Mike Danson examines the constraints and options as we face a coming winter of discontent

Few are against workers and citizens generally being protected against the cost-of-living crisis caused by Brexit, massive energy price increases and levels of inflation not witnessed for many decades. In a normal economy with a government armed with the fiscal, monetary and other powers we could expect interventions to address the tsunami of fuel poverty, falling real wages and social security payments, and shortages. However, we do not have a governing party in Westminster willing to take the necessary steps to keep citizens safe and secure. Meantime, inflation, profits and dividends are unrestrained and economic instruments to modify decline and poverty go unused. Although there is devolution to the three Celtic nations, even the Scottish Parliament – the most powerful – has very limited powers to intervene to manage the macroeconomy and to ameliorate the Tories’ failures.

With very limited borrowing powers, constraints on income tax rates for unearned incomes and no capacity to issue currency and vary exchange rates, the Scottish Government and Parliament are in a weak position to counter the overwhelming negative forces of economic drivers emanating from the UK Government. In early August 2022, the Fraser of Allander Institute recognised these constraints on economic management, offering a realistic contextualisation of proposals for raising further revenues. Interestingly, its modelling of the impacts of the ‘Tartan Tax’ (the power to vary basic income tax in Scotland by up to 3p in the pound which was lapsed in 2007) revealed the opportunity to grow the Scottish economy, increasing employment, GDP and living standards without damaging inflationary effects and undermining these positive outcomes as long as the social wage rather than nominal wage was the objective for workers. As argued below, this appreciation of the social wage or social contract has relevance for today.

With direct labour costs – wages, salaries, taxes and national insurance – accounting for a high proportion of spend on Scotland’s essential health, education and social services, about 70% of total expenditure, these external constraints on the nation’s fiscal, monetary and borrowing powers inevitably mean that there is a necessary link between workers’ wages and the number of jobs. Unless there is more in the budgets of local authorities, NHS and education, which already account for 70% of Total Managed Expenditure, then raising revenues from sources other than the Scottish Government is critical if jobs and services are to be protected whilst addressing the cost-of-living crisis facing workers. Previous studies – Scottish Left Review, July/August 2019 – have explored possible new funding opportunities. These are discussed below, though none can be introduced quickly to offer much in the current context. Similarly, releasing ring-fenced local authority funding for wage increases would directly and significantly impact on early learning and childcare expansion as in 2022 these account for over 70% of such monies and support poorer and working-class families in particular.

Many of the beneficiaries of social services – the elderly, very young, in care and carers, disabled and otherwise vulnerable people – are amongst the poorest. They are dependent upon UK social security payments and Scottish and local government social support, some in direct payments others in in-kind support. They are also those facing the greatest rates of inflation currently with uplifts in benefit rates not due until next April, although the Chancellor has promised a string of ad hoc payments to alleviate their deteriorating worth in the interim. With Scottish Government dedicated support to these groups of fellow citizens already draining the constrained Scottish budget, meeting the need to fund these social services cannot happen at the expense of cutting these national and local services even further. There have been years of efficiency strategies driven by central governments’ regimes for ‘best value’, ‘public sector management’, PPP/PFI schemes, housing stock transfer and moves of employment and activities out to ALEOs (arms-length external organisations), seeing workers suffer deteriorations in their terms and conditions which were then worsened by austerity cuts, leaving very few areas for further reductions without damaging the economic and social life of local communities. It is now very difficult to identify any significant savings for redeployment in local government budgets so that wage increases to give any sort of protection to social service workers cannot be at the expense of reductions in these services. Therefore, as front-line carers and staff involved in delivering these essential services testify in a recent STUC (see, for example, Francis Stuart’s article in this issue), there are no more ‘productivity’ gains to be identified and implemented. Therefore, with all these constraints and constrictions on local and Scottish government budgets, and with Westminster and the capitalist class causing the unprecedented inflation and lack of intellectually sound responses, how can the circle be squared?

Local government has had the largest cut in Scottish government funding allocations in recent years, bearing the brunt of austerity. Within the constraints of the powers available to the Scottish Parliament, there is the need to identify possible new sources of funding and finance to meet these needs sustainably and equitably. There is widespread agreement for a fundamental rethink of tax structures – the balance across income, consumption and wealth taxation, the extent of taxation, and the scope for Scotland to establish new tax bases. Echoing the concept of the ‘Social Contracts’ favoured by the Labour Governments of the 1970s and the bases of the successful Nordic Countries’ economies and societies of today, there is a need for fiscal, monetary and other policies to be considered ‘in the round’ for it’s their combined effect, including distributing cash transfers and public goods, not the progressivity of each tax individually which is crucial. That approach to considering how to address the threats to workers and their families being able to heat, eat and maintain tolerable standards of living this winter reaffirms the need to consider broadly what are the services delivered by the local and Scottish state and how are they funded.

Essentially, social service budgets can be set through using a mixture of grants, taxes, loans and charges. Council Tax and Scottish Government grants make up almost all of local government income, neither of which are unproblematic – the former is regressive, the latter a break on local accountability. Many commissions, reports, studies and party manifestos have concluded that within a portfolio of revenue sources for local government, a progressive property tax should be introduced. So, a local property tax should be introduced, based upon capital values of individual properties and payable by households occupying properties and by owners of second homes and unoccupied properties. Complementing this normal property tax, there is also a need for a wealth or heritable property tax to capture those who avoid paying income tax in Scotland but own substantial assets. Such a fiscal innovation could generate significant revenues and presage and subsequently work alongside a land value tax.

As well as taking time and technical detailed support to introduce such property taxes, no existing tax or charge should be retained without scrutiny of its continuing impacts, purpose and fit with other policies. The critiques of such instruments as the Small Business Bonus Scheme and other Non-Domestic Rate reliefs have illustrated these are areas of public subsidy that may not be the optimal approach to supporting new and small enterprises and so an inclusive and competitive economy. Some of these represent costs to local government of many hundreds of millions of pounds every year and so questioning their continuing rollover between national budgets should be a priority. But, as other work (see Scottish Left Review May/June 2016) has demonstrated withdrawing these indiscriminately, would threaten many with deeper poverty and job losses. Many of those ‘entrepreneurs’ are actually the spuriously self-employed, doing work that was formerly in local government, larger employers and other unionised workplaces and, being self-employed, they are not entitled to the national minimum wage, never mind a ‘living wage’. Without an employer, they are not entitled to statutory sick pay, maternity or paternity pay, paid holidays, training support, and they are reliant on the state and their own savings in retirement with no employer contributions to pensions. (Re)absorbing these jobs and workers back into the formal structured labour market should be a priority for unions, but again will raise costs for providers of state social services. As was shown in the cases of Cordia (Glasgow City Council’s care arm) and Community Safety Glasgow, bringing thousands of workers back under the council’s auspices has improved services for vulnerable citizens and terms and conditions for workers.

More generally, following many successful recent examples in Europe, extending this re-municipalisation should be on the agenda of local and Scottish Governments alike. Reversing the housing stock transfer, ALEOs, PFI/PPP and the other managerial initiatives is long overdue, and would redistribute profits away from the rich and tax havens to workers and society. Having strong local sub-national seats of power, engaged citizens and workers is consistent with the plans and strategies underpinning community wealth building, community empowerment and a just transition to address the climate emergency.

Complementing these structural changes, there have been recent initiatives for local government funding which complement the need to spread the burden more fairly to those who can afford it and who have benefited from changed working conditions and real incomes under the Covid pandemic. These include the workplace parking levy, tourism taxes, charges for disposable cups and other packaging, increasing levies on second homes and so on. Nevertheless, some have automatically and immediately sought to undermine these and similar instruments to improve the quality of air, the environment and wellbeing of their fellow citizens highlighting the challenges of making any interventions in a complex society where conservative attitudes can delay or stop consideration of their combined effect. Cancelling Trident would allow the release of substantial funds for local government and lead to significant increases in employment, incomes and wellbeing.

Considering all these issues leads to recognition of the dilemmas facing policymakers, union leaders and analysts. There are no easy short-term solutions with unintended consequences inevitable given that social services are essential and delivered for the poorest and most vulnerable in our society. Ultimately, under the current constitutional arrangements, powers and responsibilities for reducing the historical and globally high levels of inequality and poverty rest in Westminster; and in the longer term cannot be separated from the need for alternative sources for funding local public services and government.

Suggested reading:

McGregor, P., Stevens, J., Swales, J. and Yin, Y. (1997) ‘Some simple macroeconomics of Scottish devolution’, in M. Danson (ed.) Regional Governance and Economic Development, (Pion: London).

Fraser of Allander (2 Aug 2022) Income tax proposals in the Conservative leadership campaign – implications for the Scottish budget https://fraserofallander.org/income-tax-proposals-in-the-conservative-leadership-campaign-implications-for-the-scottish-budget/

Mike Danson is Emeritus Professor of Enterprise Policy at Herriot-Watt University and a Trustee of the Jimmy Reid Foundation charity.