Wings Over Scotland

Labour today is a far cry from the party of old, a party that was set up to provide a voice for the working class so as to gain control over the means of production for the masses rather than to be dictated to by capitalism. The modern incarnation is now peddling the notion of “One Nation Labour”, with Johann Lamont decrying what she calls the “something for nothing country” of Scotland, presumably referring to the stubborn preference of the Scots for the social democractic principles of “old” Labour over the neoliberal New Labour. As justification for the rightward shift, Lamont asserts:

“If we wish to continue some policies as they are then they come with a cost which has to be paid for either through increased taxation, direct charges or cuts elsewhere. If we do not confront these hard decisions soon, then the choice will be taken from us when we will be left with little options.”

(Clearly she’s been using Gordon Brown’s sub-editor.)

On the face of it, that seems a relatively straightforward statement of fact: if you can’t pay for something then you have to cut back, go without or find new money to properly fund it. It should be noted that as we’ve seen, at present there’s no need to make this choice because current spending is fully funded. However, as costs rise and privatisation, budget cuts and PFI in England (along with some creative accounting of England-only spending as “UK” projects or reserve-budget items) continue to cause reductions in the Scottish block grant, we soon will.

So how do we bridge this funding gap? What are the options that a Scottish Government can take to address the problem of decreasing funding and growing commitments? Let’s take a look.

• Improve efficiency – This should always be the first port of call for any government when hit by tough times. You need to examine the whole process from start to finish and redesign it in such a way as to remove bottlenecks, duplication and processes that add no overall value. In other words it is the systematic removal of waste from the running of government, where “waste” is anything that does not give the end user (ie the public) the service they want.

• Consolidate services where possible – By having one agency undertake overlapping responsibilities a government can achieve economy of scale and reduce duplication of effort. For instance, if one public service is already going to be having contact with the public for one service, does it complement their core service to provide a secondary service at the same time? If the answer is yes then it should be consolidated to reduce the numbers of providers required to achieve both services, cutting duplication of effort and resources.

• Consolidate back-office functions – By consolidating the back office functions of different services, a government can achieve economies of scale and reduce duplication. This is the premise behind the single Scottish police and fire services, and can also be seen in the calls for increased back office co-operation and consolidation amongst educational institutions.

But these are not the only options available to governments to balance the books. There are other routes to balancing the finances that are designed to either reduce the scope of services or increase the flow of income to pay for them. These are the approaches that Johann Lamont is signalling as Labour’s choice, admitting as she does so that Labour have written off being able to (or willing to) achieve sufficient savings from the first three strategies.

Scottish Labour’s new policies to combat future financial shortfalls break down thus:

• Reduce services – If there’s not enough funding for all services currently then it should be addressed as to what are ‘essential’, and what are merely ‘desirable luxuries’. From Labour’s announcements we can glean that they view universal healthcare, access to free medicine, care for the elderly and the right to free higher education as the latter. As such, it is these areas that they are targeting for cuts to services.

• Charge for services – An alternative (or complementary) strategy to cuts is the option to charge at the point of use for services users previously paid for through general taxation. If people want or need a service they will pay for it, if not the burden of paying for it can fall on those who do.

• Raise taxation – If services are deemed necessary and there’s not enough funding then raising taxes is also an option. But what taxes could the Scottish government change? As part of devolution we get the “luxury” of being able to change the following:

• Council Tax

Council Tax is a regressive tax, with the rates being set not by the ability to pay but by the value of the house you live in. It takes no account of whether the taxpayer is the property owner or the tenant (and is therefore a covert redistribution of wealth from the poor to the rich). A small number of bands means that the super-rich pay significantly less as a percentage of earnings than the poor.

So let’s imagine Labour win a Holyrood election and increase Council Tax to pay for services. They reassure their core vote by promising only to increase the rates of the highest bands. But reality swiftly intervenes: the government only sets the Band D rate and all other rates are worked out against a formula. Even if they were able to pass laws to allow individual bands to be altered, the poorest areas (and those which therefore tend to have the biggest bills for public services) tend to have very few top-band properties, so receipts from increased Council Tax would be hopelessly inadequate.

• Landfill Tax

Although not yet in place, the Scottish Government will soon be able to run and collect a Landfill Tax. But unless set at stratospheric levels it wouldn’t raise anywhere near enough money, and would also be self-defeating since its ostensible purpose is to reduce the utilisation of landfill. If the tax were increased it would end up forcing more recycling – a good thing – but the revenues raised would plummet. Landfill Tax is a policy instrument rather than a serious revenue-raising instrument. (Which is why Westminster was happy to devolve control of it in the first place.)

• Stamp Duty

Another Scotland Act power which isn’t yet in effect but soon will be. Scotland has lower levels of revenue from stamp duty than the UK average, so devolving it allowed Westminster to cut the block grant by more than the levy will generate. Increasing it to recover the loss would deflate the housing market, which would be economically desirable in the long term but hugely politically unpopular. Cutting it would boost the property market and general economy, but obviously cut Scottish Government revenues further.

Also, and crucially, any benefits to the wider economy would be reaped by the Treasury in Westminster – in the form of income tax receipts and welfare savings – rather than the Scottish Government. Cutting stamp duty would effectively, then, be a subsidy from Scotland to London.

• Business Rates

Business rates are another trap for a devolved Scottish Government. If business taxes go up then you get more money in the short term but inward investment falls and fewer jobs are created. Cut them and more businesses may set up in the country, employing more people and paying more taxes, but once again that means it’s Westminster that gets the benefit, leaving Holyrood with less money to pay for devolved services.

• Income Tax

And finally we have the supposed “jewel in the crown” of the Scottish devolved funding, the +/- 3p variation available of basic rate Income Tax. This power is currently unavailable anyway, and is due to be replaced with new tax-varying powers under the new Scotland Bill, but its core flaw will still be present – as with Council Tax, rates can only be varied across the board, meaning that if you want to extract more money from the well-off you have to penalise the poor at the same time.

All other taxation is reserved, so the Scottish Government’s options for increasing revenue by that path are all but non-existent. That leaves only one more avenue – reducing public spending. But if we did want to cut public spending then where would we start? The five largest budget items in GERS for the period 2010-2011 are:

• Social protection – £21 billion
• Health – £10.9 billion
• Education – £8 billion
• Debt interest – £3.7 billion
• Defence – £3.3 billion

So where could we find some extra cash there?

• Social protection – Welfare is reserved and George Osborne has signalled his intention to cut another £10 billion from the welfare bill over the next few years, which would mean a Barnett reduction of at least £1 billion to the Scottish block grant. The prospects for making savings therefore look bleak.

• Health – Healthspending is ringfenced by the Scottish Government but there could be efficiency savings and consolidation of services and back office administration over the 14 health boards. Some room for manoeuvre, but the NHS is already running to stand still and the chances of net savings are almost zero.

• Education – Tuition fees, reductions in places or even the merging of schools, colleges and universities could cut the cost of education, but the social cost would be high, as would the long-term economic one – an educated workforce pays back more into society than a nation forced into minimum-wage jobs which have to be supplemented by state benefits. A side-benefit for Westminster is that forcing the Scottish Government to confront this issue offers the chance of serious political damage to the SNP.

• Debt interest – No choice. It gets paid. (As we’ve previously seen, Scotland’s notional debt burden is disproportionately high as a result of Westminster attributing UK debt to Scotland, which is then strangely used by the Unionist parties as evidence that Scotland is insolvent in a cunning double-whammy.)

• Defence – The Trident Replacement Program is a Labour-initiated plan to replace the strategic nuclear weapons system of the UK over the next 30 years. The build cost of the new system is £20 billion according to the MOD (Which neglects to include the £3bn price tag of buying a new generation of missiles from the USA). This money will be paid up in advance of the new system operating, over a period of about a decade. Due to this overlap there will be a 10-year period where the UK is paying £2.3bn per year for the new system on top of existing Trident costs. Scotland’s share of this cost will be £193.2 million a year on top of the £210m we already pay annually for Trident maintenance, meaning that for the next decade we’ll be paying £403.2 million a year towards a weapons system that Scotland doesn’t want.

So the solution to Scotland’s future budget problems seems obvious. The catch, of course, is that the place where huge savings can be made is an area over which the Scottish Government has no control, and in which all three London parties have effectively identical policy platforms.

The SNP indicated at its annual conference last month that if elected to govern an independent Scotland it would set a Scottish defence budget of £2.5 billion – a saving of around £800 million on Scotland’s current notional share of UK spending. (A significantly larger proportion of that £2.5bn would also be spent within Scotland than the present £1.5bn, bringing a welcome boost to the general economy.)

But this wouldn’t be the end of the savings under independence, since at a stroke we would also do away with the £7m annual price tag of the Scottish Office (currently paid out of the block grant), and with only one Parliament to worry about we’d also no longer have to contribute to the annual £0.5bn cost of running Westminster, of which Scotland’s share is roughly £42 million.

On those three things alone, an independent Scotland could expect to receive an ‘independence dividend’ of almost £850m a year. Is that sum a price worth paying for membership of the UK? In 2014 we’ll get to decide.