Fiscal Commission Report

There have been some heavyweight salvos this week in the constitutional debate. From the YES corner we have Crawford Beveridge and his team drawn from the First Minister’s Council of Economic Advisers. This is without doubt a weighty contribution, full of decent analysis; if not a lot of repetition in case we missed the key messages!  

The first report of the Fiscal Commission Working Group sets out a macroeconomic framework centred on three pillars: 

·         Monetary Policy – including the choice of currency and the framework for setting interest rates and the money supply to promote (‘price’) stability and minimise short-term volatility;

·         Financial Stability – including the use of prudential regulation, supervision and resolution tools to ensure stability in the financial system; and,

·         Fiscal Policy – including the setting of taxes, government spending and borrowing within an overarching framework of fiscal sustainability. 

A key message is that under independence Scotland would control the levers that would give the country the flexibility to respond to the prevailing economic conditions. A positive example of this is immigration policy, although the implications for border controls are not explored in this paper. 

This report sets out a very similar monetary approach to that outlined by John Swinney by keeping the pound within a Sterling zone and UK co-ordination of financial supervision. This includes “separating the link between the balance sheet of financial institutions and government”. The lessons from the “arc of prosperity” have clearly been learnt!   

The fiscal recommendations are also similar, although it says more about the public spending implications of fiscal policy. It describes a fiscally conservative approach in the early years of independence in order to establish Scotland’s credibility as an independent nation. This very much reminds me of Gordon Brown’s approach as UK Chancellor in 1997. 

The report recommends that, “in addition to boosting economic growth, the Government should explore and prioritise opportunities to address inequalities and to promote intergenerational equity and environmental sustainability”. That’s a fine objective, but the report goes on to link fiscal policy to the UK through a, “fiscal sustainability agreement with overall objectives for ensuring that net debt and government borrowing do not diverge significantly.” 

On public spending the report recognises that the balance of Scotland’s relative fiscal strength depends heavily on revenue from the North Sea. Estimates of this revenue vary widely and are subject to worldwide price volatility. The Fiscal Commission recommends establishing a stabilisation fund from oil revenues that exceed current budget requirements to smooth out and future financial shocks. While this is a prudent measure as part of their fiscal framework it does limit the ability of the Scottish Government to tackle structural inequality. In fact the framework they propose would significantly constrain the ability of the Scottish Government to adopt an alternative economic strategy such as A Better Way advocated by the STUC. In essence it foresees a fiscally conservative approach that places market credibility above other considerations.  

The Fiscal Commission’s approach to monetary policy has the same shortcomings I highlighted in last Red Paper publication. There has to be a huge question mark over the willingness of the rest of the UK (rUK) to enter into their proposed Sterling zone and to share governance of the Bank of England in the way the Fiscal Commission suggests. Even if that was possible Scotland would at best be a junior partner with a minority say over a key lever of economic policy. Handing over monetary policy to rUK also limits the scope of fiscal policy. We only have to look at the Eurozone crisis debate to see the link between monetary and fiscal policy. If the key economic levers are controlled by another country, then there is less influence on monetary, and fiscal, policy than under devolution. 

The Fiscal Commission’s much vaunted flexibility under independence is looking more like a straightjacket for a future Scottish Government. It may help to make independence sound less threatening to the financial markets, but there is little for those who argue that an independent Scotland should be a radical beacon of change.

Cross posted at the Red Paper and there will be an opportunity to discuss these issues on Saturday at the Red Paper seminar. You can register here.

We're living longer - but it costs

That’s the conclusion of the Scottish Parliament Finance Committee in a report that looks at the aging population in Scotland and the financial consequences. 

Scotland’s population increased to 5,295,000 in 2011 – the highest ever. Since the 2001 Census, the population has increased by 233,000 (5%). This represents the fastest growth rate between two census years in the last century. However, it is the most elderly age-groups of the population that are projected to increase most dramatically. Between 2010 and 2035 those aged 75 and over are projected to increase by 82%. 

Evidence to the committee highlighted the importance of focusing on healthy life expectancy as well as life expectancy.  The ratio of healthy life expectancy to non-healthy life expectancy is not changing much in Scotland (for men it is widening), so the increase in life expectancy is also increasing the potential costs. ADSW estimates the difference between best and worst case scenarios is over £1 billion by 2030 - the difference between an 18.4% increase in costs (excluding inflation) or a 28.7% increase between 2010 and 2030. The committee recommends that the Scottish Government, councils and health boards do more long term planning to address this issue. 

The Committee’s aim is clearly meant to be a wake up call to Government and public bodies to plan for the costs of an aging population. It therefore focuses on the negatives rather than the positives. This is something I mentioned when giving oral evidence to the committee before Christmas. Many older people are living healthier lives to a greater age which will decrease the number of years that they require care. Older people, particularly those with good pensions, have a huge spending power and businesses and policy makers should recognise the needs of ageing consumers. They also make a productive contribution through caring and volunteering in various settings and, since the abolition of the Default Retirement Age many of them are continuing to work well beyond the previous norm of 65.

The committee looked at the financial implications of this in three main areas: health and social care; housing; pensions and the labour force.

Council and health board budgets have not kept up with demographic change in the past ten years, let alone the future. For example, emergency admissions to hospitals have a targeted 10% reduction, but they are actually increasing, particularly for the o/75s. The committee found limited progress in preventative spending, joint planning or a shift in funding.

Evidence on housing highlighted the need for new build and adaption of existing stock to accommodate an aging population. For example, the overall number of pensioner households requiring adaptations will rise from 66,300 in 2008 to over 106,000 in 2033. It is unclear if this rising demand has been costed in current plans.

On pensions and the labour force the committee notes that longer life expectancy will increase the cost of public sector pension schemes. As the report quotes, I did highlight the fact that averages can hide a harsh reality for many workers in Scotland who are unlikely to reach the new retirement age. 

The Hutton Report recognised that costs would fall as a proportion of GDP. This is largely due to the 2008 reforms and further changes will reduce costs further. For example, this year the Scottish Government will save £295m on the NHS scheme.  The committee recommends that the government investigates the longer term costs. 

In summary, the report scopes a huge challenge for public finances and believes more needs to be done now. While this is a useful reminder, a focus on cost can obscure the positives of people living longer.

Meat Inspection

No apologies for returning to the issue of food safety and meat inspection. It has been in the news every day this week, followed by feature articles in today's papers.

And rightly so. The horsemeat scandal has been a real wake up call to both consumers, regulators and the industry alike. Today, with no small degree of irony, the NFU pitched in with this piece in The Herald:

"The National Farmers' Union (NFU) Scotland has warned that the country's livestock farmers are becoming increasingly frustrated by the deepening crisis, which is in danger of damaging their livelihoods. Yesterday it called on the Food Standards Agency (FSA) and the Scottish Government to get across to the public that Scotch meat standards remain among the highest in the world."

The irony is that for years parts of the meat industry have been lobbying at EU, UK and Scottish levels for greater self-regulation. Now that they issue has blown up in their faces they want government to act!

As we highlighted yesterday the meat inspection workforce managed by the Food Standards agency has shrunk from a high point of 1700 – during the BSE and e-Coli crises in the 1990s – to around 800 today. This has been a direct consequence of the deregulatory policies of both the European Commission and UK Government to hand over more and more meat inspection duties to the meat industry and dispense with proper independent inspection.

The Scottish Government rightly decided last June to take back operational control of this devolved issue through the establishment of FSA Scotland. Something many parts of the media have overlooked, and perhaps not surprisingly, the Scottish Government have not exactly been shouting loudly about this week.

We warned then that a new food standards body for Scotland could result in watering down of standards and says it must not be used as a backdoor to privatisation. The de-regulating meat lobby has been just as busy in Scotland.

So here are three things that the FSA should do now and Scottish Ministers could also commit to as they introduce the legislation to formally establish the new body:

1. The immediate re-introduction of daily, independent inspections of meat cutting premises,
2. The FSA to oversee the independent inspection of food manufacturing premises –where government cuts have compromised the ability of local environmental health services to do so,
3. The FSA to ensure that all horses killed in the UK for human consumption are tested for the drug “BUTE” and that any horse carcases tested should not be released for human consumption until the test has returned a negative result.

We need a measurable shift away from self-regulation and back to independent inspection at all stages of the food process. Perhaps now the meat lobby will recognise that this is in their interests as well as consumers. 

Budgets and infrastructure

Finance has dominated the action in Parliament this week with the Scottish Government’s budget for 2013/14 and the fallout from the Infrastructure plan update.

John Swinney made some limited concessions to parliamentary scrutiny including:

·         An increase in funding for colleges of £61 million over the spending review period. However, in the draft budget, ministers proposed a £34.6m cut to college budgets. Of the £61 million announced yesterday, there is only an initial £10 million injection which still means the sector loses £24.6 million. As those giving evidence to the Education Committee  this week pointed out, this means fewer courses and much needed places for students.

·         An additional £38 million for the housing budget, increasing funding for energy efficiency of homes and more affordable housing. Again, while welcome the additional cash it only reinstates part of earlier cuts.

·         £2 million to bring vacant town centre properties into residential use.

·         An additional £10 million for trunk road maintenance. The additional funding will be used to deliver essential road and bridge repair works identified as part of Transport Scotland’s detailed inspection programmes. Nothing for local roads that are the responsibility of councils.

Local government continues to take the largest budget cut over the spending plan period. In addition the regressive Council Tax freeze and small business bonus will continue with no increase in the funding for this measure. The total job loss in Scottish councils since the crash now exceeds 34,000.  Local government makes up 57.3% of workforce but has taken 66.7% of the workforce cuts.  This is reflected in Council budget setting that also starts this week.

The other major contributor to the budget deficit is of course continuing pay restraint. Public sector workers continue to pay the price of the bankers folly and the economy suffers through the loss of demand and consumer confidence. With bankers still defending their bonuses at Westminster this week they have clearly learnt nothing.

On capital spend the Scottish Government has published its updated Infrastructure Investment Plan. This plan totals £3.4bn reflecting a 26% cut in the capital budget from Westminster. There has been reasonable progress on a range of conventionally financed projects. However, there was particular criticism of the Scottish Government’s PFI programme.  The NPD version of PFI had raised only £20m of the £353m originally projected for 2012/13, and project starts were being delayed as a result. There is a rich irony in SNP ministers having to defend the failures of their PFI schemes after years of telling us how bad PFI was. Do governments ever learn?

Scottish budget cuts will be reflected in individual budget allocations for councils, health boards and NDPB’s. In addition local employers will have unavoidable commitments that will add to the amount to be saved including inflation, demographic change and other service demands. So the full impact of these budget cuts will be even greater.

Developing a human rights agenda

I was speaking at a conference in Edinburgh today on the challenges for staff in developing a human rights agenda in Scotland. It was on the same day as the Scottish Parliament was debating 'Promoting and Protecting Human Rights - Scotland, Europe and the Wider World.'

Most of our members and their employers are covered by the Human Rights Act and this approach is embedded into devolution through the Scotland Act. It is a particular issue for members in health, social care, police and education settings.

The Scottish Human Rights Commission (SHRC) are promoting a National Action Plan for Scotland and their analysis of human rights in Scotland is reflected in our experience. Much more needs to be done on process including measures, awareness and capacity building. A particular problem is with impact assessment as this is rarely done well with a tick box approach being the norm. Studies done by Warwick University highlight the importance of clear guidance, shared evidence, monitoring and collective impact studies. The SHRC also have a project that is developing new guidance for public bodies. This month sees the publication of council budgets for the coming financial year. We will be looking careful at the impact assessments on these budgets. Human rights is more than simply justifying the risk of cuts on disadvantaged groups.

Another concern is the UK Government's review of the public sector equality duty. It reflects their regulatory burden approach rather than viewing impact assessment as a positive tool to improve services. More positively, I highlighted the work being done to incorporate human rights approaches into the new national police force, including the Constable’s declaration and a new ethics code. Sadly the Bill also undermined the human rights of police civilian staff in several areas.

Individual public service staff also have responsibility for human rights. However, we found very limited awareness  of human rights approaches and members tell us that they
don't generally operate in a human rights culture. It is viewed as an add on - not integrated into the organisations decision making process. There is some awareness of the FAIR approach that is viewed as a useful tool. There is also not enough training or capacity in this field and I illustrated this with our own work in producing a Scottish Gypsy Travellers guidance booklet for members.

The primary human rights constraint on staff are the spending cuts. These are pushing the boundaries of proportionate responses under human rights law - particularly in areas like care procurement, personalisation, mental health, housing, fuel poverty and of course welfare reform. With 51,700 fewer public service workers in Scotland since the crash, staff are simply too stretched to give adequate consideration to human rights approaches. Cuts are widening inequality and social exclusion.

Public service reform is also a challenge for human rights in Scotland. Contrary to the Christie recommendations we are seeing increased centralisation of services. While communities of place are important we should not forget the importance of communities of interest when protecting human rights, particularly of people from ethnic minorities.

Finally, I looked at the role of human rights in protecting workers. As a senior trade union official I am painfully aware that however robust my organising, bargaining and campaigning may be, I can go home at night in safety. There are many comrades across the world who don't operate in a human rights environment and have lost their lives doing what I do ever day. That is why we should view human rights as of international importance and not be sucked into the isolationist approach of a UK Bill of Rights.

Human rights as a policy and legal approach is of increasing importance to trade unions. It should underpin our approaches to fair pay and attacks on conditions through zero hours contracts and similar provisions. The UK government's attack on health and safety at work undermines human rights, as does privatisation with its disproportionate impact on women workers. The right to strike under Article 11 has also been the subject of some legal debate given the highly restrictive laws in the UK.

In conclusion, human rights should impact on wide range of public service staff. However, it is constrained by limited organisational development and a tick box process rather than an embedded culture. There is limited staff awareness and training and the cuts are a major constraint. More positively, there is a growing recognition of human rights as means of protecting workers.

Local taxation

We had a very good session today at the STUC looking at the options for the reform of local taxation. I presented UNISON’s thinking along with Andy Wightman arguing for Land Value Tax and Stephen Curran on Glasgow City Council’s local taxation working group’s report. 

I started with first principles. What a fair system of taxation should look like with an emphasis on tackling all forms of wealth and using progressive taxation to reduce inequality. UNISON’s principles for local taxation include; local authorities raising and control revenue; business rates returned to local authority control; a property tax as the best for fit local government and grant support allocated with a minimum ring fencing. 

We have looked at all the options including a Local Income Tax (LIT), Land Value Tax and a fairer property tax. However, on this subject I almost always find myself drawn back to the Burt Review. This is without doubt the most thorough look at local taxation in Scotland in a generation. 

The problem with LIT is well documented as the many critical submissions to the Scottish Government’s efforts to introduce this tax show. An effective basket of taxation needs a property tax otherwise the tax burden falls disproportionately on workers. You can’t hide property or move it abroad as the richest do to avoid income tax. 

Land Value Tax is a property tax and therefore starts from the right place. However, while it taxes the owners of land there is nothing to stop the owners passing the cost onto tenants. The biggest difficulty is that two plots of land with very different properties end up with the same charge and few people will perceive this to be fair. Bills will be hard to understand as people roughly know the value of their property, but not the land value alone. We have poor data on which to base valuations and collection will be difficult from owners who can conceal their ownership through companies - breaking the link between local taxes and local democratic accountability.  

LVT undoubtedly does start to address a number of issues around land speculation, housing policy and would support land reform. There may well be a role for it at the national level, but as local tax it is far from ideal. 

Reforming the Council Tax by increasing the number of bands at the top and the bottom and increasing the multiplier between bands is a popular reform. However, on its own it still doesn’t make the tax progressive enough. It could work better if linked with regular compulsory revaluation and a reformed Council Tax Benefit. 

That leaves a Local Property Tax (LPT) as recommended by the Burt Review. It would be levied as a percentage of the capital value of the property (around 1%) thereby covering land and house value. It is more progressive than the Council Tax, avoiding the ‘cliff edge’ consequences of banding and is simple and understandable with all the benefits of a property tax. 

 

It has to be recognised that there are no easy solutions. As Derek Birrell’s study shows, there has been a political impasse across the UK in tackling this issue. The best options all involve political risk because of the significant number of losers. Both LVT and LPT would deliver more gainers than losers, but that doesn’t address the political risk factor, especially as the losers are the articulate middle classes. Even with transitional arrangements no politician has yet had the bottle to take the plunge.

Cost of austerity economics

Tom Gordon has an interesting piece in today’s Sunday Herald based on Scottish Labour research. This shows that more than £600m has been spent to pay off Scottish public sector staff in redundancy and similar payments over the past five years. Part of my response is quoted in the article, but space limitations means a fuller analysis is justified. 

My first reaction might surprise many people because £600m was smaller than I would have expected. 51,700 public sector jobs have been lost in Scotland since the crash and that is a net figure allowing for some new recruits. It would appear that this is the cost of getting rid of 34,300 staff; therefore some 20,000 staff have gone through natural wastage at no cost to the public purse. 

Labour’s Ken Macintosh is of course correct in saying that it is ‘perverse’ to spend this amount of money to fire rather than hire staff in the current economic circumstances. John Swinney is also correct in identifying the primary cause as being the UK Government. Although the Scottish Government has exacerbated the problem with decisions such as the Council Tax freeze and the police civilian staff debacle.    

The problem is primarily at UK level because the cuts are a key element of the ConDem austerity economic strategy. Contrary to assurances at the outset, the public sector jobs have not been replaced by private sector jobs and the deficit has not been reduced as they claimed. As we and others predicted it simply increased unemployment, with the consequential additional public spending, and damaged the economy even more through the loss of demand and consumer confidence. 

The other reason for the problem resting at UK level is more complex. Councils, health boards and others consider their decisions on cutting staff based on the payback to their budget. For example, councils will typically let a worker go on voluntary redundancy/early retirement if the cost can be recouped within three years. That’s fine as far their budget goes, but it ignores the wider costs to the Scottish and UK governments of adding to the ranks of the unemployed. For example, for every £1 spent by a local authority 64p is reinvested back into the local economy. This means that only a fraction of the savings made on paper from cutting staff are a real saving to the public purse. 

Of course councils and other public bodies have to balance their budgets although they could do more to challenge the consequences. They may not have to take account of the bigger picture, but the UK government can and should. They don’t because staff cuts are nothing to do with the budget deficit, and everything to do with an ideological drive to reduce the size of the state.