The Courageous State

My holiday reading is usually non-work related, but I have made one exception this summer, finishing Richard Murphy's 'The Courageous State.

For those not familiar with Richard, he is a chartered accountant and political economist who advises the Tax Justice Network amongst others. His Tax Research UK blog, now ranked the number 1 economics blog in the UK, has put the Tax Gap high on the political agenda. A day rarely goes by without me tweeting something from it. He has a prodigious output of quality analysis.

This book does three things. First, it says that neoliberalism has given us feeble politicians who think anything they do will be worse than the market outcome, so they do little or nothing. They fail us as a result. Second, it argues that this is wrong and a whole raft of new economic thinking from Richard shows why. And third, it contains a whole range of economic policy proposals that courageous politicians could adopt to get us out of the neoliberal mess we're in.

I also enjoyed his first book (with others) on tax havens. However, it wasn't the easiest read. 'The Courageous State' is written much more with the general reader in mind. Here are two reviews from good writers that spell out why.

"Conventional economists have run out of ideas. But Richard Murphy abounds with them.He writes with electric clarity about what went wrong and what could be done to put things right. He is a new economic thinker, and guided by a sharp and practical accountant's eye he knows where the money is hidden, who has it and how to release it. Murphy is is as courageous as he says our politicians should be." --Polly Toynbee, The Guardian

Rich individuals, corporations, well-funded special interest groups and much of Fleet Street is on one (the wrong) side and then there is Richard Murphy..the heroic figure. Tireless and forensic, driven by an admirable moral fervour, I take my hat off to a campaigner with Duracell batteries --Kevin Maguire, Sunday Mirror

I am reading this book on my iPad. A bit heavier and more cumbersome than the Kindle, but great for highlighting and bookmarking sections you want to keep. Needless to say there are acres of highlights in my copy!

And my leisure reading? The second in Robert Low's Kingdom series covers the execution of Wallace and the crowning of Robert the Bruce. Bob lives in Largs and is a former journalist, perhaps better known for his Viking books. His treatment of the wars of independence is bit grittier than, say Nigel Tranter, but is well written.

Lastly, 'Eagle', the first of Jack Hight's Saladin Trilogy. I enjoyed his first book on the siege of Constantinople. He writes really good historical fiction, just as I like it. There are a few more books in the reading pile, just in case the weather keeps me off the golf course!

Experiences of devolution

I was in Cardiff last weekend at our Labour Link Forum. My first union post was in the city and it has certainly changed a lot, particularly the area around the Welsh Assembly. On Saturday I contributed to a workshop sharing experiences of devolution. Something we do too little of with Welsh colleagues and in this session, delegates from London.

Two Welsh Assembly Members outlined their experience of devolution, one of whom was formerly an MP so could offer some comparisons. Their experience was very similar to ours. They stressed the immediacy of the political process under devolution. Working much closer with the public and trade unions. Of course we both recognised that this also has much to do with the size of our countries compared to England. Something English colleagues may wish to consider if they revisit regional government.

They also highlighted the disconnect between the experience of devolved governments and Westminster. Devolved governments have delivered in very different ways to Westminster, yet there seems to be a nervousness at UK level to showcase the achievements. Labour in Wales have delivered some impressive initiatives, putting clear red water between them and Westminster. This reflects our own experience of devolution when there was often a reluctance to highlight the very different solutions Labour developed in Scotland.

They also indicated a close interest in our constitutional debate and the wider implications for the whole of the UK. This is something that has been given limited attention so far and it was interesting to see Welsh FM Carwyn Jones today calling for a constitutional convention for the UK. He has also proposed a reformed House of Lords with equal representation from the four nations, similar to the model used by the US Senate. He also spoke at the Cardiff conference in a speech that impressed Scottish delegates in particular.

This theme was also taken up in today's Herald by Iain MacWhirter. He argues:

"The rational solution is surely to turn the new House of Lords into a Senate elected largely on a regional basis to reflect the new constitutional reality. I've been punting this idea around for some time and I've yet to hear a sensible argument why it shouldn't work. If a Senate works in America, Australia and a host of countries, why not here?"

The problem is that England needs to be persuaded and probably to go down the road of regional government, or at least regional representation. That didn't have much traction when it was last tried in the NE referendum, although the removal of powers from local government muddied the waters there.

Either way there appears to be some merging of our constitutional debate and House of Lords reform.

Fiscal implications of constitutional change - Part Two

In Part One of this blog I covered the fiscal implications of the constitutional options currently on offer, either through independence or extended devolution. In Part Two, I will set out some of the possible solutions I discussed at the recent Red Paper event in Glasgow.
 

I should emphasise that all this is consistent with our general Red Paper approach to this issue. We are not a think tank who has disappeared into a dark room to produce a proposal. We want to engage those sympathetic to our aims in Scotland, to develop a left alternative that focuses less on the mechanics of devolution and more on what we can do with additional powers.

 

If we look at other European countries that devolve fiscal powers, taxes on income are the most popular, followed by property and then taxes on consumption. The Scotland Act 2012 already gives Scotland significant powers over income tax and many property taxes are already devolved. Consumption taxes, primarily VAT, are difficult to devolve because EU rules generally don't allow variations within nation states. Whatever taxes are devolved there has to be some mechanism through grants or borrowing to address volatility in tax revenues.

 

The table below sets out the current estimate of income raised by each tax in Scotland. It can be seen that detailed discussion of many taxes is of only academic interest because the revenue raised in Scotland is small.

At present revenue from devolved taxes in Scotland is one of the lowest in Europe at 13.8%, just over £4bn. After the Scotland Act 2012 is implemented that will rise to 30.8%, just over £9bn.   This will put Scotland in the same league as Germany and Sweden, with one of the most devolved tax revenues in Europe. However, because a Scottish Government can't vary the rate in each band, any increase in income tax is not as progressive as I would wish. This is illustrated in the table below.

Taxation is not the only power we should consider. As described in Part One, the Scotland Act 2012 gives the Scottish Government new borrowing powers and there is a consultation on bond issuance. However, again these are very limited, both in method and amount, with the Treasury orthodoxy insisting on central government’s right to control overall state finances. This is a crucial issue for Scotland and in my view it is essential that Scotland gets wider borrowing powers. The only restriction should be prudential i.e. can Scotland finance the cost of borrowing from revenue. This power already exists for local government therefore it seems absurd that devolved administrations should not be able to replicate that authority. With such flexibility we could finally get rid of the huge cost of PPP/PFI schemes by giving prudential borrowing powers to health boards, NDPBs and public corporations, including Scottish Water.

 

With the focus of debate on independence and extended devolution we should not lose sight of the value of fiscal solidarity across the UK. Allocating resources on the basis of need was the thinking behind the Barnett Formula. It also happens in other European countries using mechanisms like shared taxation, hypothecated spending and equalisation mechanisms. Scotland has benefitted from this approach in the past and may need to do so again. Greater fiscal autonomy must still allow for resource transfer to areas of need across the UK. In particular we need to recognise where real economic power lies on these islands and even under independence, it isn’t here in Scotland.

 

This is because Scotland operates in a global market dominated by the Washington Consensus. On tax this means promoting falling income tax rates, low corporation tax, higher consumption taxes, low taxes on wealth, tax simplification (including flat tax) and creating tax competition with a race to the bottom for the rich. In the UK over the last 30 years this ideology has resulted in UK income tax rates falling from 60% to 45%, and Corporation Tax from 52% to 22%. VAT has increased from 12.5% to 20%, tax havens banned to tax havens encouraged with 5.5% tax rate and Inheritance Tax almost gone.  We now have the lowest number of HMRC staff ever, creating a tax gap of some £130bn. For more on this I would strongly recommend the Tax Justice Network.

 

For all the debate around fiscal powers we need to return to the question of what we want these powers for. Let me suggest the following broad fiscal policy aims:

—  Create a more equal society;

—  Allocate resources to tackle poverty;

—  Progressive taxation & welfare support;

—  Role of business is to pay taxes, provide decent jobs and social sustainability in return for state support;

—  Collective ownership and management of the means of production;

—  Sustainable development including green taxation.

 

These aims could drive a UK/Scottish fiscal strategy as follows:

—  Progressive taxation playing a pivotal role in addressing inequality;

—  Barriers to the effective taxation and distribution of wealth being removed;

—  Taxation helping sustain family relationships whilst promoting gender equality;

—  Taxation policy facilitating creation of sustainable employment in sustainable businesses (industrial strategy) that have access to long term capital;

—  Taxation policy that supports the delivery of sustainable, democratically accountable public services;

—  Taxation policy that contributes towards meeting climate change targets;

—  Contribute to global approach to corruption, tax evasion, information, capital controls. Race to the top in addressing inequality and poverty.

Finally, I looked at how fiscal devolution might support this strategy. These are my initial suggestions:

·         Devolve all property based taxes. They already largely will be after the Scotland Act 2012 is implemented. I am agnostic on adding Inheritance Tax given the modest amount it raises, but logically this should be included.

·         Income tax fully devolved. Partial devolution doesn’t make a lot of sense. This could include National Insurance as the link with contributory benefits is becoming increasingly weak and it may in any case be merged if the Chancellor gets his way.

·         Business taxes should remain at UK level for the reasons outlined above and in Part One. Tax competition is wrong in principle and in any case will be constrained by tightening EU rules in this field.

·         Consumption taxes (primarily VAT) again largely at UK as EU rules don’t allow variable rates in the same state. There is a stronger policy element to fuel duty, tobacco and alcohol taxes, but given the integrated nature of the UK it is hard to see how these could be set differently in Scotland. Unless the aim is to promote the sales of white vans!

·         Full prudential borrowing powers including bond issuance.

Any partial devolution of fiscal powers will also require a balancing mechanism using a combination of grant and borrowing.

 

Will any of this significantly improve the governance of Scotland? Probably not a lot, as I remain sceptical that the political will exists to use these powers to achieve the strategic aims I propose. But they will at least force the Scottish Parliament to consider how they might be used to create a better, more equal society.

Draft UK Energy Bill

A few meetings over recent weeks on the draft UK Energy Bill. This Bill introduces Energy Market Reforms (EMR) together with some reform of Ofgem and nuclear inspection. The draft Bill has been published and the Bill will be introduced in Parliament later this year. Royal Assent is planned for late 2013, with reforms implemented by secondary legislation in 2014.

The energy market reforms will introduce a complex mix of mechanisms to underpin the so called energy market. These are needed because around a fifth of current generation capacity will be decommissioned in the next decade. £110bn of new investment is needed, more than double the current rate of spending and existing systems simply won't deliver the mix of capacity that is required.

The different mechanisms aim to provide long term price certainty for low carbon generation investment (Contracts for Difference), together with capacity payments to ensure security of supply (Capacity Market). The carbon tax and emission standards will phase out high carbon power generation.

These are complex mechanisms and it is unclear exactly how they will work until the secondary legislation stage. It will certainly increase energy prices in the short term, with at least the hope, that they will be lower in the longer term.

For Scotland the EMR introduces a complex mix of devolved and reserved powers. The Scottish Government's prime concern will be to ensure that the mechanisms do not disadvantage the renewables industry that they put so much emphasis on. Emission standards and the renewable obligation, key to the system, are devolved powers. Early indications are that renewables may not do as well as nuclear, given the need for long term guarantees. Coal operators looking to CCS are also sceptical. Gas looks like being a gainer, not least because they are exempted from the emissions performance standard until 2045. Overall, uncertainty running up to 2014 is likely to impact on investment, despite efforts to create a smooth transition. We also need to judge the impact of the TRANSMIT review on transmission charges, always a key Scottish issue.

UNISON has long argued for a planned energy policy. There is a rich irony that it is the Tory market fetishists that are introducing something very close to a planned policy. They will argue that the planned element is short term, but in reality the regulatory elements are likely to continue for many years. The mechanisms focus almost entirely on the supply side and the consumer barely gets a mention. Given they will pick up the cost, there is a strong case for greater transparency and consumer protection. All of these systems will be complex and expensive. If we wanted to get really serious about protecting the consumer, we would bring the industry back into public ownership.

We also need to keep an eye on developments in the European regulatory system. If, as is likely, they adopt a different system - we could end up with supplier incentives to import French nuclear or German coal powered generation into the UK.

Finally, what does all this mean for the independence debate? It appears that this is another area where the SNP favour a UK wide solution. Hardly surprising as it socialises the cost of renewables across the UK. It is less clear if the rest of the UK will be as enthusiastic to subsidise generation from another country!

Fiscal implications of constitutional change

This is the first of a two part post summarising my presentation to the Red Paper conference in Glasgow on the fiscal implications of constitutional change.


Lets start by recognising, that whatever the criticism, the Scotland Act 2012 does give the Scottish Parliament significant new fiscal powers. A Scottish income tax to replace part of the UK income tax; the devolution of stamp duty land tax and landfill tax; the power to create or devolve other taxes to the Scottish Parliament; new borrowing powers (although only a consultation on bonds); and a Scottish cash reserve to manage fluctuations in devolved tax receipts. In addition we already have the Council Tax and business rates. There remains the thorny issue of political willingness to creatively use these powers, but I will return to that later.


What about the fiscal implications of independence? Well, we apparently have to wait until December 2013 for anything definitive on that, but we do have John Swinney’s statements. His post independence strategy appears to be to keep the pound within a Sterling zone including financial services (and possibly consumer) regulation. A VAT cut for tourism and construction coupled with a Corporation Tax cut to give Scotland a ‘fiscal edge’. Other business friendly policies include cutting business rates, tax breaks for R&D and renewables, a review of competition policy and the apparently obligatory cutting of red tape.


I would argue that this vision has major shortcomings. Handing over monetary policy to rUK also limits the scope of fiscal policy. As Bell and Elliot have said:
“monetary union would also entail co-ordination, if not integration of fiscal policy”, then “the burden of any adjustment that would be required to restore competitiveness in the traded sector would fall on nominal wages”.


We only have to look at the Eurozone crisis debate to see the link between monetary and fiscal policy. For an SNP government to support regulation from London, which will very much be in the interests of those institutions, is bizarre. Of course all of this depends on rUK allowing an independent Scotland to pick and choose bits it wants to keep. If the key economic levers in hands of another country, then there is less influence on monetary, and fiscal, policy than under devolution.


However, my biggest difficulty is with the concept of a ‘fiscal edge’. It appears that SNP policy is still wedded to Celtic tiger strategy. Even if desirable, you simply cannot  replicate 1990’s Ireland. Other small countries like Denmark, Norway, Sweden, Finland all have higher Corporation Tax and better performing economies. The UK business tax rate already low. The evidence that tax cuts pay for themselves (Laffer curve) is simply not there. Any saving goes into profit not investment and many of our companies are sitting on vast cash reserves already. There will certainly be a huge hit on public finances that is unsustainable. A better way, as the Stephen Boyd and others have pointed out is actually higher taxation to fund investment in people, plant, infrastructure and research.


The Laffer curve theorists that promote this view would also apply it to personal taxation. In particular they oppose progressive taxation and promote the flat tax approach as Laffer set out himself in an interview on Radio 4 this week. Again as the table below shows there is no link between different levels of taxation and economic growth. While I am not aware of SNP spokespersons advocating this approach, it would be consistent with the policy of business taxes and needs to be clarified in the White Paper.

So what about the extended devolution options?

Firstly, we have Devo-Max, the proposition that all revenues would be raised in Scotland and the cost of reserved services would be paid to London out of these revenues. The mechanisms for this have been set out in some detail by Andrew Hughes Hallett and Drew Scott. What is less clear is the economic benefit. As Arthur Midwinter states:

“there is no clear pattern from comparative analysis that winning or having greater fiscal autonomy policy is beneficial to economic growth”.

In addition this model in full is untested anywhere in the world and therefore there must be a real risk of unintended consequences.

Then we have Devo-Plus. This proposal argues that most revenues would be raised in Scotland to pay for devolved services with VAT and NI retained at UK level to pay for reserved services. Again the mechanisms have been worked out in some detail. What is less clear is the purpose of this devolution. For that we need to look at the authors, Reform Scotland, objectives that are the apparently,  “traditional Scottish principles of limited government, diversity and personal responsibility". Translated this means- small state, privatisation and blame the poor!

In summary, none of the above meet the key test of devolution for the purpose of creating a more equal society and investment in our people. They ignore issues of class and class power.

In part 2, I will set out some possible different fiscal approaches.

Police and Fire Reform

Today the Scottish Parliament concluded its consideration of the Police and Fire Reform Bill. The Bill centralises police and fire services in Scotland, removing them from local authority control. While many of the concerns also apply to fire, it is the policing elements that have been the most controversial.


The Bill seeks to retain some element of local democratic accountability through local
police plans. However, as the new Scottish Police Authority and Chief Constable have the power of direction, this is likely to be little more than cosmetic due to the command and control culture of a uniformed service. Britain has, for good reason, a history of local policing. This structure gives a government minister very considerable powers to influence and direct policing in Scotland. I am not alone in regarding this as an unwelcome constitutional development. Local authorities will also reflect on the removal of more powers from local democratic control and the growing centralising tendency of this government.


The main, arguably only justification for centralisation is cost saving. As Audit Scotland has warned, savings from public service reorganisation are far from guaranteed. MSPs today voted for the Bill without seeing the full business plan, a quite remarkable omission given this is the minister's raison d'être for change.


The issue of VAT liability illustrates both the finance and the accountability issues. Despite the assurances given in the Policy Memorandum to the Bill, the Treasury made it clear from the outset that if you organise police and fire in this way you lose s33 exemptions. As a consequence Scotland is going to give the Teasury a £30-40m handout every year. If the new services had been organised as a joint board then this could have been avoided. But of course there would be less ministerial control. A very expensive way of shifting power to the centre.


Also on finance, a recurring theme during the Bill's progress has been maintaining the artificial target for police officers, resulting in the loss of up to 3,000 police staff roles. Hundreds of police officers are already being taken off the street to back fill police staff jobs and this will rise further once the budget cuts kick in. This cannot possibly meet the best value provisions in the Bill. UNISON supports a balanced, modern police team, with the right skills and expertise for an effective police force. We need the skills of police staffs to enable police officers to do the job the public wants them to do, where they want them to do it – that is fighting crime, out on the streets. The new force should be able to set a balanced police staffing structure free from political direction on police officer numbers.


I also believe this crazy policy will lead to the future privatisation of police services, despite the broad assurances given by the Cabinet Secretary. A clause in the Bill is specifically designed to facilitate the appointment of private contractors as police staffs. As I warned in evidence to the Justice Committee, it is inevitable that Audit Scotland will question the employment of police officers in civilian roles, at up to twice the cost, under best value provisions. As the new force is politically directed to maintain police officer numbers, the only way of squaring the circle is by the privatisation of significant police functions including custody and 999 calls. Again irrespective of best value considerations.


So, overall a bad day for policing in Scotland and I predict one we will come to regret.

Scottish bond issuance

The Treasury have issued a consultation paper today on bond issuance by the Scottish Government. This is very firmly consulting in the context of devolution with no reference to bond issuance under independence.

 

The consultation has some significant limitations, primarily because it is not seeking views on the amount to be borrowed by this mechanism. Any bonds issued have to be within the limits imposed by the Scotland Act 2012’s overall limits on borrowing. At present these are set at 10% of the Scottish capital budget (around £230m in 2014/15) subject to an overall limit of £2.2bn. The paper argues that controls on borrowing are necessary for the UK’s fiscal credibility that benefits the Scottish economy. The primary means of borrowing is the National Loans Fund (NLF). The Scottish Government may, with Treasury approval, borrow from commercial banks, but not from other commercial sources.

 

This power has to be viewed in the context of the Scotland Act 2012’s aim to devolve greater control of Scottish revenue raising. From April 2016, the Scottish Parliament will move from raising less than 15 per cent of its own budget to around 30 per cent. This will be achieved through the new Scottish rate of income tax (the 10p variation), devolution of land tax and landfill tax, the power to create or devolve other taxes, new borrowing powers and a Scottish cash reserve to manage volatility in devolved taxes. In cash terms, Scottish Ministers will control over £6 billion of tax revenues and they intend to establish a Scottish version of HMRC to administer this.

 

UNISON Scotland has long argued for the power to issue bonds and believed it should have been introduced with the other Scotland Act powers. The consultation paper is predictably negative about this power and this reflects the conservative approach of HM Treasury to borrowing outwith central government. It is fair to state that bonds can be more expensive than the NLF and that is why local government rarely uses their powers to issue bonds.

 

Bonds are a long term source of finance and allow access to wider pool of lenders. Importantly, these include the public and pension funds, giving a sense of civic pride in infrastructure projects. For this reason we believe that they could be particularly useful in financing capital investment by Scottish Water. Network Rail uses bond finance and because they are guaranteed by the government they attract AAA rating. Bonds at sub-sovereign level are common in the US, Canada, Germany and elsewhere across the world. The problem of a cost premium can be addressed by an explicit government guarantee. This is reasonable because central government is placing controls on the level of borrowing using this and other powers.

 

I would argue that these limits should simply be prudential borrowing, i.e. that the Scottish Government can fund its capital costs from current revenue. However, for the purposes of this consultation, bonds would be included in the total borrowing limits in the Scotland Act. So the ‘moral hazard’ or risks the consultation paper emphasises would be minimal. It is somewhat ironic that the paper highlights the additional cost of commercial borrowing, as that is precisely what the UK and Scottish governments have been doing for years through PPP schemes.

 

Overall, the consultation paper makes a grudging case for bond issuance and sets against that every possible negative scenario Treasury officials could possibly find. However, within their self imposed constraints these risks are marginal at worst. The gains from bond issuance may not be huge, but I would argue it is a worthwhile addition to the Scottish Government’s financial powers.

I will cover this issue and the wider fiscal implications of constitutional change in my presentation to Saturday's Red Paper conference in Glasgow.