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Money matters By Gordon MorganThis article was originally published in the latest issue of Scottish Left Review www.scottishleftreview.org The left in Scotland tended to judge the Labour led administration in Holyrood by the same criteria as Labour in Westminster. New Labour went beyond just trying to manage capitalism better than the Tories, they wholesale rewarded the rich and privatised more industries then invaded Iraq. Scottish Labour insofar as it distanced itself from these policies was assessed benignly. The SNP administration has already shown Labour in Holyrood to have been at best complacent and probably incompetent in its management of public finances and exposed the left as having been largely silent in criticism of these issues. How could Labour commit £500m to digging a rail tunnel under an airport, in opposition to the rail company and the airport operator at a time when air travel is increasingly seen as a major contributor to global Warming? Why did Labour seek to build more private prisons to house fine defaulters and drug users when the alternatives had been shown to potentially save at least £200m a year? Why has the cumulative budget underspend reached £1.5bn whilst hospital trusts ran out of cash and cut services? Salmond and the SNP have pledged to run the administration more effectively and prove their competence to run an independent Scotland. They also intend to prove that the existing fiscal settlement constrains the Scottish economy and contributes to cultural and actual poverty. The left has to work out new criteria by which we can judge a Holyrood government. It may no have control over money supply, foreign exchange, many taxes or trade. It does however, control most of the public sector and a substantial amount of public funds. It can materially lessen poverty or reward the rich. It can expand the public sector and grow the economy or use PFI/PPP schemes. The following is a preliminary outline of the fiscal issues around which the left should assess the SNP government. The 2007/8 Scottish Budget is £26.1bn. This includes all money for areas like local authorities, health, education as well as funding for capital projects. Most of this money comes as a direct grant from the UK Government under the Barnett formula. As Scottish ministers have no powers to borrow additional money, the Scottish Budget is extremely vulnerable to changes in how the formula is calculated. The SNP has demanded the return of £23m a year in carers allowances cut from the budget when free care for the elderly was introduced (on the basis that no rebate was due as there was no charge). The SNP quite rightly point out that all persons previously receiving means tested free care (for which the allowance was paid) still receive it, hence it should be included in the budget. More significantly, the same argument will be made by the Treasury if local income tax were introduced with the potential loss of £300m a year in council tax benefit. Even assuming no sleight of hand, the Barnett formula is likely to reduce the Scottish Budget over the coming years as English population grows relative to Scotland. A Strathclyde University report in 2005 predicted a squeeze potentially losing five per cent of Scottish jobs. Add to this pressure from English regions to move from the Barnett formula to “redress subsidies” to Scotland and an ongoing fight to maintain the budget for the next four years is virtually guaranteed. With Wales demanding more fiscal powers and Northern Ireland and English regions wanting fair settlements a radical review of the Scottish budget is more likely than not as part of a new settlement The SNP and the Tories may both advance proposals for fiscal autonomy – where the Scottish Executive is responsible for raising its budget as well as spending it. Achieving change without wrecking or allowing the budget to be wrecked by Westminster is a major challenge facing the SNP. The SNP pressed for equalisation of Business rates with England (which Labour has done) and demanded a cut in corporation tax for Scotland. Given the likely effect of a cut in corporation tax would be reregistering of headquarters from London to Edinburgh rather than additional economic activity and a probable substantial cut in the Scottish Budget to reflect reduced overall Westminster take in corporation tax, they best beware Gordon Brown granting their request. It is very unlikely the SNP will contemplate an adjustment of income tax as allowed under the Scotland Act, unless it coincided with changes to council tax. If the choice is service cuts or up to 3p added to income tax, a campaign could be launched for the latter across several parties. Whilst any move from council tax will assist the poorest families, a flat rate of local income tax as proposed by the SNP would slightly add to tax paid by two wage families on average wages if it were to raise the same as the council tax. To avoid raising taxes for average earners, the SNP relies on no removal of council tax benefit and also on administrative savings to balance the books. Independent studies for more information look at the work undertaken by Mike Danson, suggest that at the rates proposed by the SNP insufficient revenue will be raised and cuts will be required elsewhere. A proposal such as the Scottish service tax which incorporated a progressive rate for high earners should be argued for as that would both produce additional revenue and reduce the tax burden on average wage earners. The SNP could introduce new taxes to achieve social goals for example road charges, carbon taxes, planning gain, however, Westminster may challenge their competence. To sell the need for these new taxes, the money raised would need to be closely linked to funding related projects. Given the diversion of funding for the Olympics, if Glasgow wins the Bid for the Commonwealth games, a Scottish Lottery? The prohibition on borrowing by the Executive or its agencies has fuelled the drive for use of PPP schemes despite their much higher cost and ongoing future expenditure thus restricting future budgets. Alternative mechanisms which greatly reduce the profit going from the public purse to shareholders have been considered by the SNP but not yet acted upon. At Council level, Edinburgh in the ‘90s set up development trusts which through land swaps and planning deals provided leisure centres and met various development goals saving tens of millions. In Glasgow, various trusts have been established allowing council businesses to work commercially. At present council “trust” workforces are building houses on council land with around £100k profit per house going to developers making the proposals. Reputedly Councillors have been asked by senior management why the trust cannot build and sell the houses in accordance with strategic planning goals and use the profit to meet other council objectives e.g. the same trust currently builds schools. Across Scotland a coordinated approach to linking planning and development trusts together with Council land and property sales could generate tens of millions a year to be used for strategic investment goals e.g. hospitals, schools, social housing, energy conservation and meet many of the objectives of a planning gain tax. If the SNP abolishes Scottish Enterprise and transfers some of its powers and cash to Local Government, this task could be achieved more quickly. Scotland locks up a higher percentage of our population than any other country in Europe. The SNP has committed itself to abolish prison sentences of six months or less and to cap the numbers held on remand. It has been shown, in evidence to Parliament on Rosemary Byrne’s Bill, that each £1 invested in effective drug rehabilitation services saves over £9 in criminal justice costs. Action on these issues should reduce the prison population and allow the two new 700 place private prisons sanctioned by Labour (Low Moss and Addiewell) to be cancelled. We should press the SNP to announce its intention to cancel these private prisons and demand support from Labour and other parties on these policies. Many in the SNP have been prone to see Public sector bad e.g. complaining too high a percentage of GDP relates to the public sector. Whilst in an independent Scotland, this argument would require to be challenged. In a fiscally constrained environment of devolution it is a pure distraction. With a fixed budget, the SNP should recognise that maximising production within the “public” sector and reinvesting surpluses from public sector enterprises aids the Scottish Budget more than giving money to shareholders. The Executive should publish a simple financial summary of all PPP schemes currently funded by Executive agencies of local Authorities and we should demand that all parties in the parliament push for a freeze on new schemes pending a review of the impact on future budgets. This would greatly strengthen the case for allowing Executive borrowing. Labour claimed EU rules forced it to put CalMac services out to tender. Most commentators believed essential lifeline services could be exempt and that Labour were ultra cautious. The SNP criticised Labour’s actions, however, they will face a major challenge over water and energy. Despite almost all water infrastructure having been developed using PPP schemes, Scottish Water is still public. This could change under new proposed regulations. Energy production and distribution has been privatised and is regulated in accordance with EU competition rules. Security of electricity supply is of strategic importance to Scotland and massive investment is required to achieve carbon emission targets. If the SNP willing to challenge the private sector energy monopoly and force strategic investment in new electricity production and distribution using planning laws and taxes and if necessary set up new publicly controlled energy companies? The EU is claimed to be looking at Shetlands development fund to determine if it illegally subsidises companies. Is the SNP willing to fight within the EU to secure exemptions from competition rules and demand the right (from Westminster and Brussels) to establish financial and development trusts to meet its strategic carbon emission goals? The left needs further discussion on such structures (financial and development trusts etc) and how they would operate to ensure democratic accountability yet meet strategic needs. For eight years the budget discussions in the parliament, the Barnett formula, borrowing restrictions, fiscal autonomy, EU competition rules, financial trusts etc have been incredibly boring subjects even for those centrally involved in the debate. Suddenly with the election of the SNP government and Brown’s constitutional review, complacency could be swept away and these become hugely significant live issues. Conferences are being held, books written on alternative economic strategies. The left must actively engage with these issues and seek agreement on common campaigns. I look forward to other contributions on these matters in future issues of Scottish Left Review. Gordon Morgan is a former Chief Officer in Local Government and is Solidarity's National Treasurer.
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