As I See It
Recognition at last that we need to tighten belts
If there is one thing that we have to be positive about, it is that at last the problem of Scotland’s public finances and resulting deficit is being recognised as a problem – and is being talked about.
I must declare an interest. I have been writing about this issue for years, indeed I used to make speeches about it in the Scottish Parliament when I was Tory finance spokesman in 2004-05.
Back then I tried to explain that a long as there was a raising of expectations in the minds of the Scottish public that Holyrood could, in the good years, provide nice things for free then there would eventually be a day of reckoning in the tough times, when those good things could no longer be afforded without borrowing or taxing more.
The problem is that public borrowing is taxation deferred to future generations – our children and grandchildren, and even great-grandchildren – and that higher taxes depress economic growth and can reduce (rather than increase) tax revenues that our mistaken largesse depends on.
You may recall that a certain Mr Brown repeatedly said at the time that he had abolished the economic cycle and there would be no more “Tory boom and bust”. That did not turn out particularly well. We ended up having the biggest bust for nearly 80 years and our public finances were ill-prepared to deal with it, because instead of saving in the good years we had been borrowing more and more.
There was a lesson there for everyone, and the public began to recognise the relationship between an annual deficit and growth in the national debt. The last UK surplus was in 2003 and we are still waiting on one 15 years later.
Scotland’s own contribution to this annual deficit and growing debt has been to give away copious free benefits because the politicians that voted for them (and indeed the Scots who voted for those politicians) did not have to worry about them being funded. Whether or not the economy was in good shape or bad, the UK fiscal transfer through the Scottish block grant and its top-up through the Barnett Formula would ensure Holyrood’s commitments were covered.
‘There has been a great reluctance to discuss the growing Scottish deficit’
This has ensured there has been a great reluctance amongst practically all parties to discuss the growing Scottish deficit, even after the price of Brent Crude collapsed and oil tax revenues went into the red.
The Growth Commission has at least recognised that in the real world, as I argued in this column, there has to be a stated and credible policy about how the deficit will be funded – and if it is high (and it is, at over 8% of GDP) how it will be reduced over as short a period of time as possible.
Unfortunately, the Growth Commission chose an approach that is now being shredded by experienced economists whereby public spending would be one per cent less than GDP growth. That would be fine when growth is high, but as Scottish growth continues to underperform it inevitably means an independent Scotland would have at least a decade of tartan austerity – although the authors will not admit this.
Don’t take my word for it, however; the Institute for Fiscal Studies and reputable economists Donald Mackay and John McLaren have all pointed to a credibility gap in the Growth Commission’s report. Nevertheless, at least some in the SNP now recognise the problem and are trying to address it. That’s progress of sorts.
Then last week the Scottish Government’s Fiscal Commission reported how a £400 million black hole in Scottish public finances was developing and that tax revenues could drop as much as £1.7 billion against previous projections.
The reason these gaps have become both possible and visible is that more tax powers have been devolved to Holyrood and so it is able to vary many taxes that were previously uniform across the UK. Unfortunately, the Scottish government has been greedy and raised taxes on property, business rates and personal salaries and this is leading to lower growth and lower revenues. By comparison England is seeing higher growth, higher revenues and is cutting the deficit year-on-year.
Yesterday Reform Scotland, a think tank that has repeatedly argued for more taxes to be the responsibility of Holyrood so the politicians might take greater responsibility for their spending decisions, published a paper by Dr David Skilling, an economist from New Zealand, who also happened to give advice to the SNP’s Growth Commission. An agnostic on independence, he argues for the importance of fiscal discipline and that taxes in small economies have to be competitive with each other.
What we are seeing is the development of a consensus that fiscal discipline is necessary and that taxes must be competitive.
The problem that now has to be overcome is for our politicians to recognise what this means in terms of policy. Are there spending programmes that are neither a necessity, nor delivering what was promised, that may be trimmed or abolished to help reduce the deficit? Furthermore, are there taxes that are uncompetitive – such as LBTT or our income taxes?
Whoever is in power over the next decade will feel pressure to be frank with the Scottish public and admit that we are living beyond our means and must reduce the size of the state and the rates of tax that support it – so we can find an equilibrium that leads to greater growth and wider prosperity.
At last I feel some financial honesty is creeping into Scotland’s political debate. For the sake of our businesses that generate the nation’s wealth let’s hope it’s not a here today gone tomorrow fashion.
Brian Monteith is a former member of the Scottish Parliament