Wage cuts and the economy

Yesterday, we launched a report on the impact of real wage cuts on workers and the economy. It contrasts the increasing wealth of the richest with the “triple whammy” of frozen pay, inflation and tax and benefit changes affecting ordinary families. This table illustrates the point:

Median gross weekly pay in Scotland in 2007 was £360.20. This had risen to £396.10 by 2012. If it had increased in line with inflation, it would be £423.22 by 2012. A worker earning median pay (exactly halfway along the income distribution – half earning more, half earning less), is therefore 6.4% or £27.12 a week and £1410.24 a year worse off.

Then we look at inflation. This table shows how wages and inflation used to rub along together. That changed dramatically in 2010, narrowed slightly and is now growing apart again.

We also need to dig a bit deeper into the inflation numbers. The headline figure is bad enough, but it is much more challenging for low paid workers when essential items are rising even faster than the headline rate. This table illustrates the point.

And the final individual pressure - the combined impact of tax and benefit changes will mean a 1% drop in income for the bottom 30% of households and 2% for households with one earner and two children.

To all of this I would add the wage/productivity gap. We only have decent figures for manufacturing, but with 51,700 job losses in the Scottish public sector since the crash and a pay freeze - it won’t look that much different.

Source: Touchstone Blog

When you consider this chart you can see that the productivity gains are not going into wages. This means we are back to the uncertain world of trickledown economics.

The consequence of all this is a vicious circle: productivity doesn’t feed through to wages; this holds back household incomes, which stunts demand, which leads to lower investment, which could lead to slower improvements in productivity. It is also important to local economies. The low paid spend more of their disposable income locally and therefore real wage cuts contribute to the lack of consumer confidence on the High Street. One of the reasons we are in the longest and deepest recessions in a generation.

Pay cuts may drive short term profits and help government's balance the books. But they do nothing for social justice and also damage the economy.

Why pension governance matters

Now that the Public Service Pensions Act has completed its parliamentary stages it's time to look at one of the successful amendments that we welcome. The Act strengthens the governance of pension schemes and funds as recommended by the Hutton Report. I don't often give credit to the Liberal Democrats, but they were instrumental in this positive measure.

The new requirements are for a scheme advisory board and pension boards for local funds. The Scottish Local Government Pension Scheme (LGPS) already has an advisory board called SLOGPAG, so this isn't a big change. However, its role is considerably strengthened by the Act including its relationship with each of the 11 funds in Scotland that invest some £24bn. The biggest change is at fund level, with a requirement that each fund shall have a pension board with half the members being member representatives.

For those familiar with private pension schemes member representation doesn't sound very radical - indeed it is a legal requirement. However, the LGPS is probably the only funded scheme in the EU not to have effective and statutory member representation. In the main they are administered by a pensions committee made up almost exclusively of employer representatives i.e. councillors from the local authorities covered by the fund. The funds are also, in most cases, closely linked to the organisation of a lead council in a way that would not be acceptable in a private pension scheme.

While the changes are driven by primary UK legislation the Scottish implementation will be the subject on secondary legislation in the Scottish Parliament. There may well be a need to amend other primary Scottish local government legislation. All of this will be covered in the current negotiations over a new Scottish LGPS.

Why does this matter? Well it matters to the scheme members because the Act also imposes a cost cap and badly administered funds could result in lower benefits or higher contributions. It even matters to members not in the scheme because employing organisations have to pick up the cost of failure and that could cost jobs. That's not just councils, because one-third of the members work for admitted bodies like NDPBs, voluntary and private sector organisations.

It also matters to the wider public, not just because of the taxpayer cost. These funds could be an important contributor to the Scottish economy. Sadly at present they rarely are with 45% of the £24bn assets invested in overseas equities. I recently prepared a paper with assistance from SFHA, supported by Shelter, that proposed investment in social housing. A modest pilot plan, but there is still resistance from traditional fund managers, despite this being common practice elsewhere in Europe. A UNISON pension trustee covered this issue in his blog this week:

"I suspect that the real problem is that property fund managers and advisers are use to what they know. One adviser told me that the excuses put forward by such managers is just "lazy thinking". They are experienced in investing in shiny new retail parks, hotels and warehouses. Investing in Social Housing is outside their comfort blanket. Also Housing Associations are not use to sharing the capital appreciation of their assets either."

Investment strategy is not the only issue that would benefit from stronger governance. There is insufficient separation in the treasury functions of the lead authority and the pension funds. Something that would not be acceptable in a private sector scheme and is specifically disallowed under the EU IORP Directive. The UK government has tried hard to keep the LGPS out of the provisions of IORP Directive. However, being included might be the funds saviour, because otherwise the Solvency 2 Directive will apply and that requires funds to come into balance within a year. A cash flow problem Scottish employing authorities could do without.

Then we have the issue of fund mergers. Does Scotland really need 11 separate funds? Our research indicates that bigger funds would have performed better over the last ten years and it should save some fund management fees. I understand that this is a live issue in England where the minister has indicated that the status quo is not an option. And on the subject of fees there was a very interesting presentation by Dr Chris Sier  to a recent TUC conference. His work shows just how much money is going in fees and suggests that there are other 'covert' costs that are not being fully disclosed.

So pensions fund governance really does matter on so many different levels. The legislative changes are just the start of a process that needs to change the culture of pensions governance in Scotland. There are also significant issues for trade unions in supporting pension representatives and taking members through this complex business.

City short termism

Well this is a new experience for me - I am going to favorably quote a fund manager. Particularly as I am on my way back from a meeting in London on pension governance, which had little good to say about them as a group!

Ian McConnell in today’s Herald has a very interesting interview with James Anderson, manager of the £2.7 billion Scottish Mortgage Investment Trust. In this interview he has described the UK's political and economic leadership as "deeply lacking" and "profoundly frivolous".

He appears to have been prompted by the dangers of any EU exit, following the Cabinet splits on this issue. Now, we may disagree about the EU, but what was more interesting is his view that this policy is driven by the City’s regulatory concerns and short termism of a finance driven economy.

For example, he took issue with the short-term view of global stock market players who did not like companies investing for future growth at the expense of immediate profitability. He also regards one of the main problems in the UK economy as: "I think the single dominant one is still the extraordinary mental dominance the City of London exerts over our economic policy-making. I don't believe - that the business model of the banks has become transparent; has become simple rather than complex - they have slightly more equity. To believe that the fundamental problems of the British financial system have changed is hard."

On former Conservative Chancellor Nigel Lawson's call last week for the UK to leave the EU he said: "You read about what Nigel Lawson says about wanting to come out of Europe. It is really about protecting the City of London from regulation. I think it is profoundly frivolous to blame Europe for the problems of our economy, or think exiting Europe would solve the problems of our economy."

He also called for moderation of austerity economics saying: "Austerity, from the perspective of cutting current expenditure, is to my mind counter-productive. I think we are increasingly learning that. Austerity for the sake of it – is it being pursued anywhere other than Britain now?"

Finally he rounded on short termism in financial markets: "The great danger of that, the message companies are taking from that, is you shouldn't invest because, if companies say they are investing for future growth, the markets don't like it at all. That is pretty much everywhere in the world."

Some of this message has clearly been digested by the Labour Leader, Ed Miliband. In a little commented on (except by me) section of his Scottish Labour Party conference speech, he committed to abolishing the requirement for publishing quarterly accounts. This is a cause of short termism as companies start to worry about the impact on share prices, rather than focusing on long term strategies. I think he understands the importance of rebalancing our economy away from finance to more productive parts of the economy. A big challenge, but it appears that he might have at least some allies in the finance sector.

I will now need to recover in a dark room and then normal service will be resumed!

More on energy and constitutional change

There has been a flurry of publications on energy policy and the independence referendum in recent weeks. Following my own initial thoughts last January, now might be a good time to assess how the debate has progressed.

Firstly, we have Jamie Carstairs’ chapter in ‘Scotland’s Future’ on ‘Energy and Constitutional Change’. He gives the reader a broad overview of UK and Scottish energy policy, focussing on the key issue of funding to pay for new generation and the associated infrastructure. Currently renewables are not viable against electricity revenue with the wholesale electricity price at roughly £50Mwh as against onshore wind at £94Mwh, or offshore wind at £140-180Mwh. This means support to the renewable industry has risen from £232m in 2002 to £2.2bn this year.

The existing subsidy arrangements benefit Scotland because it receives a higher share of the payments made by all UK consumers. If Scotland were independent there is a big question mark as to whether rUK would be prepared to subsidise renewable in Scotland, particularly the higher cost projects like offshore wind and marine technologies. On the other hand there may be some EU countries that have a shortfall under the Renewables Directive. The UK needs to spend £200bn up to 2020, with most of the financing coming from the private sector. Carstairs argues that independence is unlikely to be a great concern to equity investors who already operate across national boundaries.

Another problem might be evolving the market arrangements between the two countries because high wind penetration leads to high price volatility. Although he accepts this is not intractable as other markets cope with near 100% hydro and higher wind penetration. However, transmission constraints mean that Scotland’s costs rise when networks are congested. These costs, currently shared across the UK, will fall on Scotland, pushing up subsidy costs. There is also the long standing dispute over transmission charges. An independent Scotland might gain more influence over regulation, if an agreement can be reached on a single market such as the Irish model. But that is still a big if. Carstairs offers a number of issues for debate rather than providing many answers. Well he is a consultant!

'Future Scotland - Energy' is part of SCDI's contribution to the constitutional debate. As you would expect this is a very balanced paper setting out in some detail the challenges facing the industry, irrespective of constitutional change. These include replacement generating capacity, upgrading the networks, affordable prices and workforce skills. The latter is a point often missed in other papers. Combining replacement demand with new additional growth, there will potentially be a need for between 52,000 and 95,000 people with the necessary skills.

This paper focuses on the need for greater certainty on how the GB market might operate post-independence. In particular how the higher cost of renewables will be covered, spread across the GB customer base or more narrowly on Scottish consumers. Then there is the investment in networks and how these will be regulated. Finally how fuel poverty and climate change targets will be allocated. These are all valid points and the paper poses a series of questions that both sides of the debate will need to address.

Balance isn't a virtue I would normally ascribe to the right-wing David Hume Institute. However, they have commissioned a number of papers on energy and constitutional change from reputable academics. Professor Mark Schaffer and colleagues at Heriot Watt cover the rapidly evolving and complex external/global energy environment and its implications for Scotland; Professors John Paterson and Greg Gordon from Aberdeen considers the oil-related issues; and Professor Kim Swales and colleagues from Strathclyde University examine the electricity issue. They also have a paper by Trisha McAuley (Director, Consumer Focus) on consumer related issues and an over-arching paper prepared by SCDI.

The electricity paper is the most useful in this context. They firstly address the issue of security of supply as that should be the primary concern of government. Smaller economies find this more challenging and the Scottish Government's narrower choice of technologies makes cross border transfers all the more important, particularly if there are major outages. The Scottish Government also argues that England will need Scottish generation to keep their lights on. However, as this paper points out, rUK will have other, potentially cheaper options, should that scenario become a reality.

On the development of renewables the authors argue there are costs and benefits. The benefits include the potential, at least, of more policy instruments to encourage renewables/ discourage fossil fuel generation (such as a carbon tax), and to encourage inward investment. However, it seems likely that, in the long-run, there will be costs in the form of higher electricity charges for Scottish consumers relative to those in RUK.

So what do all these words (and charts) tell us about energy and constitutional change? In the main they do a good job identifying the issues. Given the range of uncertainties it is difficult at this stage to do much else. Factual analysis is important particularly when the politicians are making some pretty bold assertions. The Scottish energy minister has form on this, with his 'lights out in England' claim and yesterday's assertion that Scotland will have viable oil reserves to the end of the century.

Personally, I remain sceptical about the Scottish Government's plan. Being tied to UK market without any democratic say in its operation, doesn't seem to be a better option than greater devolution. There are real risks that the additional costs of their unbalanced energy strategy could be dumped on Scottish consumers, instead of the risks and costs being spread across the UK.

Other more radical solutions are ignored in all of these papers. In the next Red Paper book I will argue that we need to look at new ownership models for electricity generation and the networks. A UK public opinion poll for YGov showed 61% in favour of common ownership of energy and only 26% against. This shows the public are way ahead of the policy makers.


Cross posted at Utilities Scotland

Scots say no to privatisation

A bit of good news this week from Ipsos MORI for those of us holding the thin red line against the privatisation lobby in Scotland. As their Scotland Director puts it:

"Put simply, Scots view public services as hugely important, are increasingly satisfied with their delivery and are wedded to the current model of these services being delivered by public bodies."

He draws attention to the Scottish Household Survey that shows 88% of adults in Scotland are satisfied with local health services, up from 81% in 2007. Levels of satisfaction with local schools rose by 6-points over the same period, from 79% in 2007 to 85% in 2011.

There has been a lot of debate about different attitudes in Scotland to England. Professor John Curtice arguing that the differences are not that great. I covered similar territory in my chapter in 'Scotland's Road to Socialism', while concluding that the data justified a more optimistic view. I would also argue that this is reinforced by actual voting patterns.

There are also different attitudes as to how public services should be delivered and funded. For example, while support for raising taxes to pay for services has declined across the UK, it is still more popular in Scotland (40%) than England (30%).

But the key difference between Scotland and England is over who is best placed to deliver public services. On a series of performance criteria Scots are clear that public authorities are best placed to provide public services. MORI again said:

"When asked which sector would be best at providing public services that best understand what service users need, over half of Scots (54%) believe public authorities do the best job while just 11% believe that the private sector would do a better job, compared to figures of 30% for public authorities and 16% in favour of the private sector among adults in England and Wales. Similarly, 58% of Scots believe that public bodies would provide the most professional and reliable public services, compared to 19% who would favour the private sector in that regard. This contrasts with figures of 30% for public bodies and 29% for the private sector among adults in England and Wales. Even when asked to consider which sector would provide the best quality service for the money, a measure where one might expect public bodies to do less well, 50% of Scots believe the public sector would provide the best public services, compared to 17% in favour of the private sector. Again, this contrasts significantly with England and Wales, where 27% believe the private sector would perform best on this measure, while 25% preferred public bodies."

This is also not a one off view. BBC election polls regularly put the delivery of public services high on the list of voters concerns. Outright privatisation or even the use of private finance gets a big thumbs down. The Scottish Government has one of the the biggest private finance programmes in Europe, but it is very careful to give it the title Non-Profit Distributing. It's nothing of the sort of course, but the political message is clear. Even the proponents of privatising Scottish Water dress up their plans as 'mutualisation' or 'Public Interest Companies'.

So campaigns like UNISON Scotland's 'Public Works' can take some comfort from the survey data. Particularly when you consider the massive resources available to the opposition. However, the Neo-Liberal monster never sleeps and we must never become complacent. In particular, it mustn't be seen as simply a campaign for the status quo. We can be radical in our solutions for improving public services without the need for privatisation.

Future of UK and Scotland conference

The Economic and Social Research Council has launched its Future of Scotland programme that will provide evidence and analysis across a broad range of policy areas. This includes a two day conference in Edinburgh,The Future of the UK and Scotland, that brings together a large number of academics and policy specialists.

This is a very welcome approach for two reasons. Firstly, the programme recognises the UK dimension to the debate. Secondly, it seeks to provide some objective evidence to a debate that is all too often dominated by arid rancour.

I found this morning's session particularly helpful, as it focused on the Scottish economy in national and international contexts.

Dr Angus Armstrong from NIESR, explained that the proposed currency union is more than just a monetary union. Just as the Euro crisis has demonstrated, it is not the currency but the national economies that are the problem. His paper takes us through the setting of common interest rates, financial infrastructure, a banking union, and probably most topical, how the currency union might provide liquidity support. He suggested this might be done through a liquidity support contract. However, this would be complex and difficult to enforce across different jurisdictions. He also highlighted a problem I hadn't considered before. If we had an oil price boom, Scotland's economy would be in growth while England's would slump. This would require very different monetary policies. The same applies in reverse if the oil price crashed.

Paul Johnson from IFS, painted a very dismal picture of the UK and Scottish economies over the next ten years. Scotland would not be exempt from this and has added pressures of starting from a higher spending base and more challenging demographic change. He recognised that independence would give us the opportunity to design a different tax system, even if the constraints of the currency union meant the overall pot size was  similar. His charts show that income is spread more equally in Scotland than England, largely because of the London effect. This makes tax redistribution in Scotland politically challenging. This confirms my view that we should focus on wages - such as Ed Miliband's pre-distribution approach.

Professor Peter Sinclair gave an entertaining presentation, rich in Scottish historical precedent. He felt England had been well governed by Scots, but perhaps were not quite ready for independence! The meat of his paper was to contrast the economic performance of large and small countries. Mixed evidence at best for small countries would be a fair summary. An important factor is that we would have to factor in higher borrowing costs, at around an extra 55 basis points and that's not cheap.

The papers and slides should be available on the ESRC website soon at www.esrc.ac.uk/scotland. Well worth a read and one to watch for further events and information.

 

Council Tax freeze leads to higher charges

UNISON Scotland has published a summary of some interesting new research on the Council Tax today.

 

We asked all Scottish councils, using a Freedom of Information request, how their charges have changed since the Council Tax was ‘frozen’ in 2007. The responses reveal that people on modest incomes are having to pay far more for costs like their rent, school meals for their kids, and charges for care in day centres for their vulnerable relatives – and still services are being cut back.

 

Some examples include:

 

• Rent: In Edinburgh, a three bedroom council home has gone up from £61.57 per week to £85.55 - which adds up to £1237 a year extra. That’s more than the average council tax bill in Edinburgh which is £1098; and even more than the normally-quoted band D charge of £1169.
• School meals: The charge for school meals in Argyll and Bute has gone up from £1.60 to £2.10 since the Council Tax was ‘frozen’ in 2007. That’s £5 extra a week for a family with two children – or a rise of £200 a year.
• Day centres: Councils are introducing charges for attendance at day centres for elderly and disabled residents: East Dunbartonshire is now charging £10 a week for attendance at day centres for elderly and disabled residents. That is £500 a year. Meanwhile, Falkirk has introduced a charge of £23.50 per visit for people with learning difficulties.

Meanwhile those in the leafier suburbs benefit most from the unfair Council Tax freeze. While charges are being increased and services cut - Band H households are “saving” on average £441 per year while those in the cheapest homes (Band A) “save” £147 a year. The freeze disproportionally benefits the wealthy.

 

While doing this research we also came across another interesting fact. Discussions around the Council Tax usually use the Band D charge for comparison, but the average bill rate gives a better idea of what people are actually paying. The average council tax bill in Scotland is £985 while the average band D charge is £1149. I suspect this may have had some impact on the Scottish Government's decision to drop the Local Income Tax. If the actual average is some £250 lower than the usual quoted average, then far more people in average houses would lose out.

 

There is also an issue around how councils manage social risk when making service cuts to balance their budgets. This was highlighted in a recent Joseph Rowntree Foundation report, 'Managing the social risks of public spending cuts in Scotland'. Even when Equality Impact Assessments are done properly, and that is fairly rare, they may not be measuring or assessing the real risks. The report recommends that councils need to develop more innovative priority-setting processes, frameworks and criteria to help their decision-making protect disadvantaged and vulnerable groups. Incorporating these processes in a locally tailored tool for risk mitigation – a Social Risk Impact Assessment (SRIA) – would move from a 'service-based' to a 'needs-based' approach.

 

However, the key message from this research is that increased charging far outweighs the claimed savings. It’s much fairer for everyone to pay a small amount extra in tax than have big increases in charges that bear no relation to ability to pay for services. For a government that claims to champion universal services, a big hike in charges is simply not a consistent policy approach.

 

The Council Tax freeze was introduced in very different financial circumstances from those that apply today. It's long overdue a review when the consequences are cuts in services and charges for those least able to afford it.