Draft Scottish Budget - read with care!

If you are struggling with the different interpretations of the Scottish Government’s draft budget, don't panic, it is confusing!

My briefing for UNISON branches attempts to cut through the spin and outline the impact on the services our members deliver. In this blog I will instead focus on a few key points.

Firstly, this is a real budget, not just spending plans, because it includes the revenue raising powers.

So we start with the block grant, which is being cut by 9% due to UK austerity plans between 2010-11 and 2019-20. However, in the coming year the Scottish Government has a little wriggle room because there is a small real terms increase in funding of £188m. The next two years are considerably tougher under current UK plans.

Then you add in any of use the devolved tax powers. They have decided not to increase income tax, although not cutting tax for higher rate (40p) taxpayers should generate an additional £79m. Other devolved taxes on land transactions, landfill and aggregates, generate small additional revenues.

Of course taxes can be reduced as well, and the budget confirms that they remain committed to a 50% cut in Air Passenger Duty - an unaffordable, environmentally damaging tax cut for the better off. Thankfully, not this year though because it would cost a massive £171m to implement. That's the same as this year's real term increase in NHS spending.

The most confusing spin is over the local government budget allocation. I'm afraid when our branches sit down with their councils to discuss the budget, they will find that their director of finance doesn't recognise Derek Mackay's extra £240m. Unsurprisingly, the reality is somewhere in-between his spin and that of some councils.

We should remember that the Scottish budget only determines the Scottish Government's allocation to councils - important though that is. There is a real terms cut in the local government (including grants) budget allocation of £327m. The Scottish Government argues that this is mitigated by the extra income from the council tax bands (£111m) and helpfully they have abandoned plans to expropriate that for their own priorities. While this shouldn’t appear in the Scottish budget, it is a real additional source of revenue, albeit one that will benefit better off councils with higher banded properties. Councils with disadvantaged communities will also have to fund the improvements to the council tax reduction scheme.

The government then adds in the extra £107m coming from the NHS budget for social care. This won’t impress your finance director because it is for a specific additional commitment (contractors living wage) so won’t help to mitigate grant cuts. That's not to say that it isn't very welcome and desperately needed to help stave off a staffing crisis in social care. There are some other additional pots, but again these are ring-fenced. Yes, they did claim they would stop doing that!

The government then gets very cheeky by assuming that councils will increase the council tax by the maximum 3% they are allowing - generating £70m of real extra revenue. Again, this is a matter for councils, who may reasonably point out that the government isn’t using its tax raising powers. The Scottish Government will not 'pass on austerity to the household budgets' with a national tax, but has an expectation that councils should do that locally. This looks like an exercise in political buck passing.

Branches will also find that their finance director has a long list of unavoidable commitments that also don’t appear in Derek MacKay's calculations. Not least the cost of the UK Apprenticeship Levy that the Scottish Government appears to be pocketing the revenue from. Councils can reasonably argue that they have a good record in creating apprenticeships and should get this cash reimbursed.

So, the bottom line is that councils are yet again facing the biggest budget cut. In fairness, there is some scope for mitigation, but nowhere near the spin the government is putting on the figures.

We should also have a quick look at the health budget. Health boards get a cash increase of £321m, but that falls to £170m in real terms. The assumption is that inflation will be 1.5%, but health inflation is usually significantly higher.

Health branches will also find their directors of finance are less than impressed by this figure. They also have unavoidable commitments including the Apprenticeship Levy. However, the biggest issue will be the £107m directed to integration authorities to pay for the increase in the living wage. This is very welcome and a justifiable priority, but it’s not NHS spending. It is blatant double counting to include this in NHS budgets and the local government finance order.

Part of the problem with the 'Draft Budget' is that it isn't really a budget document at all. Most of the 186 pages set out a political narrative, which is not unreasonable, but adding in numbers that have nothing to do with the government's budget to spending tables, crosses a line for me. So read with care!

Time to look again at PPP schemes

The Scottish Government’s spending plans for 2017/18 is unlikely to be a cheery read when it's published on Thursday. However, when budgets are being cut, it is all the more important that government ensures that resources are not being wasted.


A good example of this is set out today in a joint Guardian/Ferret investigation into the Scottish government’s NPD model of PPP schemes in Scotland.


The report covers errors over interpreting EU rules which is expected to cost the Scottish government the equivalent of £932m in lost expenditure because it must now match the private finance spending under the NPD (PPP) programme with money borrowed from the Treasury. The scramble for matching funds is also expected to have knock-on effects on budgets.


The investigation also found that the private consortium building Scotland’s largest NPD hospital in Dumfries is expected to generate £160m in interest and finance fees on loans totalling £242m, including the £212m spent on building the hospital.

The consortium is charging an interest rate of 5.1% on borrowings of £218m. This results in the consortium earning more than £100m in interest payments from the public sector. It is also charging 11.3% on a further £24.2m in “subordinate debt”, which will earn financiers £37.5m in interest.


If Scottish ministers had instead used public borrowing they would expect interest rates from the state-run national loans fund of about 1.6%. If government argues that their borrowing consent was insufficient, then a deal could have been done with the local council who can also borrow at this rate.
 
A similar deal has been done by Northumbria Healthcare Foundation NHS Trust for its PPP contract at Hexham General Hospital, saving £67 million. This was funded by a loan from Northumberland County Council, which borrowed from the loans board.

This is precisely what UNISON Scotland suggested over a year ago in our ‘Combating Austerity’ report. We calculated that the austerity cuts in Scotland could be wiped out by refinancing PPP schemes in this way. Sadly, progress has been at a snail’s pace with a handful of projects being examined. Ironically, we believe Dumfries hospital may be one of those.


When jobs and services are being lost, it is absolutely vital that we chase every available saving. Effective monitoring, restructuring and refinancing PPP schemes are just some of the range of proposals we set out - and some authorities, to their credit, have acted on these. On PPP refinancing, it requires the Scottish government and their arms length agency the Scottish Futures Trust to take action.

Cutting Air Passenger Duty is the wrong priority

The scale and destination of the cuts to the Scottish Budget will become apparent with the publication of the Scottish government's spending plans on Thursday. This is not the time to cut taxes such as Air Passenger Duty.

This is first Scottish budget with the full devolved fiscal powers in play. The Tories, despite voting for the new powers, don't want to use them. The SNP wants to use them a little. Labour, Liberals and Greens want to take a different course to Tory austerity, by making greater use of the powers.

I may not agree with the Scottish government's cautious approach, but I understand the argument. A tax rise for most of us isn't likely to be popular, particularly when wages are depressed. However, railing against Tory austerity is simply not credible when you have the powers to take a different course and more importantly, you are actually cutting taxes for the better off.

The proposed cut in Air Passenger Duty (APD) follows a consultation, which followed predictable battle lines. The airports and airlines think it is a wonderful idea and churn out nicely rounded claims on jobs and revenue. The environment lobby responds by pointing to the extra emissions the plan will pump into the atmosphere, damaging our already overheating planet.

For me the case against a cut in APD has four pillars.

Firstly, even if it had economic merit, we can't afford it. Today's Fraser of Allander Institute report lays bare the dire state of Scotland's public finances. This leaves Derek MacKay with few options. He will claim to be protecting the NHS budget, while awarding a 'fair' settlement to local government. Needless to say, this is impossible and is achieved through some cosmetic double counting of the social care budget. 

APD yields more than £300m to the Scottish Budget. That's a significant amount of revenue, more than half of last year's cut to the local government budget and the equivalent of more than half a penny on income tax. Even cutting it by half will result in significant cuts to jobs and services.

Secondly, for a government that claims to be 'world leading' on climate change, this tax cut could have a damaging impact on the environment. The Scottish government's own analysis of a 50% cut in APD estimated a consequential increase in emissions of up to 60,000 tonnes CO2 per year. Air travel already accounts for 13% of Scottish greenhouse gas emissions from transport - a sector that has not contributed nearly enough to climate change action. Yes, we are making progress in reducing emissions in Scotland, but mostly on the back of the recession and the closure of Longannet power station.

Thirdly, air travel already has a privileged tax position. Airfares are not subject to VAT and aviation fuel is tax-free. Implementing fuel duty at the same rate as private fuel tax would result in £5.7 billion of revenue at UK level, adding VAT to tickets would result in £4.0 billion, and the abolition of duty free would yield £0.4 billion. This means the aviation industry already benefits from an annual tax exemption of at least £10 billion, which amounts to around £1 billion lost to Scotland. In contrast, rail fares have been increasing at three times the rate of wages, for a service that many more of us rely on every day.

Fourthly, this is a regressive tax proposal. Propensity to fly increases with income and socio-economic group, and 15% of the population of the UK take over 70% of all flights. Scotland’s lower income groups will achieve no or minimal benefit from a cut to APD, and higher earners (and corporations) will achieve a disproportionate benefit. No wonder the Tories have abandoned their manifesto commitment to oppose the APD cut!

The Scottish government's spending plans are challenging enough without the additional burden of a cut in APD . It is simply unaffordable, damaging to the environment and provides more support to an already tax privileged sector. A tax cut for the better off is a strange priority for a government that claims to be opposed to austerity.

       

             

Tackling fuel poverty

There has been a welcome drop in the number of households in fuel poverty in Scotland. However, it’s still a long way from the eradication that was supposed to happen this year and still higher than the first year statistics were collected in 1996.

 

Some key points from the report:

 

• Between 2014 and 2015 the rate of fuel poverty declined by 4%. In 2015 there were around 748,000 fuel poor households representing 30.7% of all households. 

 

• Around 203,000 households, or 8.3% were living in extreme fuel poverty in 2015.

 

• Just over half of the reduction in fuel poverty rates can be attributed to the drop in energy prices and around a third to improvements in energy efficiency

 

• On average the private and the social housing sector have similar rates of fuel poverty: 30 and 33% respectively. There is more noticeable decline in fuel poverty in the social sector, reducing the social-private gap which was seen in the SHCS sample for 2014.
   
• In 2015 37% of Scottish homes were in EPC band C or better and half had an energy efficiency rating of 65 or higher (SAP 2012). This is similar to 2014.

 

Norman Kerr, Director of Energy Action Scotland said:

 

“Just last month the statutory duty under the Housing (Scotland) Act 2001 for the Scottish Government to eradicate fuel poverty expired and the target was missed.  Two working groups were tasked to advise Scottish Ministers on their next steps and they have made over 100 recommendations.  It is now vital that the Scottish Government uses this advice to develop a new strategy, set a new fuel poverty target and increase funding for its programmes in the upcoming Budget Statement. The progress to date on solving the problem of cold, damp and unaffordable to heat homes must not be lost, but can and should be built upon.”

 

With energy prices remaining relatively low, spending on energy efficiency remains an important element of a fuel poverty strategy. Twenty businesses have written a letter, with the backing of the Existing Homes Alliance, calling on ministers to increase spending on energy efficiency in next year’s budget to £190m. They say this would allow for existing schemes to be expanded and provide confidence to the sector at the start of the new Scotland’s Energy Efficiency Programme (SEEP).In the longer term, the alliance wants spending to be ramped up to an average of £450m a year over ten years.

Another measure that would help with eliminating fuel poverty is ending the price differential between pre-payment meters and direct debit. Prepayment customers represent just 15% of the domestic market, but account for over 30% of all fuel poor households.

 

A recent UK analysis shows that removing the price disparity between tariffs could lift between 95,000 (12%) and 181,000 (23%) of fuel poor prepayment customers out of fuel poverty and reduce the gap for the remainder.  The widespread adoption of SMETS2 smart prepayment meters (Smart PPM) could deliver real competition in the prepayment market, driving down prices towards parity with direct debit payment. 

 

The reduction in fuel poverty in Scotland is welcome, but there is still much to do when nearly a third of households remain in fuel poverty. This is the time to develop a new strategy and invest in energy efficiency.

Time for action on investment management

If you read anything about pensions this year, you should include the recently published Financial Conduct Authority (FCA) interim report on the asset management market. It may not be the easiest read, but it shines a light on why we get such poor value for money from our pensions in the UK.

OK, I don’t expect you to read all 206 pages! There is an executive summary. It should certainly be required reading for pension trustees and in the SLGPS, pension board and committee members. It confirms what UNISON has been shouting about for some time – we need much greater transparency over the real cost of using investment managers.

The UK’s asset management industry is massive. It manages £6.9 trillion of assets. Over £1 trillion for individual investors in the UK and £3 trillion on behalf of UK pension funds and other institutional investors. The service offered to investors comprises a search for return, risk management and administration – although it is the investor that bears virtually all the risk. 

Over three quarters of UK households with occupational or personal pensions use these services, including over 10.2 million saving for their retirement through pension schemes. There are also around 11 million savers with investment products such as stocks and shares ISAs. 

There will be very few UNISON members who are not touched by this industry, although most will probably have never heard of it. More importantly, they will have little idea how much of their hard earned cash goes to the industry. The report states that asset management firms have consistently earned substantial profits with an average profit margin of 36%! These margins are even higher if the profit sharing element of staff remuneration is included. The saying ‘we are in the wrong job’ has a whole new meaning!

On transparency of costs the report states that investors are not given information on transaction costs in advance. These costs can be high and add around 50 basis points on average to the cost of active management for equity investments. The report says:

“In addition, we have concerns about how asset managers communicate their objectives and outcomes to investors. Investors may continue to invest in expensive actively managed funds which mirror the performance of the market because fund managers do not adequately explain the fund’s investment strategy and charges.”

This is something the LGPS has been addressing through its transparency code and the Scottish LGPS has issued guidance to funds in Scotland to adopt the code. However, its still only voluntary at present and measurable outcomes are some way ahead. The drive for transparency is not as present on the retail side with only half of investors even aware if they are paying charges.

One of my colleagues likes to illustrate this issue using a fridge analogy. If you buy a fridge you can compare the marked price. But the real comparison should include, energy use, delivery charges, warranties and much more. Very few of these charges are transparent when it comes to asset management.

More of us will be familiar with the investment disclaimer, "past performance is no guarantee of future returns". The FCA report highlights the reasons for this. Funds measure performance over different time periods and there is a practice of merging poorly performing funds, “giving investors the false impression that there are few poorly performing funds on the market”. Even those who do outperform don’t continue to outperform the relevant market index or peer group for more than a few years. 

Pension trustees are often sold active investment strategies on the grounds that they deliver higher returns than passive funds that track an index. In the UK the split is around 20% passive to 80% active, whereas in the USA the split is closer to 50:50. However, the evidence in the FCA report suggests that actively managed investments do not outperform their benchmark after costs. And the costs of active investments are significantly higher than passive investments as this chart from the report shows. 

Charges have also have remained stable, unlike charges for passive investments, which have been falling. The FCA suggests that this reflects competitive pressures and unwillingness in the active fund market to undercut each other. Weak pressure on prices can lead to weak cost control.

The FCA report is particularly scathing about the role of investment consultants, with 60% of the market controlled by three firms. For example, they found that investment consultants accept hospitality from asset managers, suggesting a further conflict of interest and could result in poor outcomes for end investors. They are considering a market investigation reference to the Competition and Markets Authority (CMA).

The report concludes with a number of very welcome interim proposals on remedies – not least on transparency and all-in fees. However, this is a hugely powerful and profitable industry and they will be lobbying hard to water down any action. It’s up to us to reclaim our pension funds for the workers who rely on them.

Audit Scotland on Council Finance

Audit Scotland have published their annual  Financial Overview of Councils . It doesn’t paint a happy picture, in fact it should probably come with a soundtrack.

The report talks of ‘significant challenges’ for Local Government finance.  If that sounds like accountant speak for bad things – it is. Boiled down to its absolute basics they say “All councils face future funding gaps that require further savings or a greater use of their reserves.” For “further savings”  read “cuts.

The reports says that councils are, generally speaking, managing their finances well but that funding gaps are developing which will mean either more cuts or greater use of council reserves.  They urge councils to do more long and medium term financial planning but acknowledges that single year grant funding from the Scottish Government can cause problems with this.

 Overall Council Spending is at £19.5 billion. This is lower than in 2011/12 although spending on some services has increased - the most obvious being social care due to rising demand. Some councils are overspending on their social care budgets and Audit Scotland warn that this needs  to be tackled (BTW  that isn’t accountant speak for cuts – they mean that councils should be doing better at saying how much they will be spending on particular services).

Scottish Government grants are councils’ major source of income. Between 2010/11 and 2015/16, Scottish Government funding (combined revenue and capital) for councils reduced in real terms by around £186 million (1.7 per cent) to £10.9 billion. Taking into account 2016/17 funding, councils have experienced a real-terms reduction in funding of 8.4 per cent since 2010/11.

Councils have usable reserves of £2.5bn that can be used to support services . Most (23) Councils added to their reserves in the last year. Reserves can be used to support services but obviously this is not a sustainable source of long term funding. The Commissions estimate is that Councils are planning to use a total of £87m ( 75) of total reserves  in the coming year to plug gaps in funding . Reserves are what might be reasonably considered as rainy day money – and it might be reasonably considered to be wet weather  so there use to maintain services and jobs is a good thing. But as Audit Scotland point out , this is hardly a sustainable method of funding services.

Recent years have  seen a decrease in the amount of funding coming from Council Tax and in increase in both the number of services for which councils charge and the amount charged.  Councils are criticised for not being clear about how charging decisions affect local citizens.

Around 2250 staff  took packages and left Local Government in the last year giving a total of just over 13 000 staff leaving councils in the last five years .   Audit Scotland note that equal pay ‘remains a substantial issue’ for local government – they will publish a report on this in 2017

Councils spend around £1.5bn a year on servicing debt.  Most tales the form of traditional fixed interest rate loans. The exceptions to this are PFI /PPP/NPD and LOBO’s ( Lender Option, Borrower Option)  loans. The commission notes that PPP/PFI/NPD predict ( repaymants are often inflation dependent – so exact repayment levels  are more difficult to plan for) . This just backs up the case that UNISON Scotland has made that effort needs to go in at both council and Scottish Government Level  to explore either buying out or Combating Austerity toolkit these projects. It’s also the case trhat the Public Works Loan Board isn’t always the cheapest way of doing things either . Some ideas that might help kget the cost of debt down are explored in our combating austerity toolkit     

Looking ahead Councils are expecting demographic changes to put demands on key services like social care and are assuming a ride in the wage bill of between 1%-1.5% in each of the next two years. Overall  councils anticipate an £87m in-year shortfall between their  General Fund revenue income (before using reserves ) and expenditure. That’s after approving savings or cuts of £524m. You hum it he'll play it. 

In other news councils are also urged to do  more long and medium term financial planning but acknowledge that single year grant funding from the Scottish Government can cause problems with this.

The Audit Commission are also making it plain that  Councillors need to get better at scrutinising the plans put to them by senior officials Councils need to get better at explaining their financial position – so that it’s in an  understandable format for a wide audience.  Being polite accountant types who talk about savings rather than cuts they don’t say any more than that – but perhaps they might be thinking that the need  for councils to explain things might be about to go up sharply. For all too obvious reasons,  altogether now 

The case against Trident replacement

The replacement of the Trident missile system cannot be justified on moral, economic or defence grounds. That's the conclusion of a new report launched in the Scottish Parliament today by the Jimmy Reid Foundation.

The moral and philosophical case against renewal is well understood, even by those who support Trident replacement. Inherently indiscriminate nuclear weapons can never satisfy the just war principles of discrimination and proportionality. 

There is also a defence case against renewal; one increasing supported by former defence chiefs and others who recognise that the massive expenditure on Trident is at the expense of conventional defence. Equipment and resources that are needed to address real threats to our security, rather than a vanity project maintained largely to maintain a seat at the UN Security Council.

Important those these arguments are, the strength of today's report is in making the economic case against Trident renewal. The often vastly inflated claims of job losses are carefully debunked and the report calculates that some 600 civilian jobs are dependent on the existing Trident system at Faslane and Coulport.  The replacement of Trident will cost at least £205bn - a figure that is likely to go up with the weaker pound (as much of the spending goes to foreign companies) and the normal cost drift of defence programmes. That means every Trident job costs £18m.

We also need to recognise the opportunity cost of spending £205bn on other public services. With more than 30,000 devolved public sector jobs lost in Scotland since the crash, these resources would provide many more jobs and services that people really need. It could also boost real manufacturing jobs in the UK, rather than transfers to banks and foreign multinationals.

As trade unions we cannot argue the indefensible, simply because it has job implications. What we have to do is to minimise the impact and negotiate a just transition to other work. It might be argued that this is easy for a union with no members linked to Trident replacement to make. However, there are other policy areas where we have taken just such an approach. For example, we are in favour of public ownership of the gas and electricity sectors, a policy that would result in the loss of sales jobs in the industry done by UNISON members. Our approach is not to defend the obvious waste in the current system, but rather to make the case to transition our members into more useful and more satisfying work.

In this context, the report calls on the Scottish Government to establish a Scottish Defence Diversification Agency, whose main focus would be the planning and resourcing of jobs away from Trident. The report outlines how this could be done and points to case studies from other parts of the world.

Spending staggering sums of public money on a useless weapons system cannot be justified at any time. However, given the current state of the public finances it is beyond indefensible. The strength of this report is that it focuses on the economic case against Trident replacement and offers a just transition for those who may be impacted by non-renewal. Their skills are much needed elsewhere.

The report will be available on the Reid Foundation website

http://reidfoundation.org