Scottish budget and the economy

I was giving evidence to the Scottish Parliament's Economy Committee this morning on the draft budget.

When it comes to the economy we have to be realistic about what Scottish budget can achieve. Government can support and mitigate but there are limitations. However, we can take action in Scotland with existing powers, while arguing for more.

My key point was that our profoundly unequal society is at the root of Scotland's economic ills with the richest people 273 times wealthier than poorest. More than 40% of those below poverty are line in work and welfare cuts making matters worse. The big structural economic issue is the shift from wages to profits and income growth for the super rich.

Austerity economics has resulted in longest and deepest recession for several generations. The recovery is taking too long and even IMF have said recently that the, "case for rapid deficit reduction in the wake of a crisis is increasingly difficult to support". The nascent economic recovery is still stuck at pre-recession levels and will stay there unless there is an increase in real wages rather than relying on private borrowing and a cut in personal savings. Employment is also stuck at pre-recession levels. The public sector in Scotland is down 52,000 jobs or 8.6% since its peak, while the private sector is down 5,000 or 0.3%. Self evidently the private sector has not plugged the gap.

The Scottish Government can support job creation through public spending and boost the spending power of the lowest paid through the Scottish Living Wage. This has a direct impact on the local economy. This is the time to borrow for investment while money is cheap, but we also need action on taxation and tax dodging. We are also not doing enough to rebalance the economy from financing to productive industries. This requires greater investment in workforce skills. A topical issue today in the oil industry, but it has a wider impact.

Some members of the committee were particularly exercised about the shift in funding from revenue to capital. No one disputes that capital investment is important, but there are risks if it is at the expense of revenue. There are significant leakages from capital spending, even allowing for the economic multiplier. You only have to see the disgraceful race to the bottom in the care sector, to understanding the damage revenue cuts can do. This week's IFS report also highlighted that Scotland's capital spending is 48% higher than the rest of the UK, while revenue is only 12.5% higher.

Scotland Performs also needs a much wider range of indicators and it would help if it was kept up to date. Oxfam and the Carnegie Trust have shown how this could be done better. GDP is not the only measure.

Any discussion about the budget inevitably gets us into robbing Peter to pay Paul. There are areas of spending including the regressive Council Tax freeze and ineffective small business bonus scheme that could be redirected. Public sector pay cuts, college regionalisation, local govt funding cuts and the dead end of regulatory reform are other areas of the budget that are doing little for the economy. Government MSPs are always keen to highlight wasteful PPP spending and there is even a separate annex to the budget that notably covers the last government's PPP schemes, but ignores the SNP PPP schemes!

There was an understandable focus on fuel poverty and I explained the key elements, most of which are outside the control of the Scottish budget. But we could do more on energy efficiency with great economic spin offs. On broader energy policy the recent Audit Scotland report is a frank appraisal of progress towards the challenging targets. Spending is not at anticipated levels largely due to uncertainty over the UK energy market reforms.

Finally, we need to take a different approach to the budget, breaking away from the silo culture. The debate about ring fencing the health budget would be very different if the focus was on tackling health inequalities. You could say the same about climate change, food strategy and others. Most of the big challenges require cross cutting solutions, so why not think about the budget in the same way.