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Weekend: Bridging the funding gap

Posted on November 10, 2012 by

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.

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21 to “Weekend: Bridging the funding gap”

  1. G H Graham

    Why let inaccuracy get in the way?

    Last night the Better Together campaign claimed that residents of Greenock had to be “tuned out” in order to stay for the entire duration of Alistair Darling’s speech. Who can blame them?

    And his own campaign couldn’t even spell his name properly.

  2. panda paws

    Another excellent article Scott but the problem here is that you are preaching to the converted. This type of analysis has to get out to the MSM and/or to a wider (undecided?) audience. There’s a hard core of unionists that won’t change their mind regardless of the arguments but others and the devo-maxers are there for the persuading. 
    Does anyone know if the Yes campaign are putting together analysis and figures? I’m assuming they are, but I think it’s important to start challenging Bitter Together soon before “factoids” become received wisdom.

  3. mogabee

    There’s no alternative. I’ve thought long and hard about this but see no other way.

     Scotland has to DITCH the hangers-on, those subsidy junkies……….. the Westminster mob!

     You know it makes sense…..

  4. James Morton

    Well lets start with some basic math
    Amount of Benefits believed to be taken by fraud is 1.1billion. But as I was told recently that also takes in to account those monies the DWP believes that it overpaid through their error. Also this is the alleged amount, it turns out that this does not take into account appeals.
    ATOS: Contract worth 3.2 billion
    Amount of benefits unclaimed every year – this can vary but this is one of the most recent reports –
    ICT contracts – Government and local government agencies are locked into 10 year contracts worth a considerable sum of money. Registers of Scotland a agency that actually recieves no government funding as it operates as a trading fund trust, is in the process of untangling itself from a contract with BT. It’s estimated that this contract including the development of a critical peice of software (now written off) cost this agencie around 150million pounds. The agency is to compensate BT for ending the contract early.
    PFI: Possibly the worst idea ever. Allows for backdoor privatisation of public services but on a cost plus basis that is simply eye watering. It is quite simply the most moronic way to spend public money and led to many a disaster – the Trams in Edinburgh being the most recent example.
    Private contractors and consultants. One report stated that this area saw a huge increase in public funds, something in the order of 2.2 billion. It can come under many guises, one area is “fun@work” days were I believe the cost is around £250 per staff member attending. Though used in the private sector, it is increasingly being used in the public sector too.
    Defence – so many areas were money can simply disappear – read anything by chuck spinney as to how crazy it can get in the US. One simple stat I will chuck out to you, there are currently in the UK armed forces 5,500 personnel of senior command rank than there are units for them to command. There are huge areas for savings to be made here.

  5. Vincent McDee

    I’ve said this before but I never get tired of repeating it:

    Scotland becoming Independent is simply going to be a matter of self-preservation. 

    PS: A law nationalizing PFIs at cost should be one of the first priorities.

  6. Rev. Stuart Campbell

    “the problem here is that you are preaching to the converted. This type of analysis has to get out to the MSM and/or to a wider (undecided?)”

    I’m working on something.

  7. scottish_skier

    Scottish independence: Darling predicts independent Scotland would rejoin UK

    I guess this means all those against independence can therefore vote ‘Yes’ safe in the knowledge that independence is just for Christmas?

    Certainly, for devo maxers this would be ideal as on re-joining, we could negotiate a better deal.

    When are Ireland, the USA, Canada, Australia etc coming back BTW? I’ve not heard much on this front. 

  8. YesYesYes

    “When are Ireland, the USA, Canada, Australia etc coming back BTW?”
    It’s an intriguing question and it’s a long list. In 1945, there were some 50 independent nation-states in the world. By 2000, there were some 200. Of these 200 new nation-states that have become independent since 1945, more than one third of them are nation-states that have won their independence from Britain.
    So far, not one of these countries has given the slightest indication that they want to re-join the UK. On the contrary, all of them seem to jealously protect and defend their independence. Funny that. 

  9. YesYesYes

    Sorry, should read “Of these 150 new nation-states that have become independent since 1945”.

  10. orpheuslyre

    An admirable piece of work.

    I was struck by your mention of the rightward drift into unitary one-nationism in your opening section.

    It rang a faint bell. In 2008 Wendy Alexander wrote a long policy paper on Labour identity. At that time she was still closely allied to Gordon Brown.

    No-one read the paper. It was flagged for months in advance by the ever faithful Scottish media but in the end it was overdue, and horribly convoluted with dismal prose, and it was quickly followed by the party conference, which swallowed the news agenda.

    But a close reading of the paper reveals a strange fundamental assumption. In it, Alexander seemed to identify class, party, nation, and state as one single thing. And that this entity was on an historically-assured path to a virtuous place in the future. In other words there was a sort of bastardised Hegelianism about her political view on identity that provided the basis for the sense of iron-clad entitlement and hysterical morality that we we never fail to see in SLAB politics, and we continue to see in Johan Lamont. 

  11. Juteman

    According to the article on BBC Scotlands website, we could rejoin the UK if things don’t work out too well anyway.
    Cheers Darling! That should help the undecided to vote YES, if they think they have a fallback position. Well done mate!

  12. scottish_skier


    The loss of unionist marbles is a sight to behold. What’s more, we’re just getting started.

    On the referendum, further point to note…

    If someone supports a ‘strong Scotland in the union’ or Devo Max then they should vote for independence. Would put Scotland in a powerful position for negotiating a new relationship with the UK. Bit like UK government with the EU. Clearly the UK wants us to stay which gives Scotland a good starting position.

    Maybe the Scottish Government should just speed things up by declaring independence then organising a referendum on re-joining the union? Darling believes that’s what’ll happen anyway so… 

  13. Juteman

    The Unionist own goals are amazing. Johann with her ‘something for nothing’, then now Darling with his ‘try before you buy’ strategy!

  14. Rev. Stuart Campbell

    “In 2008 Wendy Alexander wrote a long policy paper on Labour identity.”

    Here it is if anyone wants to see it:

  15. mogabee

    That policy paper by Ms Alexander is one hell of a long fan letter! 

     Dear Mr Clinton, Brown and Blair, love you loads…….

  16. G H Graham

    Re- Rev Stu’s link …

    Wendy Alexander’s paper launches immediately with a bare faced lie …
    We in the Labour Party have been fortunate to live in a time when politics

    in the English-speaking world have been dominated by three of the most

    gifted politicians of the centre-left – Bill Clinton, Tony Blair, and Gordon Brown.

    Under the guidance of these three men, the USA and the UK were rescued from

    the economic doldrums and enjoyed the longest period of sustained growth that

    either country has known while huge strides towards reducing injustices and

    inequality were made.

    Hold on a minute …
    Commissioned by Labour’s deputy leader Harriet Harman in October 2008,  a 450-page report by the Government’s National Equality Panel represented a damning verdict on Labour’s 13 years in office and Tony Blair’s pledge on poverty in 1996. A story based upon the report was published by the Daily Mail in January 2010.

    Labour has made inequality worse: Gulf between rich and poor now widest since WWII 
    Just one more example of Labour saying one thing when they have in fact done the opposite.

    So when Darling’s contradicted himself by claiming Scotland would end up rejoining the Union only weeks after warning that once independent, there would be no going back, we should not be surprised.

    It’s Labours M.O.

  17. muttley79

    Wendy Alexander thinking that Tony Blair, Gordon Brown and Bill Clinton were politicians of the centre-left?  Absolute horseshit.  No wonder she did not last long as Scottish Labour’s leader.  Despite the Alexanders being constantly bigged up by our Labour-loving media, and by dint of their father being friends with Dewar, Smith etc, being granted a very swift, patronage fuelled rise, they have achieved very little.  Significantly, they are both a pair of girning, annoying, smug gits.  They also were/ are the epitome of New Labour entitlement.

  18. muttley79

    Wendy Alexander thinking that Tony Blair, Gordon Brown and Bill Clinton were politicians of the centre-left?  Absolute horseshit.  No wonder she did not last long as Scottish Labour’s leader.  Despite the Alexanders being constantly bigged up by our Labour-loving media, and by dint of their father being friends with Dewar, Smith etc, being granted a very swift, patronage fuelled rise, they have achieved very little.  Significantly, they are both a pair of girning, annoying, smug gits.  They also were/ are the epitome of New Labour entitlement.  GTF!

    Hopefully right avatar this time, damn spell mistakes!


  19. Boorach

    Hold on, pause for thought!

    This could well be eyebrows (by Grecian 2000)’s exploring for a bargaining point for rUK seeking union with Hail Alba after the YES vote! 

  20. douglas clark

    That is exactly the sort of counter-arguement I like!

  21. douglas clark

    Scott Minto,
    I found this very interesting, you might do too:

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