Election 2016: Who does the Scottish economy exist to serve?

Written by Liam Kirkaldy on 25 April 2016 in Inside Politics

Inequality looms in the shadows of an election campaign dominated by tax plans

In the fall-out from the Panama Papers, the idea that politicians should publish their own tax returns appeared as something of a side-show. The question being asked of Britain’s leaders, after all, was not about the tax that was being paid, but about the tax that was not.

The leak of these documents – 11.5 million files released from the database of the world’s fourth biggest offshore law firm – gave an unprecedented glimpse into the shadowy workings, or failings, of the global tax system.

Even the Prime Minister was dragged into the mess, following reports his late father had run a network of offshore investment funds, based in tax havens. It was all legal, but, still, as he prevaricated and fudged his answers, it did not look good.


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For the public, the papers seemed to tap into widespread concerns that there is one rule for the rich – the people with the capability to utilise offshore avoidance schemes – and another for the rest.

In a time of austerity, it raised questions over who the economy exists to serve. The leaders of Scotland’s political parties quickly moved to publish their own returns, though few expected any scandals from their release. The fact that Jeremy Corbyn had filed his return a few days late and had perhaps paid more tax than he was due to, rather summed up the mundanity of it all. As Lib Dem leader Willie Rennie put it: “Compared with certain other party leaders my tax returns are rather dull but here they are anyway.”

The Panama Papers may have forced the issue of tax into Westminster but in Scotland, following the transfer of new financial powers with next stage of the Scotland Act, and with the election approaching, the debate was already happening. The two conversations are based around similar questions.

This election campaign, more than any other in the history of the Scottish Parliament, has been defined by the economy and tax. The key question is what we want from the economy. What are our objectives, and who does it exist to serve?

Conventional wisdom suggests the answer lies in growth. Certainly that is what the Scottish Chambers of Commerce (SCC) is demanding from parties as they release their manifestos ahead of the election.

As Liz Cameron, director and chief executive of SCC, put it: “As Scotland prepares to head to the polls for next month’s Scottish parliamentary elections, we know that our economy is on a knife edge between growth and recession and that the prospects for the future are unclear.

“In these circumstances, it is imperative that our new Scottish Government puts the economy at the centre of its plan for government over the next five years, systematically addressing those factors under the Scottish Parliament’s control that could be used to make Scotland the most competitive place in the UK to do business.”

In a recent report the SCC warned that, in first quarter of 2016, performance across the Scottish economy has been inconsistent throughout five key business sectors.

Construction saw growth in the number of new contracts, sales revenue and profitability in the first quarter of this year. SCC said construction firms expect growth to continue, but remain concerned over skills shortages. The near future also looks bright for the retail and wholesale sector, which experienced a relatively successful first quarter, “with growth in sales, investment and optimism returning to positive territory”.

The manufacturing sector experienced a sharp decline in order growth over the quarter following a strong quarter at the end of 2015. However, businesses in the sector expect growth to resume over the next quarter. The tourism industry in Scotland performed well in terms of sales and investment trends, but is experiencing weaker levels of confidence on future performance as well as tightening profit margins.

Meanwhile the financial and business services sector has continued to perform poorly in the first quarter of 2016, as it has done for almost a year. Businesses in the oil and gas sector have struggled the most, with recent GERS figures showing North Sea oil revenue fell by 55 per cent between 2013-14 and 2014-15.

It is hard to see much room for optimism over the short-term future of the North Sea oil industry, with analysis from the Institute for Fiscal Studies (IFS) revising down projected oil and gas revenues following falls in expected oil prices, along with UK Government tax cuts. 

In fact, over the next few years, revenues are expected to be negative, with the IFS forecasting -£0.8bn per year on average, between 2015-16 and 2019-20, compared with the £0.7bn per year it predicted last year. And because most of these revenues would have come from operations in Scottish waters, the impact on the Scottish deficit is proportionately much larger than on the rest of the UK. Scotland recorded a net fiscal deficit of £14.9bn when a geographic share of North Sea revenues is taken into account – the equivalent of 9.7 per cent of GDP, in 2014-15. As a proportion of GDP the Scottish deficit was nearly double that of the rest of the UK.

The decline in oil and gas prices, profits and investment has meant Scotland’s economy grew slower than previously expected. The deficit makes up a bigger part of a smaller economy.

However, North Sea oil and gas apart, the headline figures have been reasonably positive for some time. The economy has continued to grow for 12 consecutive quarters – the longest stretch of continuous growth since devolution. Office for National Statistics (ONS) figures show that, in the last quarter of 2015, Scottish the employment level, 2,636,000, was the highest on record. At the end of 2015 youth employment was at its highest level since 2006. Yet recent figures are more concerning. Unemployment, across the UK, rose by 21,000 between December and February. Incredibly, 20,000 of those people are in Scotland.

 And this period of economic growth takes place in the shadow of a more troubling process. Since 1997, the gap between rich and poor in Scotland has widened, with research from Professor David Bell and David Eiser demonstrating that, although Scotland’s richest saw their real income rise by more than 25 per cent between 1997 and 2013, the poorest experienced a 10 per cent drop.

Releasing the findings, David Eiser, economics research fellow at Stirling Management School, said: “Since the late 1990s, the very poorest five per cent of households have become even poorer, partly as a result of stricter rules around benefit eligibility. At the same time, the richest one to two per cent of individuals have seen their incomes grow far more rapidly than any other group, largely driven by pay increases in the financial and business services sectors.”

The study ran up until 2013, but Eiser said it “seems almost certain” inequality will have continued to increase in the three years since.

He said: “The recession and its aftermath saw a large increase in the proportion of insecure work – part-time work, temporary work, and out-sourced agency self-employment – which has increased wage inequality. Many working-age benefits have also been cut in real terms, reducing the incomes of the poorest households.”

For Francis Stuart, research and policy adviser at Oxfam, this process of widening inequality is deeply troubling. He told Holyrood: “Broadly speaking, since the 1980s, we have seen big increases in income inequality across all measures. Since the 1990s that has remained at a fairly high level but not changed too much.

“In Scotland we have a combined wealth of £700 billion, but almost half of that is owned by the top ten per cent. We don’t have long-term trend data on wealth inequality, that is a relatively new measure from the ONS and the data only goes back to the early 2000s, but work by Thomas Piketty suggests that since the 1960s wealth inequality has been increasing.”

High levels of in-work poverty are particularly concerning, given that around half of those living in poverty in Scotland are in households where one person is working. Stuart says that is driven by a combination of factors, partly because of low pay but also because of things like the number of hours people work, and the level of in-work benefits.

He said: “In Scotland we have 445,000 workers who are paid less than the Living Wage, and two-thirds of them are women. We have seen since the recession in 2008 there is still a stagnation of wages. The typical Scottish worker is more than a thousand pounds worse off than they were in 2008, and that has been particularly bad for certain groups. Female part-time workers have lost out more than full-time male workers, and there are also issues in terms of security of work. There is not much data at a Scottish level but we know that over 800,000 people across the UK have a zero-hours contract as their main form of employment, with over 1.7 million zero hours contracts as a whole. We have also seen an increase in self-employment, temporary and agency work, and an increase in under-employment.”

There is not just one solution when it comes to tackling inequality, but the most obvious solution is trying to stimulate higher wages.

Stuart says: “The National Living Wage will help, but there is more that needs to be done in increasing wage floors across the economy. I think we probably need to look at different sectors if we do that, around half of low paid workers are in retail, hospitality or social care. So we need to look at those sectors and how we can drive up wages. In the social care sector, for example, a lot of the funding comes back to government, so we need to look at how government can put funding arrangements in place so those workers are paid the Living Wage.

“But there are also things beyond pay, and where people want to work more hours we need to think about how we can help facilitate that. For example, providing better childcare support would potentially allow more women to move into full-time work. Then there are also things we can do through the benefits system.

"Then, finally, we need to look at the quality of work, we know that in the UK four out of five workers in low pay are still in low paid work ten years later. We also know there are big issues with a low pay, no pay cycle, so a large proportion of people who are unemployed have been in work six months previously. There is more that can be done to provide secure and sustainable employment, so people can work their way out of poverty.”

It was these issues which led the Scottish Government to establish its fair work agenda, with Roseanna Cunningham given a brief specifically aimed at making work pay. In these developments, Stuart says, there is still room for optimism.

Stuart says: “In Scotland all politicians recognise that inequality is an issue. It is now in the government economic strategy, for example, and part of the reason could be a recognition that of course inequality is bad for those who are losing out on the bottom but it is also bad for society as a whole. Some of the work the IMF has done, for example, shows that unequal countries have slower rates of economic growth. There are also significant implications for educational attainment, which is high up the political agenda, as well as health inequalities. So I think there is a cross-party recognition that we need to address economic inequality if we are going to tackle the wider challenges we all face.”

He adds: “There are things that can be done through the powers of the Scottish Parliament to address poverty and inequality, and those are growing powers. So things like devolving the employability programme will provide an opportunity to do things differently, and then there are the new tax powers. There are certainly things that could be done to make the tax system more progressive and to raise revenue to then address poverty.”

A report from the Joseph Rowntree Foundation (JRF), ‘Monitoring Poverty and Social Exclusion in Scotland 2015’, makes a similar point, with the authors striving to emphasise how action by government can have a real effect on levels of poverty and inequality. Part of that action, clearly, involves spending.

Releasing the report, Aleks Collingwood, Policy and Research Manager at JRF, said: “The steep fall in pensioner poverty and the smaller fall in child poverty since the 1990s shows that sustained government policy alongside an improving financial environment can really make a difference. UK Government policy around tax credits and child benefit on the back of steadily rising levels of employment and pay (up until the recession) impacted positively on both of these groups.”

The study by David Bell and David Eiser stated that although the Scottish Parliament does not have control over most taxes and benefits, as well as the labour market and finance, those in Holyrood still hold tools with which to address inequality.

The first recommendation was changing council tax, which the authors describe as “badly designed and unfair”. The second was using new powers, arriving under the next phase of devolution, to create a more progressive tax system.

And with the election almost upon us, questions over tax, equality and the imbalances of the Scottish economy are more pressing than ever.

The past few years have seen inequality rise first in the consciousness of the electorate, and then on the policy agenda. The referendum acted as a catalyst in the public debate, with Nicola Sturgeon herself confirming its centrality to public discourse as soon as she took over as First Minister.

Standing in front of the Scottish Parliament, in her first speech since taking over from Alex Salmond, she said: “My role as First Minister will be to help build a Scotland that all those who live and work here can be proud of.

“A nation both social democratic and socially just. A Scotland confident in itself, proud of its successes and honest about its weaknesses. A Scotland of good government and civic empowerment. A Scotland vigorous and determined in its resolution to address poverty, support business, promote growth and tackle inequality.

“These are the points against which my government will set its compass.”

The strategy, embodied by the party’s anti-austerity stance going into the 2015 general election, was tremendously successful.

Now, naturally, people question what comes next, and how new tax powers can be used to make the next step in the journey – whether the aim is growth or reduced inequality. With the various tax policies now public, we have an idea of where parties sit in relation to redistribution.

Research from left-leaning think-tank IPPR Scotland suggests different party tax proposals will raise between zero and £1.2bn per year, in real terms, by 2020-21.

The plans released by the Scottish Tories are easiest to analyse, given Ruth Davidson’s party plans to match UK tax policy, and so would raise no additional revenue than at present.

Next on the scale comes the SNP’s plans, which the IPPR says would raise £300m per year, in real terms, in 2020-21. The Scottish Liberal Democrats’ pledges would raise £750m.

Scottish Greens’ policies would raise between £600m and £950m per year, depending on the success of the party’s plans to raise the additional rate of tax up to 60 per cent. Likewise, the IPPR says that, depending on the success of Labour’s plan to increase the additional rate of tax to 50 per cent, Kezia Dugdale’s plan could raise anywhere between £1.1-£1.2bn per year in real terms over the same period.

When the analysis came out, every party rushed to claim validation.

Willie Rennie said the paper “shows that our Liberal Democrat plan to transform education is solidly funded by our penny on income tax. It also shows that our plan is progressive. The highest paid people pay the most. That is the fair way.”

Patrick Harvie, in contrast, saw the paper as vindication for his own position, saying: “This analysis shows that the Scottish Greens’ proposals to use income tax powers to raise revenue are far bolder than the SNP’s but crucially our plans tackle inequality, while Labour’s do not. Rather than a blunt across the board rise, as Labour propose, we’d use the new powers creatively to lower tax for lower earners, and ask high earners to pay a fairer share.”

John Swinney said the IPPR showed “Labour’s plans are a tax grab on some of the least well off in our society”.

He said: “This report shows that it is only the SNP that are putting forward balanced, reasonable and fair tax proposals that will support public services like our NHS whilst protecting households’ budgets.”

Scottish Labour’s Jackie Baillie said Swinney’s reaction proved: “The SNP are so desperate to justify not taxing the richest more they have descended into issuing false statements about impartial analysis from an independent think tank.”

She said: “This expert intervention shows that only Labour has a credible plan to use the powers to stop the cuts to schools and public services. The SNP’s refusal to tax the richest will see the poorest lose out.”

Clearly things are heating up in Scottish politics. But while the reactions were predictable, whether these policies define the outcome remains to be seen. Scottish politics has long been dominated by discussions over inequality, and yet there remains a sense that the outcome of this election was decided long before tax plans, the means by which parties would or could go about redistributing wealth, were released.

This is the greatest contradiction of the election: tax has dominated the campaign, but it seems unlikely to define the outcome. The battle lines, and the polls, seem to have been set since the referendum – in fact, it may have been the SNP’s overwhelming lead that pushed the party towards the relative timidity of its approach to tax.

Widespread concern over the shape and character of the Scottish economy may not decide the outcome of the vote. Not so soon after the referendum, and before the actual transfer of economic powers required to, at least partly, reshape it. Beyond that there have always been claims Scots talk a more radical path than they walk. With the next stage of devolution, we will find out.

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