Job losses and the Scottish Budget

In recent days there have been many political exchanges over job losses as a consequence of the cuts to council grant allocations in the Scottish Budget for 2016/17. Let’s look at the issue calmly.

John Swinney’s view is that job losses have been “utterly exaggerated”. Christina McKelvie MSP says, “But there are not 1,000’s losing jobs, that’s just made up”.

The most widely quoted estimate for job losses is 15,000. This figure doesn’t come from the trade unions; it comes from COSLA. They do after all after access to most of the councils and their senior officials that actually have to deliver the cuts. I am not a party to their calculations, but it is clear that they are based on the consequences of both the grant allocation cut and the additional unavoidable commitments councils have to finance next year. 

What we do know for certain is the combined General Resource Grant + Non-Domestic Rates Income figure, which is used to calculate local government’s total revenue settlement, falls by 5.2%, or more than £500 million, in real terms (the equivalent figure in cash terms is a reduction of 3.6%, or £349m). We don’t know the sum total of the additional commitments, although the largest element is likely to be the increase in National Insurance contributions that COSLA estimates at £125m. That alone takes the cash cut to £474m, but in practice it will be much higher when you take account of other service pressures.

If we look back historically, SPICe calculates that the local government budget fell by 6% between 2008/9 and 2015/16. We also know that local government employment during that period fell from 314000 to 244,800 (latest figure). Allowing for police and fire transfers that means at 42,400 jobs were lost during that period. We generally round that figure down to 40,000.

It isn’t a linear calculation to say a 6% cut equals 40,000 job losses, but it does give you an idea of the scale of the employment challenge when councils are facing at least a 5.2% cut in the coming financial year.

The reason no one can give a precise figure is because councils will use a variety of measures to make the cuts. Some will use reserves or other financial instruments to mitigate some of the cuts. Some service cuts are more staff intensive than others, although council services by their nature are staff intensive. The proportion of the budget that constitutes staff costs depends on how you calculate total expenditure, but a rough figure for most councils would be around 60%.

From local budget consultations that have taken place, we do have some idea of job losses. Several councils have provided estimates although they should be used with caution given that they depend on negotiations and other savings assumptions, including cuts in terms and conditions. However, some 8000 job losses have been identified so far and we expect that number to grow as budgets are finalised.

So, are the job loss estimates ‘utterly exaggerated’. Historical precedent would say they are not. At best you could say they might be less than 15,000. Our more optimistic estimate has been 10-12,000 and those may not all be implemented the coming financial year. Our estimates have proved to be fairly accurate in the past, but there are too many variables at present to be sure. We can be pretty certain that the number will be many thousands - so I’m afraid Christina McKelvie needs a reality check.

The bottom line is this. If anyone can explain how you can cut over £600m from council budgets, when 60% of spending goes on staffing, without job losses – then I would love to hear from them. Our local government members across Scotland would be delighted to see that magic trick.

Budget Bill - Stage 3

The Scottish Budget is debated at Stage 3 in parliament tomorrow. While there is plenty of pain for all public services, it is local government that is bearing the brunt of austerity in Scotland.

 

In our MSP briefing, I set out the implications of the budget for all public services - little of it is positive. However, the focus of the debate inside and outside parliament has rightly been on the local government budget settlement.

 

The budget allocation to local government in 2016-17 will be £10,152.3m, a substantial reduction on the 2015-16 allocation of £10,756.7m, even allowing for some reprofiling of capital expenditure. Within this allocation, the combined General Resource Grant + Non-Domestic Rates Income figure, which is used to calculate local government’s total revenue settlement, falls by 5.2%, or more than £500 million, in real terms (GDP deflator - inflation). The equivalent figure in cash terms is a reduction of 3.6%, or £349m. Both numbers are often bandied about, so it is important to differentiate them.

 

It is worth mentioning that the income from non-domestic rates is the second largest source of revenue after the Scottish Rate of Income Tax (SRIT). This year the estimated revenue is down by £31m, 2.8% in real terms. This decrease does not reflect the Scottish Government’s optimism about economic growth and in previous years the estimated income has risen considerably, e.g. by £150m last year. We can only hope that this isn’t a backdoor way of creating an under spend to the Scottish Government budget.

 

Scottish ministers often argue that local government has had a fair share of the Scottish budget over the years. This is a dubious claim when you consider that councils are the only main spending portfolio to have suffered a cash cut. However, it certainly isn’t true this coming year. Local government’s percentage share of the Scottish budget also falls 1.7% from 32.3% to 30.6% in 2016-17 (although on a like for like comparison, the percentage share falls by 1.1%).

 

If we take a slightly longer look, we can see that the Scottish Government is cutting councils more than itself. Since the 2013-14 transfer of police and fire, the local government settlement has fallen by 1.9% in real terms (-£200.9m), whereas the Scottish Government’s DEL+NDRI has increased by 3.2% in real terms (+£1,018.8m). This chart from SPICe illustrates this point.

 

In addition, councils have been blocked from increasing the Council Tax. This brings the total cost of the freeze in 2015-16 to £630m, and the total cumulative cost from 2008-09 to 2016-17 to £3,150m. Just imagine how many services and jobs could have been saved with this resource.

 

COSLA has estimated that this settlement will result in 15,000 job losses. It is difficult to estimate actual losses because it depends on the services councils decide to cut and how they use reserves and other financial instruments. Unavoidable commitments, such as employer National Insurance contribution increases (£125m for councils alone), will add to the pressure. Even if 15,000 is at the higher end, we know for certain that of the 50,000 jobs lost in devolved services since the crash, 40,000 of those are in local government. That certainly feels like councils are taking the brunt of austerity.

 

As the First Minister has fairly pointed out, unless you increase the overall budget available, protecting one service area inevitably means cuts to another. It used to be the case that the Scottish Parliament didn’t decide the size of the budget; it was largely limited to how it is divided up. That is no longer the case, because Parliament now has the Scottish Rate of Income Tax. We agree that the Calman powers are flawed, but they are still progressive and there will be an opportunity to make it more progressive when the new Scotland Bill’s powers are implemented.

 

I fully accept that the root cause of these cuts is the UK Government’s ideological attack on public services. However, devolution is about doing things differently in Scotland. We have the powers to mitigate austerity as we outlined in our report last year and by using the new tax powers. MSP’s should choose to combat austerity, not simply pass it on to community services.

 

A new approach to mental health

Mental health services have received some welcome media attention recently. If acute hospital services were this limited there would be a major public outcry - so why do we accept second best for mental health?

It’s not because it is a rare condition. Between one in three/four people in Scotland are affected by a mental health problem each year. The most common illnesses are depression and anxiety. About 1 in 8 of Scots (12%) take an antidepressant every day.

Mental health is also the leading cause of sickness absence in the UK, with 70 million days of work lost each year due to workers suffering from stress, depression, and other mental health conditions. This costs the economy around £26bn a year – or £1000 per employee.

Like most other health conditions it is those in lower income groups that suffer the most. People living in the most deprived areas are more than three times as likely to spend time in hospital as a result of mental illness compared to people living in the least deprived areas. The suicide rate is more than three times higher in the most deprived areas compared to the least deprived areas.

Data on mental health services is patchy and not updated as often as other services. A quick glance through the ISD data shows problems with classification. There is decent data on hospital admissions as you might expect, but this is less relevant given the shift from hospital to community services.

What we do know is that people are waiting a long time for specialist care.  Less than ambitious targets came into force last year to reduce long waits to see a specialist, however most health boards have not been able to meet them. 81% of people saw a psychologist within 18 weeks, against a target of 90%. 73% of children saw a specialist within 18 weeks, against a target of 90%. Children are waiting slightly longer than they did in 2014 and 2015. The outpatient waiting time target for physical conditions is 12 weeks. 

Even this doesn’t tell the whole story. 85% of GPs told SAMH that there were gaps in service provision for patients and 87% of responding GPs said they wanted more information on local social prescribing services. Delays in treatment are a particular concern because the longer a someone has to wait, the more likely it is that their mental health will deteriorate.

As the stigma traditionally associated with mental health reduces, the demand for services is increasing. There has been a 15% increase in drug treatments in just three years.

Anita Charlesworth, from the Health Foundation, said: "Mental health hasn't increased as a share of NHS funding, despite the fact that there are huge demands on the system, and access to care for mental health still falls way below that for physical health.” 

In Scotland, mental health spending was up just 0.1% last year, and down a projected 0.4% this year. Although again spending data is patchy and probably doesn’t capture the range of service providers fully.

Last year, UNISON Scotland surveyed its members who deliver mental health services. They reported that resources are getting tighter. 76% of staff surveyed reported cutbacks in their workplace in the last three years. Staff working for charities/third sector report sharp funding cuts and consequent redundancies. Staff in local government and the NHS point to cuts being carried out via non-replacement of staff that leave, or replacement by lower grade staff. Cutbacks on training and opportunities for Continuous Professional Development (CPD) are also widely reported. 

The pressure on staff is not limited to mental health professionals. UK police are spending as much as 40% of their time dealing with incidents related to mental health problems. There are similar issues in our prisons.

So, what should we do about mental health services? Organisations like SAMH have published manifestos for the coming elections and they point the way to a new approach. Scotland doesn’t even have a mental health strategy as the current plan ran out in 2015. 

Some key actions could include:

• Parity of esteem with treatments for other illnesses including a properly resourced 12 week waiting target.
• Better information on mental health services in each locality including the range and rate of social prescribing.
• A new workforce plan that delivers staffing numbers to address increasing demand. Suicide intervention training should be a core element of CPD for a wider range of staff.
• Continued funding for the See Me campaign to tackle stigma against people with mental health problems, including a renewed focus on the workplace and in schools.

While the data and strategies could be better, we at least know that Scotland’s mental health services are under severe pressure. We should do much more.

Using procurement to tackle the tax dodgers

The tax dodging activities of companies has come under a lot of scrutiny, but we could do more to tackle this abuse in Scotland with existing powers. Companies who want to bid for taxpayer funded contracts should pay all their taxes.

 

The recent focus has been on Google, following a deal with HMRC to pay £130m in back taxes and bear a greater tax burden in future. This constitutes a 3% tax rate, something small and medium size business across Scotland can only dream of. As Richard Murphy of Tax research put it: “George Osborne is not getting the deal the UK tax payer will be expecting. It is a special rate of tax that would not be available to anyone else.”

 

Even the EU has been shocked over the methods used by multinationals minimise their tax liabilities in Europe. We have had the Luxleaks revelations, media exposure of how hundreds of global companies including Pepsi, Ikea and FedEx had secured secret sweetheart tax deals with Luxembourg, allowing them to save billions of euros in taxes. Before that it was transfer pricing and investment loopholes that allow big companies to pay less tax.

 

This abuse also has an impact on global poverty. Just 62 billionaires own the same wealth as half the world’s population – that's 3.6 billion people. This extreme inequality is being fuelled by a global network of tax dodging. Poor countries are losing at least $170 billion a year to tax havens – money that is desperately needed for vital services like healthcare and education.

 

We don’t tend to think of Scotland when tax havens are discussed. However, as the Sunday Herald recently reported, Scotland is being advertised as a tax haven across Eastern Europe. As one advert proclaims; "Having registered a company in Scotland, by using offshore rules, you do not need to carry out any audits and, furthermore, there is no requirement to provide financial reports."

 

The number of limited partnerships in Scotland has more than doubled from just over 6,000 to nearly 15,000 since 2009. We now have more of these firms than England and Wales put together.

 

Scottish Labour raised questions about this last summer after an international investigation into the alleged fraud of three Moldovan banks uncovered that some of the companies used were in Scotland. Labour's Jackie Baillie said: "It is extraordinary that Scotland is being described as an offshore tax zone. Somebody should be looking long and hard at how to close this loophole."

 

The Scottish Government has urged Westminster to simplify the UK tax system and abandon what it claims is; “the unnecessary complexity which creates opportunities for tax avoidance through countless exemptions, reliefs, deductions and allowances”. The House of Commons Treasury Committee has launched an investigation, with the Chair making similar observations about complexity.

 

Nicola Sturgeon has described tax dodging as “obscene, immoral and downright wrong”. In response to a question on Amazon from Liberal Democrat leader Willie Rennie she said: “All companies should pay the tax that they are due to pay. The Scottish Government, with the limited tax responsibilities that we have, takes tax avoidance very seriously.”

 

The Scottish Government’s tax avoidance measure used by Revenue Scotland is better than the UK approach. However, the same cannot be said of procurement. The public sector spends some £11bn each year in the private sector and this should be used as part of stronger efforts to tackle tax dodging and tax avoidance. It is entirely wrong that companies seeking to avoid paying their fair share of tax should be awarded public contracts.

 

The Public Contracts (Scotland) Regulations 2015 were considered by the Infrastructure and Capital Investment Committee last week. UNISON’s briefing to MSPs questioned why the Scottish Government is not using powers that it has for mandatory, rather than discretionary, exclusion of companies that have not met their tax obligations and /or breached environmental, social and labour laws, and to exclude companies involved in aggressive tax avoidance? If we had these provisions in place, Anglian Water, or almost any of the privatised UK water companies, would be highly unlikely to have even bid for the public sector water contract.

 

Dave Stewart MSP highlighted this to the committee last week, he said: “there is a big gap in that there is no reference to or substantial action on tax dodging. I support the moves by Christian Aid, the Scottish Trades Union Congress, Unison and others to restrict from Government procurement companies that avoid paying tax.”

 

We have demonstrated how this can be done (including a 2014 proposed amendment to the Procurement Bill). It has been argued that it is too complex for procurement managers. The solution is to require companies to sign up to the Fair Tax Mark. A Scottish firm, SSE was the first company to do so.

 

Given the Scottish Government’s rhetoric on tax dodging and the practical steps in the Revenue Scotland and Tax Powers Act, I am at a loss to understand why they are not taking action on procurement. Local and regional authorities across Europe are taking a stronger line than Scotland.

 

The bottom line should be – companies who take the taxpayers pound, should pay their taxes in full.

 

 

Big challenges for pensions and the market isn't the solution

There are major changes happening to our pensions, many of which workers are ill equipped to face, and policy is not keeping pace with the challenges ahead.

Today, I was at the TUC pensions conference. The pensions minister, Ros Altmann, gave an overview of government pension policy including auto enrolment, pension flexibilities, potential changes to tax relief and the impact on Defined Benefit schemes.

Auto enrolment opt out rates are very low at only 10% and this has undoubtably been a success. It's too early to be sure how successful in Scotland as a number of big employers with quality schemes have deferred their start date. The big challenge is that only 10% of employers have started a pension scheme - 1.8m employers have yet to start. Small employers are a particular problem as they have less capacity. We should also be concerned about the quality of some schemes and many employers are not choosing a tax efficient scheme. Keeping the trigger at £10,000 is a help, but still discriminatory against part-time women workers. The minister accepted the need to strengthen consumer protection, particularly when the secondary annuity market kicks in.

The Minister argued freedom not to buy an annuity was a positive move, emphasising unbiased guidance from Pension Wise. There were plenty of sceptics in the audience on quality of advice available and £millions flooding out of pensions as a result. Is a 45 minute interview really adequate for such a risky decision? This will all create huge long term problems for a short term gain to the Treasury.

She also recognised the challenges facing Defined Benefit schemes, not least because of the end of contracting out this April - another cash cow for the Treasury at the expense of quality pension provision. The volatile investment market is another challenge and how pension funds respond with new risk models. Sadly, very few answers from the minister on this one.

Otto Thoresen from NEST pointed out the challenges for people having to make complex decisions about what to do with their pension pot. You need to be an investment manager, actuary and have an all seeing crystal ball! NEST is seeking to provide an option that provides flexibility, but retains a default pathway.

Gregg McClymont, former shadow pensions minister, now at Aberdeen Asset Management, described government policy as changing savers into investors. For those in DC schemes they are no longer pension savers, they are pension investors. He also emphasised the skills people need to make informed decisions as being Nostradamus and Galileo merged. Most people will need a lot of help to make the right decisions.

David Pitt-Watson from the London Business School questioned how someone who pays into a DC scheme all their working life can be assured that they will have a sustainable income in retirement. They want trusted providers and strong consumer protection. They also want a simple system to achieve a predictable income for life. DB schemes provided that predictability, but DC schemes with annuities suffered from low interest rates and excessive profits. This matters because the rich don't need to worry, but the poor will run out of money - they need large scale collective provision for DC schemes that shares risk. Experience elsewhere in Europe shows that this could deliver between 30% and 60% higher returns. Government is failing to deliver the framework for this.

The discussion focused on the weakness of market systems. What people really need is a better state pension scheme, rather than a market they don't understand run by providers who have a track record of ripping them off. We should also remember that the move to DC is also driven by employers wanting to cut costs and transfer risk to workers.

Owen Smith MP the Shadow Secretary of State for Work and Pensions said we need a much more robust assessment of pension reforms, particularly for those with small pension pots. He argued that government has been gambling with future pension provision. Discussion has become muted about the impact major demographic changes, growing household debt, falling saving ratios, declining wages and job insecurity all have for pensions. Women pensioners are facing particular discrimination in occupational and state pension changes. Government is guilty of misselling state pension changes, something the current government pensions minister said before taking up her current post.

He concluded with the words of Lloyd George when introducing the first state pension scheme a century ago. He described pensions as "The fruit of security for our society". A good quote for today!

The afternoon panel session took a closer look at auto-enrolment. Speakers emphasised the success of the policy, as the PPI speaker put it, 'inertia is a powerful force'. Although with only the big employers, the ACA speaker said, 'that is the easy bit'. However, it has been less effective in addressing pension disadvantage, particularly for women, the low paid and those in ethnic minorities.

Future challenges include the increase in employee minimum contributions and whatever the Chancellor decides to do with tax relief in the Budget. The ACA argued that there is a need to gradually increase contributions up to around 16% - less than that is not going to provide meaningful levels of pension income. The CBI speaker predictably urged caution on this, referring to a range of employer costs in addition to pensions. Others questioned if this would have a negative impact on wage growth.

In summary, the theme of the conference for me was that pension reform is moving away from the traditional characteristics of a pension. Treating pension pots as investments rather than savings, places a huge risk burden on the individuals who are least able to respond. That places even more control in the hands of market players who have a very poor track record, particularly on costs. When coupled with demographic and workforce changes, pensions face real challenges. Government cannot abstain from this because the taxpayer will have to pick up the pieces from market failure.

 

Scottish Budget: getting serious about tackling austerity

In tomorrow’s Scottish budget debate, if they are serious about opposing austerity, MSPs need to do more than badly administer George Osborne’s efforts to wreck our public services.

The Scottish Parliament will debate the Budget Bill on Wednesday. The big loser in that budget is local community services with a cash cut of 3.5% or £350m in 2016-17 - that's 5.2% or £500m in real terms. On top of that there are additional commitments like the NI increases that could double the cuts. As well as the loss of valued local services, there could be as many as 15,000 job losses, with the consequential impact on the local economy.

This has inevitably resulted in a fraught discussion between CoSLA and the Scottish Government over the grant allocation. Not helped by John Swinney’s draconian penalties for any council daring to consider an increase in the Council Tax. CoSLA voted to reject the package last Friday, a position supported by those authorities not in CoSLA.

The one positive element from the budget discussions is an allocation from the £250m identified for social care, to pay the Scottish Living Wage to care workers. There still needs to be clarity over how this money is allocated, but this would make a significant contribution towards the staffing crisis in Scotland’s social care provision.

The problem with an austerity budget is that unless you expand the spending envelope, the debate simply deteriorates into robbing Peter to pay Paul, as the First Minister has fairly pointed out. The departing CoSLA Chief Executive Rory Mair hit the nail on the head in his parting interview in the Sunday Herald, he said:

“Scotland and local government have the power to raise more tax. So why are we keeping tax the same and making public service cuts? That’s the very definition of an austerity budget. If you self-deny the ability to raise more money and you decide that the way to deal with a downturn in resources is to cut, however you dress it up, that’s an austerity budget.”

Today, Scottish Labour leader Kezia Dugdale took a bold move to break away from austerity economics. She proposes increasing the Scottish Rate of Income Tax (SRIT) by 1p. This will raise around £480m, less a £50m rebate to ensure that low paid workers under £20,000 per year don’t lose out.

The reluctance to use the SRIT is in part because of our criticism of the Calman report on these powers. We have allowed a narrative to develop that, because we can’t have different rates or change the income tax bands, any use of these powers is not progressive. I confess that I have been one of those who has allowed my criticism of Calman to allow this narrative to develop.

The Calman tax powers are certainly flawed, but that doesn’t mean they are not progressive. As David Eiser from Stirling University explains, "the poorest fifth of Scottish households would experience a fall in net income of slightly less than 0.2%, whereas the richest fifth of households would experience income falls greater than 1%. So a rise in the SRIT is slightly progressive". And of course Labour’s plan means that low income earners are protected, making it even more progressive. In addition, the Calman restrictions on bands and rates will end when the Smith Commission powers are implemented, probably in 2017.

Research by the IFS into raising the basic rate of income tax across the UK found that the top half of the income distribution; “would contribute 84% of the revenue from an increase in the basic rate of income tax.”

In fairness, John Swinney accepted this in his evidence to the Finance Committee last month, when he said: “I view the Scottish rate of income tax as a progressive power... Clearly, people on higher incomes will pay comparatively more than people on lower incomes.”

There is growing evidence that people understand that if we are going to avoid these cuts, and protect the things we value, the money has to come from somewhere. Previous proposals to increase income tax have been in very different circumstances.

Scotland now has a real opportunity to break away from austerity. I hope the Scottish Government will take this opportunity to build a cross party consensus that stops the savage cuts to the services which vulnerable people rely on. That's what being an anti-austerity party really means.