Currency union and buses

Studies on the fiscal implications of constitutional change are a bit like buses, nothing for ages and then a series of contributions all at once. 

It would be remiss of me not to modestly point out that the Red Paper Collective published one of the earliest contributions to this debate. My chapter in ‘People Power’ last September covered this ground and highlighted the limitations on monetary and fiscal policy of the SNP’s ‘Sterling zone’ plan. This plan has been fleshed out in the work of the Fiscal Commission Working Group that I have previously commented on. 

The Treasury have now chipped in their tuppence worth, actually a lot more than that at 113 pages! They, not surprisingly, argue that the UK is one of the, “most successful monetary and fiscal unions in history”. This claim is largely based on the pooling of risk and resources, in contrast to the Euro. No opportunity is missed these days to have a pop at the EU, to assuage Tory back benchers! 

The Treasury correctly points out that an Independent Scotland would need to establish its own institutional framework. The notion argued by some in the Yes campaign that Scotland owns part of the Bank of England and the pound is frankly risible. It then sets out the currency options, including the SNP’s preferred plan of a formal agreement on the use of Sterling. If such a plan could be agreed, then an Independent Scotland would need to agree, “a negotiated set of constraints on its economic and fiscal polices”. The paper makes it clear that there is not a clear economic rationale for rUK to agree such a plan, citing the Euro experience. That leaves Scotland with the even less attractive option of using Sterling with no agreement and no control over monetary policy. 

SCDI have covered similar ground with their Future Scotland ‘Macroeconomic and Fiscal Sustainability’ paper. They set out in some detail the economic context and consider the fiscal position of an Independent Scotland. They also highlight that a rUK Government may seek to limit flexibility over spending and borrowing and the Bank of England would set an interest rate for the rUK, not an Independent Scotland. SCDI highlights the concerns over these arrangements for key service industries like finance. Not to mention the less publicised implications for credit ratings and a potential risk premium for borrowing. 

CPPR has published a briefing paper ‘Measuring an Independent Scotland’s economic performance’. This concisely looks at growth and standard of living and asks what does this mean for the constitutional debate. They make the point that GDP per capita is not the same as household income. A point reinforced this week by Brian Ashcroft in his Scottish Economy Watch blog. Scotland’s GDP would be highly dependent on erratic oil prices a significant proportion of which is overseas owned.

There is also a chapter on this issue in a new book ‘Scotland’s Future’ by Professor John Kay. He clearly sets out the currency and policy options for an independent Scotland and considers historical precedents. He agrees that the Sterling Zone option would be the best for an Independent Scotland, but points out that any membership of the monetary policy committee would be an economist with Scottish connections, not a Scottish representative. He concludes that, “Monetary policy for Scotland would therefore be determined by a mechanism over which Scots and Scottish interests would have at best marginal influences and, by design, no political influence”. However, his key point is that a small country close to its major trading partner has limited economic independence anyway. 

A different perspective comes from the Reid Foundation with a paper by Jim Cuthbert that makes the equally valid point that the UK’s economic performance reflects chronic long term mismanagement. In particular, the underlying balance of trade and focus on the financial sector that was not in the interests of the wider economy. It exposes the UK economy to a credit risk and makes us sensitive to external shocks. On this basis he argues that Scotland should not remain in a ‘sub-optimal currency union’. This line has been picked up by many in the wider Yes campaign last weekend, including the Greens and the SSP. Of course it also used to be Alex Salmond’s position, as Andy Nicholl reminded us in his column in the Scottish Sun. However, it would appear that his statement, “Sterling is like a millstone around Scotland’s neck” no longer applies, even if his new allies wish it did! Mind you he also once said, “The SNP believe that entry to the Euro would be in Scotland’s economic interests”. Of course, in fairness, he was not alone in that view at the time. 

So where does all this take us? I would argue back to my initial analysis in last September’s Red Paper booklet. A currency union with rUK may well be the best option for Scotland, although personally I am not convinced, but it comes at a price - fiscal and monetary policy directed by another country. This is a strange sort of independence and one that gives us less influence over these issues than we have at present, or could have with greater devolution. The political conundrum for the SNP is that if they abandoned the pound, the polls show a big drop in support for Independence. They may therefore just have to accept John Kay’s economic reality - that Scotland is tied to its major trading partner, Independent or not, and the best we can do is tinker at the policy edges.

 

 

Cross posted at Red Paper.

Reasons to be grateful for a public water service

The myth that water privatisation in England delivers a more efficient and effective water industry has been debunked in a report by the New Policy Institute. The report details: the current ownership pattern of the industry and how it has changed since privatisation in 1989; evidence on household bills, profits, dividends, investment levels, interest and tax over time and a number of possible questions that policy makers need to address.


The key conclusion is that its ownership structure has changed beyond recognition from its initial ’popular capitalist’ model. Though highly profitable, far more so than the energy industry, the industry pays little tax. However, despite sustained real increases in customer bills, it is now unable to finance large-scale investment without government support.

 
In Scotland, we of course resisted privatisation and voters in England, by more than two to one, wish they had done the same. In fact polls also show support for bringing all utilities back under common ownership. The real benefits are highlighted in this chart from the report.

In Scotland we have less profit/surplus, no dividends and Scottish Water pays its taxes.

 
No such investment problems in Scotland either. Scottish Water has just reached a major milestone of a massive pipe upgrade stretching more than 2,600 miles. The £113 million programme - Scotland’s biggest-ever water mains renewal project - will have covered a distance equivalent to that from Edinburgh to Mali. The Cabinet Secretary for Infrastructure, said: “The extensive reach of the scheme, stretching from Shetland to the Scottish Borders, means households throughout the country are now benefiting from an enhanced water supply while local areas have been boosted by the support of extra jobs. Scotland’s water quality is at its highest level ever and we are striving to improve on this through the renewal and maintenance scheme which forms part of the Scottish Government’s wider £2.5 billion water and waste services investment.”

 
As a consequence water quality in Scotland is at its highest ever level - 99.88% of supplies taken from customer taps met the required standards in the latest water quality report. Water leakage has also reduced by 44% since 2002/03.


Scottish businesses are also spending £65m less on water. Not as some claim because of competition, because there is very little of that, but because of better water efficiency. Scottish Water’s Business Stream has brought a real focus in recent years on the environmental and cost benefits of using water better.

 
All of this is perhaps a timely reminder to the Scottish Tories and Liberal Democrats, whose regular calls to privatise Scotland’s Water, not surprisingly, has little public support. We should also be vigilant over what is happening in Europe with EU Commission attempts to privatise water services. Despite a resurgence of public water services in recent years, water privatisation is on the agenda in many European countries now austerity policies are imposed and governments are scrambling to find money.


Cross posted on Utilities Scotland

Workers Memorial Day

Today is International Workers Memorial Day (28 April) and trade unionists across Scotland are marking the day at a range of events.

The appalling toll of death and injuries from the collapsed clothes factory in Bangladesh highlights the vital importance of strong health and safety laws. A lesson entirely lost on the UK Government that is making unprecedented attacks on health and safety at work. This week the House of Lords backed a legislative amendment that puts safety laws back more than 100 years, making it much harder for people to gain compensation for personal injury.

This comes on top of budgets for enforcement at HSE and councils being slashed. Employers need report fewer of the injuries to their workers and unannounced inspections of so-called ‘low-risk’ workplaces have been stopped.

In the UK alone 173 people die every year at work as a direct result of employers breaching health and safety regulations, with a further 20,000 dying prematurely following an injury sustained at work. More than 2 million die worldwide – more than are killed in wars.

The majority of these are not tragic accidents, but are avoidable deaths - the result of an employer not making safety a priority. Or worse actively blacklisting safety representatives. When safety drops down the priority list the essential safety culture is lost. That it is a road that leads to the tragedy in Bangladesh.

So today, let’s remember the dead, but also fight for the living.

Pensions and constitutional change

The Institute of Chartered Accountants of Scotland (ICAS) has published a useful introductory paper on pensions and constitutional change. This is an area of the constitutional debate that has been given little attention so far. We also need to get past the lurid media headlines on the report and the equally inadequate Scottish Government brush off. Difficult issues like pensions cannot be ducked – they are too important to all of us.

The paper poses questions covering the state pension, public service pensions and private pension schemes. It also recognises that Scotland only data is limited.

The state pension is paid from general taxation each year. There is no fund as you would have in a company pension scheme, so in pension terms this is called an unfunded scheme. With all the current focus on welfare reform, we should not forget that state pension payments total £82 billion, representing 40% of all social benefit payments and 13% of UK expenditure. There would need to be complex negotiations post independence to allocate liabilities given that the population is getting older. Data is limited and there is no UK, let alone Scottish, measure of accrued liabilities. There are also EU rules on pension payment therefore Scotland’s membership, or not, of the EU becomes an issue again.

Then we have public service pensions. The largest scheme in Scotland is the Local Government Pension Scheme (LGPS) that I am currently in the process of renegotiating. I don’t see any major independence issues here, as the Scottish scheme is already separate from the England and Wales scheme, has its own funds, regulations and is in good shape. Given the unwarranted interference in the scheme from Westminster, I would welcome some separation or complete devolution!

However, the other schemes (NHS, Teachers, Police etc) are unfunded in the language of the ICAS paper. I prefer the description ‘pay-as-you-go’, because they are funded each year by employee and employer contributions. This means that in any one year there can be a surplus or a deficit, but the balance is not retained. The UK Government calculates unfunded public sector pension liabilities at £893 billion and the Scottish Public Pensions Agency (SPPA) calculates Scottish unfunded liabilities at £66 billion. These are big scary numbers, but must be treated with caution. All public sector workers are not going to retire tomorrow and they will continue to pay contributions into the schemes. So long as governments at Scottish and UK level stop pushing them to opt out, through increased contributions and the 2016 National Insurance increases.

How you allocate past and future liabilities will be a very complex negotiation indeed. For example, the NHS scheme is currently in surplus each year, so if I was the Scottish Government negotiator I would be looking for some recognition of that. I would also want some credit for past employer contribution shortfalls. On the other hand, there are schemes currently in revenue deficit and those liabilities might pull in another direction. We should also remember that the cost of public service pensions is declining as a percentage of GDP. Changes to the schemes including RPI to CPI and later retirement ages will reduce costs further. The ICAS paper doesn’t really offer any solutions, but rightly calls on both governments to do some calculations. The Government Actuary Department (GAD) ought to be able to produce some numbers to better inform the debate.

Private pension schemes add another level of complexity. We have UK regulatory bodies the FCA and the PPF and new bodies would need to be established. Financial regulation (FCA) is relatively straightforward but pension protection (PPF) would require detailed negotiation and probably transitional arrangements.

If Scotland is in the EU then the IORP Directive provisions apply. This is supposed to stop cross-border pension deficits by ensuring schemes are fully funded. Many schemes are currently in deficit recovery mode over many years and would certainly not welcome having to plug that gap in one year. It could bury some companies. However, again we shouldn’t panic as there are ways around this, most obviously by splitting funds between English and Scottish members. Although this could be difficult for some schemes as the Scottish element might be too small to be viable.

Tax is another complexity identified in the ICAS paper. This is already being addressed by HMRC because of the tax varying powers in the Scotland Act 2012. These arrangements will also be useful should there be further fiscal devolution including all income tax as proposed in the recent Scottish Labour paper, and indeed in my own contribution to the Red Paper. There are further complications for those in Defined Contribution schemes that purchase an annuity. But again, these are not insurmountable.

There are few more important issues than security in retirement. This means pensions from all sources are hugely important and need serious consideration as part of the referendum debate. ICAS should be congratulated for this helpful contribution to the debate, once people get past the headlines and the Scottish Government response. The Treasury and the Scottish Government both need to do some serious and credible work to address this issue.



Cross posted at Red Paper.

Reflections on Scottish Labour conference

Some reflections on what I thought was one of the better Scottish Labour Party conferences I have attended in recent years. Helped by three day’s of sunshine in Inverness! 

The first day of conference was dominated by the launch of the Devolution Commission report. I have already blogged my contribution to the debate, but there were also significant contributions by Richard Leonard, Pat Rafferty and Neil Findlay. Although we made similar points, there was no collusion, other than the Red Paper Collective being at the forefront of the debate. 

I don’t have a problem in principle with external speakers as they bring a different perspective to the debate. A patient angle in the health debate was good, as was a victim of crime in the justice debate, together with Brian McConnachie QC’s different take on the justice system. However, two speakers on the same report was overkill in the education debate. Despite this, education had the feel of a proper debate with Labour students making some valid challenges to the Colleges v Universities line. UNISON police delegates also didn’t miss the mark on the myth of police on the beat. 

Ed Miliband’s speech was shorter than the usual UK leader contribution, but none the worse for that. There was some significant content as well on the One Nation theme. I particularly liked the attack on City short termism, by challenging quarterly accounts and the pernicious role of hedge funds. The trade unions had a very constructive private meeting with him afterwards. There was plenty of content to keep the trade unions happy throughout conference as Magnus Gardham’s piece in the Herald highlighted. Anas Sarwar on Amazon was a good line as was the Renfrewshire Labour Leader on tackling blacklisting. More should follow his example. 

Johann’s speech was undoubtedly one of her best. There was plenty of content to balance up the inevitable knocking copy and it was well delivered. Conference oratory is not her strong point, but this was delivered in a good conversational style that delegates really enjoyed. The warmth in the hall was genuine and some of the lines were very good. On Thatcher she was much stronger that Ed Miliband in the commons, “Let our movement be shaped by our heroes not our villains”, encapsulated my own view of how we should react to the legacy debate. I also liked, “Scotland’s greatest moment was not when we outfought our neighbours, but when we outthought the world”. Contrary to the media coverage, the speech was much more about themes of poverty, inequality, education and land reform than the constitution. Although she did highlight the SNP’s claim to be on a home rule journey while noting, “it’s a pity they weren’t there when the journey started”. I thought the line, “the powers I want are the powers Alex Salmond already has”, made the Red Paper point well that political will is more important than constitutional powers. 

Important for me was dealing with the issue of universal services after the dire ‘something for nothing’ speech. I took the view at the time that the reaction was hysterical, but she went out of her way to say that she was not attacking the principle of universality, while making valid points about priorities. “A free bus pass doesn’t work if there isn’t a bus to get on”, makes that point well. Conference also passed the UNISON Scotland motion on welfare reform that included a very clear section on this issue: 

“In this context conference affirms Scottish Labour's support for universalist principles as an effective contribution towards creating a fairer and more equal society - the universal provisions of social, welfare, education and public services paid for through progressive taxation, where the rich are properly taxed on their income and wealth.” 

The health debate had several good contributions on health inequality, including the SHA Scotland motion, and Dr David Conway’s contribution now posted on the SHA Scotland blog. We also had a good discussion on this at the SHA fringe meeting. 

Full credit to Vicky Jamieson who chaired conference well and ensured a good spread of delegates got to speak. Some of the most popular issues could have done with a bit more time, but generally most delegates felt they had every chance to participate. As always the fringe is just as important and a wide range of subjects were covered. 

The media coverage was pretty fair if a bit obsessed by the constitutional issue. My particular thanks to the Daily Record for printing a very flattering 20 year old photie of me – even if some delegates made less than complimentary comparisons with David Cameron! In fairness to some MPs who might have been less pleased with my, ‘spitting their dummies out’ TV soundbite, they were at conference in significant numbers. No sign of the boycott – or perhaps because of it! Though it didn't get as much coverage, the next line in my speech made the point to MSPs that devolution doesn't stop at Holyrood.

Despite being something of a political anorak, I am not a huge fan of conferences. But I enjoyed this one. Even though I hope we don’t replicate back to back with the STUC again. Not sure my liver will cope and even 20 year old photies won’t kid anyone!

Scottish Labour and constitutional debate

I am at the Scottish Labour Party conference in Inverness. I was speaking today in the constitutional debate. While UNISON and most of the trade union movement have not as yet taken a position on the referendum, we are participating in the debate and want to see credible arguments being presented to our members.

While I appreciate that a referendum campaign has to have formal YES and NO campaigns, most of us in the Labour Movement have a huge difficulty with any campaign that includes the Tories. That's because we don't share a common vision of the sort of Scotland we want to live in.

So far the Better Together campaign has had it fairly easy. The YES campaign's pitch in several policy areas is less than credible. Just two that I have highlighted in Red Paper publications are currency and energy. In both areas the SNP want to remain within a UK framework. That is a perfectly understandable position, but it begs the question what it is point of independence. If you hand over monetary and fiscal policy, or energy policy, to another country, how can you deliver a different approach that reflects specific Scottish requirements. Its like Panama to the US. A strange role model for an independent Scotland.

Nicola Sturgeon spins an attractive vision of a socially just Scotland. But it simply doesn't match with their Laffer Curve tax policies and the cut in Corporation Tax in particular. We should be shutting down the tax havens and the corporate tax dodgers that use them. There is nothing socially just about Scotland the tax haven.

I would also say to those unnamed MPs spitting their dummies out this week - get over it and engage with the party consultation. Devolution was delivered by Labour and as Donald Dewar said its a process not an event. You have an important role in representing Scotland at UK level, but subsidiarity means that further powers will be devolved. And I would say to MSPs that devolution doesn't stop at Holyrood. Subsidiarity means devolution of Holyrood powers to local democratic control.

The publication of the interim report of the Devolution Commission is a basis for consultation. It doesn't have everything in it that I would wish. It is stronger on fiscal devolution. This is important not because of any perceived 'moral hazard' of spending and not raising revenue - but because under current system we suffer the financial consequences of public service change in England. The paper is much weaker on non-fiscal powers. We need to tidy up the policy levers devolved to Scotland to take comprehensive action on key issues. UNISON Scotland's, 'Fairer Scotland: Devolution' covers this in more detail.

I recognise this paper is the start of Scottish Labour's process, not the end. Scottish Labour conference agreed the statement establishing the Commission last year and it is right that conference should take a position on this issue before the referendum.

Now some argue that Labour doesn't need to consider further devolution to win the referendum. That is a mistake. It's a tactical mistake because just being against independence is not enough. Scottish Labour has to develop a positive vision of the sort of Scotland we want to live in. This is the strength of contributions to the debate from the Red Paper, STUC Just Scotland and UNISON's Fairer Scotland papers.

But it's also wrong in principle. Scottish Labour is the party of devolution should not abandon that territory to others.

While mechanisms have to be addressed, the most important issue for Labour, on which the paper is weak, is the purpose of devolution. Scottish Labour must engage in the battle of ideas. The YES campaign's strongest arguments for independence relate to the weaknesses of past Labour governments in areas like Trident renewal, inequality and workers rights. Just rubbishing the SNP is not nearly enough.

Let us never forget that constitutional change is only a means to an end. Labour needs to set out a positive vision, for Scotland and the UK, that resonates with working people. One that demonstrates how a fairer and more equal society can be achieved.

Scotland's Road to Socialism

This is my shameless plug for a new book, Scotland's Road to Socialism: Time to Choose. I contributed a chapter, but no royalties! The publication is timely as the STUC debates constitutional change in Perth today and the interim report of Scottish Labour's Devolution Commission will be launched at the Scottish Labour conference, starting tomorrow.

This is a follow up from the 2007 book of similar title. Much has happened since then. The financial crash, austerity economics and of course a referendum on independence. The book includes 24 concise chapters from authors, who come from different parts of the left in Scotland, who outline their own answer to the broad question "Is there a Scottish road to socialism?"

The Editor, Gregor Gall, has managed to pull together contributions from most shades of opinion on the left in Scotland. Well kent faces from Scottish Labour, Greens, SNP, Communist, SSP, ISG and others tell, an often personal story, of their road to socialism in Scotland. For readers outwith Scotland there is little that could be described as purely parochial in this book. There is no sense of aggressive nationalism and little about entirely Scottish solutions to our national problems. There is also much more about the purpose of constitutional change, rather than the mechanisms that tend to dominate debate in the Scottish media. As ever on the left, the different roads are primarily tactical routes.

My own chapter starts with my personal journey, because we are all the product of our environment, followed by a section on Scotland and socialism. Not the only author to draw on our history, even if drawing different conclusions. I then examine independence and devolution, and how these different roads might lead to greater social justice. I conclude that political will is more important than mechanisms. And that is not a task that can simply be left to politicians and political parties. If we want a Scotland rooted in social justice that tackles inequality, then we need to build a consensus among our fellow citizens. Creating the political environment that gives electable politicians the confidence to take forward radical policies.

Every reader of this book will find as much to disagree with as to support. There is no effort to build a consensus, although there are some common themes. As the introduction highlights,  both sides of the constitutional question need to focus on the probabilities rather than the possibilities - hard nosed and realistic assessments rather than fights of fancy.



You can order a copy of the book through the SLR press. I understand it will be up shortly.