Last fantasy election?

The 2016 Scottish election was notable for being conducted in a strange, make-believe world, where some key issues were almost completely ignored. Three such issues are likely to intrude into this cosy world long before the next one in 2021.

Let’s start by looking at the fiscal context. In the light of Osborne’s 2016 budget, the Scottish Government’s Departmental Expenditure Limits (DEL) revenue (the amount the Scottish government would have got from the old Barnett formula to spend on current services) is projected to drop by about £1.2bn in real terms from 2015/16 to 2019/20 – a drop of almost 5%. This is a severe cut.

But, of course, this time the Scottish government has got significant tax powers: so the SNP propose to use new, and old, tax powers to raise an extra £2 billion or so, from changes in income tax, council tax, and business rates. But this £2bn is spread over the lifetime of the parliament. A charitable interpretation of the figures suggests that not more than £880m extra in tax would actually be raised in 2019/20.

The SNP manifesto made a large number of new spending promises on current services: to give two examples, an extra £500m pa by the end of the parliament on the NHS revenue budget, and another £500m pa in doubling free years of early education. These two measures alone come to more per annum than will be raised from the tax changes.

In other words, funding the manifesto commitments is going to use up significantly more than is being raised from the tax changes, and will therefore imply even deeper cuts in expenditure on non-protected services than Osborne’s cut in the DEL. This is the first big issue that was glossed over. What is the actual scale of cuts in revenue expenditure on non-protected services, and where will these occur?

The second issue relates to capital expenditure. The SNP government has been assiduous in developing ways of funding capital expenditure from off-balance sheet methods. For example, the SNP’s Non-Profit Distributing (NPD) programme is expected to deliver over £2.2bn of capital expenditure in the years 2014 to 2017 alone. However, revenue funded methods of providing capital imply a contractual commitment for the public sector to make future revenue payments to repay capital, and for services.

Some of these payments fall directly on central government (e.g., in the form of support payments to local authorities) and John Swinney has a prudential rule to ensure that these central government payments do not become too large. But other contractually committed payments fall upon local authority budgets, and no-one seems to be keeping an eye on what proportion of local authority budgets is being pre-empted by such contractual payments. So the second big issue which was glossed over is: are local authorities going to hit future budgetary problems because of over-use of revenue funded capital?

The third issue relates to income tax. Paradoxically, the SNP is proposing to raise £1.2bn extra over the life of the parliament by cutting income tax. This apparent paradox arises from a quirk in the new fiscal settlement. In the rest of the UK (rUK), income tax rates are being cut (in the form of an increase in the threshold for the higher rate tax band) by more than in Scotland. But the indexation factor for the abatement of the Scottish government’s block grant is related to the change in rUK tax revenues. So by cutting tax rates less then rUK, Scotland gains more from the indexation factor than it loses in tax revenues – and so is an overall gainer. Scotland is, in effect, gaming the indexation arrangements in the new fiscal settlement.

This, however, is potentially a dangerous game. In the long run, if Scotland’s economy, and therefore tax revenues, does not grow as fast as rUK, the indexation arrangements in the fiscal settlement will penalise us very severely. Raising tax rates relative to rUK could accentuate such a process, particularly at a time when a major part of the Scottish economy, relating to oil, is in secular decline. The public, therefore, deserved a mature debate about the balance of risks involved in deciding to game the fiscal settlement: but this debate did not take place.

All three of these issues could well become critical during the new parliament. If so, while the major consequences could be very uncomfortable for Scotland, we would at least have one minor consolation. Never again are we likely to be subject to a fantasy election campaign, where such vital issues are ignored.

Jim Cuthbert is an independent economist and statistician (see http://www.jamcuthbert.co.uk/ )

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