Autumn Statement: Philip Hammond is merely a passenger
With the Chancellor’s big statement this autumn being that there will no longer be an Autumn Statement, what does this mean for Scotland’s budget?
Fiscal cliff - credit Holyrood magazine
WHEN Chancellor Norman Lamont crashed the bus on Black Wednesday in 1992, costing the UK economy an instant £3bn as he took sterling out of a European monetary pact, he at least had a route map he was trying to follow.
Leaving the Exchange Rate Mechanism a week after pledging he wouldn’t, and allowing George Soros to make a cool personal £1bn gambling against him, was at least done for the specific purpose of avoiding future pressures on the UK to join the euro.
Almost a quarter of a century later, the correct analogy is not that his successor Philip Hammond is asleep at the wheel of the bus heading for a cliff. It is that as we enter the era of self-driving vehicles, he is simply another passenger sitting tight and hoping for the best.
A bit like Holyrood Finance Secretary Derek Mackay, strapped in at the back of the bus, gritting his teeth – of whom more later.
Last week’s really big announcement by Hammond in the Autumn Statement was to abolish the Autumn Statement, which he said would now become the Budget, and abolishing next year’s Budget, which would become the Spring Statement. Dear God, it has come to this, we thought, as ‘Interesting Phil’ padded out an hour and a quarter with almost nothing to say.
As Tom Clark of Prospect put it, it showed a dull man “condemned to live in interesting times”.
Actually, I have never seen Hammond as a dull man, more as someone arrogant and lacking self-awareness. An abiding memory of him is as defence secretary paying a flying visit to Edinburgh during the independence referendum campaign to warn voters that if they voted the wrong way they’d never again get any UK arms contracts because Scotland would be a foreign country. He said this at the factory of a state-owned Italian aerospace company, and he shrugged off an attempt by me to raise this small irony. His in-out visit prompted, if memory serves, a rebuke from Menzies Campbell about the negative impact of such flying lectures.
His first and final Autumn Statement as Chancellor of the Exchequer did not even succeed in being the most important announcement of the day. That honour was accorded to the Office of Budget Responsibility, which pointed out that the cost to the economy purely of Brexit uncertainty was £122bn and counting, which rather trumps Lamont’s culpability of £3bn for leaving the ERM. I am as sceptical of economic forecasters as the next and any other sceptic, but when everybody from the OBR and IFS to our own Fraser of Allander Institute is saying the only certainty is uncertainty, you have to wonder how we got here.
So what did Philip Hammond announce that was meaningful at all, and what can we glean from it in terms of the 15 December draft budget to be presented by Derek Mackay to Holyrood? Well, apart from the eye-watering £122bn sinkhole caused solely by Brexit, the UK will now be borrowing, not to support the NHS, but just to plug that gap and to provide some belated stimulus on infrastructure spending, and the horrible slide in the public finances will see debt top 90 per cent of GDP in 2017-18 into what was once seen as basket-case territory. Public spending will now have slid from 45 per cent to 40 per cent of GDP in just five years, so these pressures will continue and there was not a brass farthing announced for the NHS, which is in outright turmoil in England. That, of course, means no consequentials for Scotland, and there was also no mention of any assistance for the North Sea sector.
But there will be increased infrastructure spending of £800m in Scotland over the next five years and Stirling, with neighbouring Clackmannan, has been added to the city deals package which, with confirmation of the previously hinted at Tayside deal covering Dundee and Perth, means all of Scotland’s cities will now be able to stimulate their economies.
The lower income tax threshold will rise by £500 to £11,500 in April, as will the National Living Wage, by 30p to £7.50, but the Minimum Wage figures for under-25s and apprentice rates remain, prompting the question: if there is not a youth rebellion now, why not? It is as if Westminster politicians have given up on young people.
The big ticket change is the rise in the higher rate tax threshold from £43,000 to £50,000 by the end of this parliament, a significant boost to the higher paid. The planned onslaught on Universal Credit was eased slightly, with the taper going from 65 per cent to 63 per cent, hardly something which will be hailed by Daniel Blake.
Indeed, this saw First Minister Nicola Sturgeon tell MSPs: “The fact that the Universal Credit situation will remain largely unchanged means that yesterday’s autumn budget statement was a case of taking money away from the poorest to give it to the richest in our society. We saw the Tories showing their true colours.
“We will set out our budget plans in full on 15 December, but we have already said that we will not pass on a massive tax cut to the 10 per cent top income earners in the country. Given that our budget is being hammered by the Tories, public services are being hammered and the UK Government is borrowing an additional £100 billion because of its Brexit recklessness, this is a time to protect our public services and to protect the vulnerable, and that is what this government will do.”
This allowed the Daily Mail to state that “middle-class Scots will see their earnings slump next year because of a secret double tax whammy”.
While the basis of their calculations also involved UK-wide increases in National Insurance thresholds, even their conclusions rendered their top claim absurd. “Scots earning more than £43,000 will be £114 worse off next year, while those in the rest of the UK will be £200 better off.”
This was, of course, described as a ‘tax bombshell’, but the last time I checked, a drop in pay of a couple of pounds a week for the already better off, while unwelcome, does not constitute a ‘slump’.
Where the real slump will come is among those on benefits and lowest earnings in work. For those, in the jargon ‘just about managing’, there will be no jam tomorrow, and under Hammond’s continued benefits squeeze the numbers sliding into the ‘precariat’ are likely to grow rather than fall. There are calls for Derek Mackay to tackle all this, but remember, he’s strapped into the back of a driverless bus.
How the Finance Secretary gets his draft budget through Holyrood on 15 December is down to the negotiations that a minority government must face, but at First Minister’s Questions the day after the Hammond statement, the battle lines – and more especially, the potential alliances – were already being drawn. The Sturgeon quote above was elicited by the question from Green co-convener Patrick Harvie, who demanded: “Does the First Minister agree that the Scottish budget must not only avoid reproducing the same unjust policies that are being pursued south of the border, but result in a cumulative benefit to Scotland that closes the inequality gap and leaves far fewer people in Scotland genuinely struggling?”
And Harvie, in effect, began his negotiations with Scottish ministers in public in the Holyrood chamber, calling for an extension of the living wage to younger workers, more capital spending for energy efficiency, and a top-up of child benefit to lift our poorest youngsters out of poverty. This was the exchange which made the Mail kick off, for the First Minister replied: “Higher-rate earners earn more than £43,000 a year. My judgment is that it is not right to give a large tax cut to the top 10 per cent of income earners at a time when people at the bottom end are suffering so much and there is so much pressure on our public services. That is the judgment that we make.”
There were fiery and intriguing exchanges between the First Minister and Conservative finance spokesman Murdo Fraser, who at least opened with a good jibe (about Alex Neil admitting he had voted No and claiming other SNP MSPs were closet Brexiteers).
He made an upbeat defence of the Chancellor’s package for delivering “£800 million in extra capital spending, £74 million in extra resource spending, an extra £3.3 million for Scottish charities, a freeze in fuel duty, an increase in the personal allowance to help the lowest earners, an increase in research and development spending, and a city deal for Stirling and Clackmannanshire”.
The Finance Secretary had already spiked a number of these guns, claiming: “Under these plans, Scotland will see a real-terms cut to the day-to-day budget that pays for public services. By 2019/20 it is expected to be almost nine per cent lower over the decade, reducing the scope we have to mitigate against Westminster austerity and invest in growing our economy.
"Even on the much-heralded investment in infrastructure, all we have seen is the Chancellor moderating cuts already imposed on Scotland. As a result, Scotland’s capital budget will still be around eight per cent lower in real terms across this decade.”
Talk of “reducing our scope to mitigate austerity” sounds very much like getting excuses in early and will undoubtedly feature in the talks Mackay will be having with other parties, particularly the Greens, in coming days. So, other than foregoing that threshold change for higher-rate payers there are no plans for wider income tax changes. The Greens may bristle at this, but the scars remain of the ‘Penny for Scotland’ example, which showed that even modest tax hikes involve political pain for scant financial gain.
Instead, look for significant investment in training all these staff we are going to require for the massive extension planned in childcare which will be needed in years to come. Look for talk of the ‘journey’ towards building this key early years pledge. Look also for further investment in social care, an area in which Scotland is well ahead of the curve compared to south of the border.
This is also key to relieving some of the pressures on the NHS which Scottish ministers are determined to support with an “inflation plus £500 million” package. This will be contrasted with the Brexiteers’ lurid NHS claims on the Vote Leave battle bus and complete silence from the Chancellor on NHS funding last week.
And also, look for built-in financial protection for public sector pay and pensions. The Finance Secretary will be fighting battles on many fronts – with Westminster, with local authorities, with demands from fellow ministers, and from Holyrood opponents – and will want all these pledges secured.
All of this has to be done on an extremely tight timescale, so firm proposals will have to be in the hands of the Scottish Fiscal Commission for vetting very soon. Although the commission, Scotland’s equivalent of the OBR, is not yet on a statutory footing, it will play a full monitoring role over the next week, analysing ministers’ assumptions and projections.
The same cannot be said, as yet, of the Growth Commission, set up by the SNP after the Brexit vote and charged, under the chairmanship of former MSP Andrew Wilson, of charting possible futures for the Scottish economy. That is not due to report until the end of the year and will not inform the current draft budget.
But in the years to come, the Scottish Government will need all the help and advice it can get. Driverless vehicles we can all just about get our heads around, but for national governments we prefer safer hands on the wheel.
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