates are at an all time low which gives a fair bit more scope to raise them in the event of an attack than was the case in 1992. One has to be a bit cautious with this though as our private debt levels (particularly mortgages) are leveraged to the hilt so there will be severe consequences if this lever is pulled too hard. This said, the low interest rates are also crippling savers, investors and pension holders. They could well benefit from a raised rate such that an “attack” by the market may well come to be seen as a signal to change political and economic policy rather than a simple profiteering exercise by the speculators. As with life, balance in all things is best.

Conclusion

In short, Scotland is probably less likely than feared to suffer a speculative attack on the currency in the short term following independence and more than able to defend against more should it happen, particularly if we keep the heid and approach the separation rationally and in a well planned manner. Beyond this, it shall be a matter of analysing both the economics and the politics of the situation and never becoming too attached to any particular choice so that if a successful defence of the currency can be mounted, it should, if not, it shouldn’t and if a peg should be modified, changed or abandoned then it must.

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We Need To Talk About: GERS (2015-16 Edition)

O wad some Pow’r the giftie gie us. To see oursels as ithers see us! – To a Louse, Robert Burns

It’s that time again. The annual Government Expenditure and Revenue Scotland report is out. Click the link or the image below to read it for yourself.

GERS 2015-16

Actually it seems like only March that the last edition was out. What’s happening here?

Well, there was a consultation that almost no-one knew about which discussed a few methodological changes to GERS in line with the ‘new powers’ we’re getting and it also asked if the next report should be brought forward. I’m completely convinced that the fact that this means that we’re getting the report well before the Council election campaign next year is absolutely just a convenient side effect(!)…but no matter. We’ve got the data.

Tomorrow’s Headline Today

Scotland’s budget deficit remains at a little under £15 billion. As with last year, don’t expect a single news outlet to go one single step further with the story than that. Except maybe to say that oil revenue has dropped from £1.802 billion last year to just £60 million this year.

So what’s happened? Why hasn’t Scotland, which is “totally dependent on oil”, completely collapsed now that oil revenues have basically dropped to zero?

Last year, total revenues dropped by  around £500 million on 2013-14. This year, total revenues have INCREASED by £181 million. In fact, total revenue is higher than it was in 2012-13 when we received some £5.3 billion in oil revenue.

It’s also worth noting that if you only look at GERS 2015-16 then it looks like our deficit has increased by a couple of hundred million in the past year but if you look a bit deeper, and compare the numbers to previous GERS reports then something interesting happens.

In GERS 2014-15 our deficit was recorded as £14.8 billion but in GERS 2015-16 the 2014-15 deficit has somehow dropped by £622 million to £14.3 billion. Essentially, this shows one of the limits of GERS in that it is based on sometimes highly speculative estimates which get revised over time. It may be five years before we finally know the “true” accounts figures for this year. This accounting adjustment is extremely significant compared to, say, our “budget underspends” but unless you’ve read it here I expect it to pass entirely unnoticed.

Now, what about our all hallowed GDP? It’s down by 0.45% from £157.502 billion in 2014-15 to £156.784 billion in 2015-16 (with non-oil GDP having increased by over £2.2 billion, the highest it’s ever been).

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You know, perhaps it’s time we started measuring our economy in terms other than just GDP. We know it’s flawed. We know it throws up extremely strange results like Ireland’s “economy” growing by 25% because a few American companies moved their nameplates around. We know it doesn’t even particularly correlate to things like tax and ability to service debt very well.

Maybe it’s time we started measuring (and taxing) our country based on the things which actually matter.

But back to GERS.

Dutch Disease with Scottish Characteristics

So what’s going on here? Essentially it’s the same pattern first picked up last year. As oil prices drop, so do fuel costs. Which means everything from the costs of transporting goods to the heating and lighting costs for your home drops. This means you have more money to spend in the economy and companies have fewer overheads leading to either greater profits (thus, ideally, more tax revenue) or more room to invest in expansion.

This is a clear demonstration of the so-called “Dutch Disease” where high oil prices choke off the non-oil based economy in the form of the aforementioned fuel costs (it also tends to harden one’s currency but this is less of a factor in the Scottish case given that we don’t yet have one).

At the time of the last report I was criticised for pointing this out on the grounds that the oil price collapse “hadn’t fully fed through” hence I was jumping the gun on the observation. It shall be interesting to see if anyone says the same thing now. Could revenues drop any lower?

This should serve as somewhat of a warning to those itching for the return of high oil prices and certainly for those desperate to “replace” offshore oil with onshore fracking. It’s maybe time to have a good hard rethink about what kind of resources we want to develop in Scotland. Now, to be sure, I’ve nothing against our offshore industry and for those folk out there it’s been a pretty dreadful time. It’s just that, certainly as a Green, I think our offshore industry is on the wrong side of the country and should be based on wind/wave and tide rather than oil. You can be sure that  if the wind and tide stops flowing we’ll be dealing with problems a little bit larger than the state of our finances.

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Scotland’s offshore Wind Power Density map

Sweet Fiscal Autonomy

As mentioned earlier, part of the methodological changes discussed in the GERS consultation was to do with looking at the taxes to be devolved to Scotland under the series of “vast, new powers” we’ve been generously granted.

In terms of actual revenue, chief amongst these is income tax (excluding interest and dividends, the ability to move the Personal Allowance or to adjust the definition of “income”) and VAT (excluding any actual control at all. We’re getting the VAT added to Scottish coffers and then an equivalent amount removed from the block grant. Yay.) along with comparatively minor taxes like landfill tax, aggregate levy and air passenger duty.

In total, the Scottish government will directly receive 40.5% of Scottish revenue (£21.8 billion this year) and, given the limitations on VAT and income tax, have actual, practical control over perhaps half of that. Devolved expenditure, however, will soon sit at 63.1% of total (£43.3 billion). Basically the Scottish government can only directly control enough income to fund perhaps about a quarter of what it’s directly responsible for delivering.

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There’s a side issue in all of this related to that old topic of the budget underspends. Tucked away on page 47 of GERS there’s an interesting line which looks at the confidence intervals for some of the tax revenues used. Remember that the revenues given are estimates and are subject both to revision over time and change due to circumstances that the government cannot control. For example, if you move job half way through the tax year your income, therefore income tax, can change. If your job moves you to England, your entire income tax contribution moves from the Scotland side of the budget to the rUK one. Hence, the total income tax revenue estimate is subject to a margin of error, in this case of 1.0%.

The same goes for other taxes to greater or lesser degree to the effect that the margin of error over all of the taxes measured there is 1.6% or ±£570 million.

Remember that the Scottish Government has extremely limited borrowing powers. It can only “overspend” on the current budget by £200 million in a single year and cannot exceed a total current debt of £500 million. And yet income revenue, on which expenditure must be planned, has a margin of error of ±£570 million.

In the event, this year Scotland’s “underspend” was only £150 million. If you think you can plan a budget better than this then please, send it in. If not, might be a good idea to stop reporting and moaning about underspends.

Paying For It

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Another little line that seems to have been added to GERS this year (on page 37) is a breakdown of the annual costs of financing Labour’s PFI and the SNP’s replacement NPD loans. There’s been a bit of a milestone reached there with the availability costs of PFI now exceeding £1 billion per year or over 15% of Scotland’s total capital budget and slated to increase even further over the next decade unless something is done about it. Don’t be surprised if this becomes a major issue for the council elections next year.

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Of course and once again you wouldn’t know this if all you did was watch our Great British Broadcaster, the BBC. Their recent “investigation” into PFI couldn’t even bring itself to mention the name of the party which lumped this crippling financial burden on us.

Finally

I could go on. We could nip-pick at details like the mysterious addition to the expenditure budget of net EU contributions (there’s always been an annex discussing this but this is first year it has explicitly been counted in a separate line in Total Expenditure) or notice that for the first time in at least five years our debt interest paid has increased as our UK debt increases have started to outweigh the effect of falling bond yields.

It’s all a shell game though. We know that GERS isn’t nearly as important as people hold it to be nor is it nearly as informative as it should be. It’s not going to change many minds on its own nor does it tell us one single thing about the finances of an independent Scotland. If we want to do that, we’re going to need to build a national budget from scratch, taking into account all of the taxes (existing and new) that an independent Scotland might choose to levy. We also need to have a look again at what Scotland actually needs to spend its money on. Could we use Citizen’s Income to create from scratch a welfare system worthy of the name? Would a Scottish Government able to issue its own bonds on its own debt be able to get a better deal than the one we have right now?

Quite simply can Scotland as a nation see ourselves as better than others would prefer us to be seen?

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We Need To Talk About: A Negative Income Tax

First up, my apologies for going a little dark on the blog recently. Last month, I promised my thoughts on Scotland’s currency options going into the next independence campaign. That promise has turned into something a little bit larger than expected and will be coming soon. I think you’ll like it.

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Scotland’s Income Distribution 2013-14

In the meantime, I’ve been pondering on some possible options regarding how we could reform Scotland’s welfare system, especially in the light that the UK has been explicitly called out by the United Nations for breaching human rights obligations due to the suffering caused by Austerity, inequality and the unfair and miserly welfare system in which too many find themselves trapped. The use of sanctions has been singled out as particularly cruel with countless cases of hardship and even deaths being directly linked to their use.

Both the Greens and Common Weal have been steadfast supporters of the policy of Citizen’s Income (or Universal Basic Income), a policy which is rapidly gaining traction around the world and is starting to look as if its time has come.

Under this policy the entire welfare system – with all its inequalities, complicated means-tested targeting, exceptions, exemptions, loopholes, paperwork, cheats, dodges, admin errors, fraudsters, bureaucracy and people simply missing out entirely because they don’t know they’re owed money or do but don’t, can’t or won’t claim – is done away with and replaced with a simple, regular payment to every citizen. You can’t claim money you’re not owed (except possibly by claiming for a dead relative or for kids you don’t have) and you can’t be missing out on money you don’t think you’re due. By the way, unclaimed money in the UK welfare system outweighs fraudulently claimed money by more than a factor of 10 and is dwarfed by tax avoidance by up to a factor of 100!

tax-v-benefit-fraud-graph-excellent-2

A Universal Basic Income also gives everyone a stake in the system and a guaranteed safety net if and when it is needed (in much the same way that the NHS is open and free at the point of use even if you can afford private care).

One of the downsides of Basic Income is that it does involve a large amount of money transfers. If we wanted to give all 5.3 million citizens of Scotland a Basic Income of, say, £73.10 per week (~£3,800 per year, the same as the current Jobseekers Allowance) then it would involve a monetary transfer of £20.1 billion per year which is only a couple of billion less than the entire social protection program for Scotland (which, of course, pays out a rather larger sum than £73.10 per week to many people such as pensioners and those with disabilities). Now, of course, this doesn’t imply that Basic Income would cost £20 billion per year. The idea would be that some threshold income would be set above which the income would be taxed back off you until the costs balanced and then onwards till you were a net contributor and helped to fund others (or, as an alternate POV, you were paying into the system to cover yourself for the times when you needed to withdraw). Regardless, the scale of the monetary transfers may be a significant bureaucratic barrier but so is the current piece-meal system that it would be replacing.

I fully support Citizen’s Income as a policy for an independent Scotland but we can’t do it now as we don’t have powers over welfare. I’m not keen on putting grand plans on hold till that day though so I’ve been giving thought to how Scotland could achieve a similar goal of a universal safety net using powers that we have right now. We don’t have power over welfare but do, finally and after great trials and tribulations, have powers over most of income tax.

This led me to thinking about a project advocated in 1968 by the economist Milton Friedman. The Negative Income Tax.

The concept is this. Instead of just having a low earnings threshold below which you pay zero tax (The UK Personal Allowance fulfills this purpose here) why not a threshold below which you receive a tax refund?

In this scheme Scotland could set an income threshold, say £16,500 – the equivalent of a full time job on the Living Wage. If you earn less than that in a year, the difference between what you earn and the threshold could be taxed at NEGATIVE 23%. If you only earned, say, £10,000. You would receive as a stipend 23% of £6,500 which is £1,495. If you earned nothing in the year, you’d receive 23% of £16,500 which is around £3,800 – The same as the current Jobseekers Allowance. The tax rate of -23% was chosen specifically to create that latter situation. One could easily imagine different rates or even a progressive system to cover people who fall seriously below the threshold proportionately more than those who only fall slightly under.

This system wouldn’t be a perfect substitution for Citizen’s Income for a few reasons. Most significantly, it is a lot easier to abuse or cheat the system by under-reporting one’s income, for example. If rates and thresholds are set inappropriately it may also lead to disincentives to work at around the threshold where someone converts from a recipient to a contributor though in the simple scheme proposed here this is less of an issue.

Negative income tax does have an advantage over Citizen’s Income by reducing the volume of monetary transfer though as only those who are earning below the threshold receive the stipend rather than everyone.

So how much would this cost? To find out, I’ve done some modelling using available income statistics, in particular the breakdown of income percentiles for the UK (percentile resolution income data for Scotland doesn’t seem to be easily available. If anyone out there knows of someone who does have it then please contact me, I’d be very interested in seeing it) .

Income Percentiles

One shocking thing about the UK is that the threshold we set, of £16,500 per year (which is, remember, the amount that said to be required to maintain a decent standard of living) is not reached until the 32nd percentile. Almost one in three workers in the UK are not earning enough to live on.

If we now add our negative income tax to this model to see how much a median person within each percentile would receive it looks something like the following.

Change in Income - No UR Tax

Something to bear in mind it this income percentile data only includes people who have at least some kind of earned income. It does not include the unemployed or those who are unable to or are not seeking work, the “economically inactive”. The ONS estimates that these two groups together make up around 21.6% of the UK working age population. If we factor that group into the figures modeled here (and assuming that Scotland’s figures are roughly in line with the UK’s which will be good enough for this back-of-envelope calculation) we can estimate that the negative income tax would cost Scotland around £2.4 billion per year.

This is where things get a little tricky for the policy idea. The obvious answer to meet the costs is by adjusting the upper rates of income tax to render the scheme revenue neutral. The problem is that the UK (and Scotland) are predominantly low wage, high inequality countries. We’ve already stated that if you’re on the absolute basic wage you’re already earning more than almost a third of other workers (and this doesn’t include those earning nothing). If you pay the 40% Higher Rate, you’re in at least the 86th percentile – the top 15% of earners – and if you pay the 45% Additional Rate (assuming you are even taking those earnings as “income” and aren’t transferring money into dividends or using more arcane accounting wizardry to minimise one’s tax bill) then you are in at the very least the top 2% of earners. This doesn’t leave a very large tax base from which to levy the required funds (This was one of the reasons that the policy advocated by the Greens for the return of the 50% rate was based on reasons of income and wealth equality rather than revenue raising and did not make any spending predictions or promises based on additional revenue from this band).

If one DID want to raise income taxes to find the £2.4bn then doing it solely through the Additional Rate simply would not be possible. Even raising it to 95% (and assuming that everyone pays it) would only cover half of that bill. In order to do it with the Higher Rate, both Higher and Additional Rates would need to be raised to a minimum of 58%.

Now, a normal, independent country would not face this problem because it would be able to tailor the other half of the balance sheet as well. If a negative income tax is replacing welfare spending then the welfare budget would decrease and the balance sheet would..well..balance. But in Scotland’s case, welfare is reserved so what becomes a simple exercise in government policy which would pay for itself and hugely benefit the poorest in our society becomes a constitutional question and a financial bung of £2.4 billion per year to Westminster. Whilst we have the “powers” to adjust our tax rates, Scotland just simply does not have the ability to use them in any kind of effective manner. Those who demand that “we use the powers we have” whilst blocking the levers which would otherwise allow us to do so should reflect on their actions and words. I’m thinking particularly of our Secretary of State “for” Scotland, the “Right Honourable” David Mundell who, as we remember, has not only taunted the Scottish Government towards “using our powers” but has also threatened to tax any welfare top-ups the Scottish Government might be willing to grant. I hold no great hope of Westminster’s generosity extending to them returning saved welfare money in order to pay for a negative income tax.

I’m open to suggestions at this point. If anyone can square this circle, please…please tell me. I think I’ve found a policy which, on paper, would be within Scotland’s current powers to implement but I can’t find a way to make it work within the pitiful financial constraints of our devolution. I don’t want to have to “wait till indy” to get some of this vital work started nor am I content knowing that people could be helped but cannot be because of Westminster’s refusal to either do it or to hand over the reigns to someone who will.

This shouldn’t be such a difficult process. Only in Scotland, within the United Kingdom, in the 21st century, where we’re told we’re incapable of governing ourselves, whilst those who say that they can govern stand by and either do nothing or actively work against us, does it become one.

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We Need To Talk About: GERS (2014-15 Edition)

Economics: The art of explaining why all of your models fail to predict either the future or the past.

GERS

Click image above for data

It’s that time of year again when everyone starts looking at the first page of a dense booklet of economic data and uses it to wildly forecast despite long known limitations in doing so. So it’s also, once again, time for me to try looking a little further to tease out some details that others might have missed.

First, to get some of the headline figures out of the way. There has been a slump in offshore oil revenue due, largely, to the crash in the oil price resulting from the ongoing economic conflict going on between Saudi Arabia and the US.

This has caused oil revenues to drop from £4.0bn in 2013-14 to £1.8bn in these current figures. And thus came sic a cry of a “>£2 billion BLACK HOLE” from certain sources…

…except…total current revenue is only down £600 million. Down from £54.050 billion last year to £53.443 billion this year. That’s just a touch over 1% of a change and is comparable to some of previous year’s “budget underspends“, thus it could even be said to be within the margin of error of budget estimates. So what is going on?

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One Year of The Common Green

The Common Green blog just hit its first anniversary.

Initially started as a continuation of my monthly column in Yes Clydesdale’s Aye Magazine and to help support and expand on points made during my pitch as a potential list candidate in the upcoming Holyrood elections, it has grown to a rather larger audience than I had expected with over 32,000 visitors dropping by to read articles.

Several of those articles even went fairly viral, as these things sometimes inexplicitly do, with my early discussion of last year’s GERS figures, the prototype for my “We Need To Talk About:” series in which I pull some details out of under-reported stories, (look out for an updated version later this week when this year’s figures are published) and my dissection and explanation of the Holyrood election voting system doing particularly well (the latter article has even been republished and incorporated into a couple of school and university courses).

By far and away the most popular article I’ve written so far though was a take down of one of last year’s big scare stories. “We Need To Talk About: Budget Underspends” accounts for one in four of this site’s pageviews and was a reaction to the near blanket media coverage of an SNPBAD story which could have been neatly resolved by any political journalist with a pocket calculator (or, as it turned out, a Green activist without one!). Whilst it’s probably no surprise that an article in support of the SNP on a Green page is more likely to find favour among supporters than one critical of them, I think it spoke also to a deeper sense of despair with the way the media still tries to treat a Scotland which went through a political awakening and education during the indyref and is showing very little sign of letting that go yet. That story was a lesson that we’re not going to let politicians just make spurious claims any more and not question them. And we’re not going to let them get away without answering those questions either.

So thank you to everyone who helped this blog get to where it is, to those in the 110 countries and territories who have enjoyed reading what I’ve greatly enjoyed writing and thank you to everyone who shared the articles around (I get trackback links from the strangest places sometimes) and I’m glad to have helped people learn and talk about issues which would have otherwise passed us by.

Here’s to 2016 and beyond and, as a little bonus, below is a copy of my first formally published piece of political writing (long before I had joined a political party) for the Aye Magazine back in November 2013. Final thanks to Bill Oliphant for convincing me to do it. You knew not what you had wrought.

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We Need To Talk About: The “Tactical Vote”

“People who think about politics every day greatly overestimate how much time the average person spends thinking about politics” – A maxim that every political activist should pin on their wall.

Wheel.png

One of the many, many parodies of the #SNPOUT “Tactical Voting Wheel” seen in the run up to the 2015 UK General Election. Source: Youtube

We’re just about to cross into the single digit weeks remaining before the 2016 Holyrood elections and among a subset of the political campaigning community the inevitable debate over the “tactical vote” rumbles on. I, myself, have had a couple of fairly interesting conversations with a few such voters over the past couple of days which crystalised a few thoughts in my head about it.

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We Need To Talk About: Local Taxation

 

Council

Source: Flickr

Next year brings in the Scottish Parliamentary Elections and with it comes the proposals from each of the parties on how best to use the limited powers that the Scottish Government will have at its disposal. No doubt, much of the news and comment will be around whether or not the (marginally) expanded powers over income tax coming in under the Scotland Bill 2012 will be used and by how much.

Our approach towards local taxation, however, will perhaps lead to a far more fundamental change to the fabric of our society. There is also far greater scope within the devolution powers to do something a bit more radical that simply raising or lowering the rate of tax by a penny or so (or repeatedly defending one’s reasons for not doing so). It is therefore important, before the campaigning season begins in earnest, to understand what our options are and the potential impacts of them.

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We Need To Talk About: Budget Underspends

Victoria Quay

Q. When is a surplus not a surplus?
A. When someone is talking down the Scottish Government.

Today the Auditor General published its annual report detailing an independent opinion on how well the Scottish Government is managing its finances (or how badly it is failing to do so).

This year, as last, there have been howls of anguish from those opposed to the Scottish Government at the fact highlighted by the Auditor General that the Government spent £350 million less last year than it was given in the Block Grant.

As the opening question suggests in most normal countries when your government spends less than it has available to spend then it is running what is known as a budget surplus. This is, especially in today’s economic climate, generally considered to be a “good thing“. Not so in Scotland, apparently, where the phrase to be used instead is “budget underspend”.

How this has occurred, is due to the peculiar way by which the Scottish Government is funded and is constrained to spend its money.

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