Big questions over increasing private financing for Scottish PPP programme

A strong investigation by the Guardian’s Severin Carrell today shows the Scottish Government is bringing in extra private sector funding and control to its multibillion pound infrastructure programme.

The aim is to keep key projects off balance sheet to ensure the Scottish Government meets European statistics agency Eurostat rules on measuring state spending.

Companies set up to deliver hospital, roads and other projects are being restructured, with greater private sector control and funding.

This is bad news for taxpayers and for accountability. Conventional funding with full democratic control and proper financial transparency is the best way to finance schools, hospitals and other infrastructure.

The changes have caused delays to contracts being signed off and are a major setback for the so-called Non Profit Distributing model and hub programme, which the Scottish Government tried to claim heralded the end of disastrously expensive Public Private Partnership/Private Finance Initiative schemes.

UNISON Scotland said such claims misrepresented the continuing widespread use of private finance in public infrastructure.

We have highlighted for years the ways in which the Scottish Futures Trust and the NPD model and hub, which it promotes, merely continued PPP/PFI with some ‘slight financial tweaking’ – PFI lite.

Indeed the SFT this year again won the Government PPP Promoter of the Year Gold Award.

However, the structures it helped set up seem to have fallen foul of the European System of Accounts 10 (ESA 10), applied in September 2014, despite seeking external financial advice five times since 2010 to ensure the correct classification for NPD/hub projects.

Interestingly, the increased dependence on private sector borrowing, as pointed out in the Guardian: “allows Holyrood to load up its balance sheet with more debt”, making it “far easier for Nicola Sturgeon’s government to borrow at least £2billion to fund further capital project and bolster its anti-austerity stance using new powers from the Scotland Act 2012.”

Finance Secretary John Swinney said in Parliament on June 18 that ESA 10 “is designed to provide a comparable estimate of the level of debt that is carried country by country across the European Union so that the levels of debt can be assessed on a comparable basis.

“Frankly, those definitions are constantly changing and are also then the subject of reinterpretation. The issues broadly relate to the governance of projects and whether they are controlled by the public sector or the private sector, and the acceptability of the approach to profit capping that is implicit in the NPD programme.”

He said in a letter to the Finance Committee on 1 June that the SFT has developed proposals for changes to contractual and shareholder arrangements for hub projects “which further strengthen the case for a private sector classification” and he has instructed the changes to be implemented across the hub programme, which should take 6-8 weeks.

The Guardian report says that a leaked SFT document shows that “for Hub projects affected by the changes, a 20% stake previously held in each by public-sector partners will be transferred to a new private-sector charity. That will give the private contractors the right to increase their shares in the new companies set up to deliver each project from 60% to 80%.”

The document says that “any perception of public sector control over the (project) delivery company must be avoided.”

Labour’s finance spokeswoman Jackie Baillie has tabled a series of questions in the Scottish Parliament, scheduled to be answered on Friday.

These include asking whether the Scottish Futures Trust’s revised structure for design-build-finance-maintain projects halves the public sector share of the project from 40% to 20% and, if so, for what reason.

And for what reason the construction of (a) Our Lady and St Patrick’s High School, (b) the North West Edinburgh Partnership Centre, (c) the Royal Hospital for Sick Children in Edinburgh, (d) the Dumfries and Galloway Infirmary and (e) the Aberdeen Western Peripheral Route has been delayed and what the (i) length and (ii) cost of the delay is.

There must be full transparency on the costs and effects of these changes, which clearly reinforce our reasoned opposition to PPP/PFI. And the Scottish Government should be using its coming, far too limited, extension of Freedom of Information law to cover all companies and other bodies providing public services.

More devil in the budget detail

As we expected, a more detailed analysis of the budget shows that low paid workers, the young and the poor are bearing the brunt of the measures he announced.

As one academic puts it, "George Osborne’s budget is beyond spin: it is an assault on public welfare, and on the public understanding of government."

As usual it is the IFS that comes up with a reliable analysis. The chart below shows the poorest deciles of the population suffering the biggest income falls in relative terms since 2010 (the blue line) as well as being hit the hardest in this latest budget (the yellow bars).

Even the most positive announcement, the new National Living Wage, is misleading. The Resolution Foundation, said the label did not reflect the reality, "The new 'National Living Wage' is a welcome policy with a somewhat misleading title. It has legal clout - which the voluntary Living Wage doesn't - but it also fails to reflect how much families need to earn to have a decent standard of living." The proposed NLW is "in fact a minimum wage "premium" for those aged 25 and over," his organisation said in a briefing.

They also warned: "The new minimum wage premium cannot tackle Britain's low pay problem alone. Almost a quarter of workers on the minimum wage fail to progress beyond it within five years and this could rise if the National Living Wage becomes the 'going rate' in many sectors."

That is where the cut in tax credits hits hardest, because it supports families. The impact is highlighted in this chart.

And the National Living Wage doesn't apply to the under 25's. The latest findings of the Intergenerational Foundation, highlight a sharply widening gap on its "fairness index" between people under 30 and those over 60.

Since 2010, the report shows, there has been a 10% decline in young people’s prospects across a range of measures including housing, education, health, income and debt. This is exacerbated by a budget with welfare cuts that will hit many young families, ended automatic entitlement to housing benefit for those aged 18 to 21, and replaced maintenance grants for students in England with a loan system.

As always with a budget the devil is in the detail. And there is plenty of the devil in this budget.

 

The budget headline is wages, but dig a little deeper....

The Chancellor's summer UK budget today was long on spin, but the substance was less impressive once you delve into the detail.

The headlines are about wages with the introduction of a new national 'living wage' for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020. In effect this is an increase in the national minimum wage for the over 25’s, not a living wage at all. As the Living Wage Foundation has already pointed out, it is calculated on what the market can bear, not on what workers need to live on. An annex to the OBR report covers the economic impact and interestingly claims there will be a minimal impact on jobs. The wages pill has been sweetened for employers with cuts to Corporation Tax and employer National Insurance contributions for small employers.

While this will help low paid workers outwith the public sector, it has been set below the level of the Scottish Living Wage that applies to most UNISON members in Scotland. If the Scottish Government follows the Chancellor’s lead, as they generally do, public sector workers face four more years of pay restraint with increases capped at 1% per year.

It could be even worse, particularly for young members and low paid members with families. The freeze in working age benefits hit families hardest and young people also lose Housing Benefit until they reach 21. They don’t get the new living wage either. One of the real benefits of the English approach to supporting disadvantaged students at university was maintenance grants. They have been abolished and replaced by loans. The Tories really do have it in for young people - no wonder they oppose extending the vote to 16 year olds!

The increase in income tax personal allowances are a help, but they are a regressive tax cut that benefit higher paid workers more as this IFS chart based on previous plans shows.

The Resolution Foundation has also provided a helpful explanation of why wages alone don't work. The rich also gain from changes to inheritance tax that will cost the Treasury almost £1bn. Tax relief for £1m home owners won't help many in Scotland and will simply entrench intergenerational inequality and increase house prices. It will do nothing for house building. The OBR estimates that the budget changes will cut affordable housing by 40,000. This table from the OBR report shows the extent of upper middle class welfare in this budget.

The measures to tackle tax avoidance are welcome, even if pinched from Labour's manifesto. However, the OBR rates the estimates of income raised as 'very high' uncertainty. They will also have to deliver on the extra HMRC staff, after years of cuts. There is some confusion here between the Chancellor's claimed £750m for HMRC and the Red Book's £250m. The Non-Doms are also being phased out very slowly, giving ample time for the Chancellor's pals to find new ways of dodging tax.

The OBR also estimate that the economic recovery will slow slightly and still depends on an significant increase in household debt. I always find this a scary chart as we all recall what happened last time personal debt increased in this way.

After wages we need to look closely at the impact a UK budget has on Scottish public spending. Cuts in departmental spending (RDEL) will follow a much smoother path than was implied in March, moving away from the previous ‘rollercoaster’ pattern. Real terms RDEL cuts now range from 0.5 to 2.4% a year between 2015-16 and 2019-20. In March, the real cuts in 2016-17 and 2017-18 were 5.8 and 5.4% respectively – larger than any seen in the previous Parliament. RDEL spending is now assumed to fall by an average of 1.5% a year in real terms over this Parliament, compared to the 1.6% over the previous Parliament. Essentially the cut is similar, but spread more evenly over a longer period as this chart from the OBR report shows.

It is difficult to calculate the Barnett consequentials until we see the departmental allocations for devolved services in England. That will probably become clearer in the Autumn Statement. However, the limited good news is that the massive cuts planned for the next two years will be somewhat reduced from the March plans.

The impact on jobs is still significant. UK general government employment is estimated to fall by 0.4 million by the first quarter of 2020, leading to a total fall from early 2011 of 0.7 million. These figures are 0.2 million smaller than projected in March, but still equate to a 13% overall reduction in headcount. The Scottish job losses could be between 30,000 and 40,000 posts by 2020.

The OBR now publishes tax forecasts for the devolved administrations. They only cover the Calman provisions, not the more extensive powers being debated in the Scotland Bill at Westminster. This chart sets out their estimates.

For those interested in pension funds there will be considerable analysis of the tax changes. I also note that tucked away in the Red Book is a reference to pooled investment of local authority pension funds. Something we are at least considering in Scotland.

Overall, doing something about some wages is I suppose some progress from this Chancellor, even if it is only a partial plug for benefit cuts. Welfare cuts for the poor paying for tax cuts for the rich is a more predictable element of the budget along with spending cuts that aim to cut vital public services. I also suspect this is a budget that requires more analysis of the detail - with more horrors yet to be discovered.

 

 

Why the social security system is vital to low paid workers

As we await the the assault on working people in the first Tory budget next week, new data points to better ways of supporting the low paid and reducing inequality.

The Joseph Rowntree Foundation has published its annual research on the The Minimum Income Standards (MIS), which asks members of the public what goods and services they think different types of households need to live to an adequate level. They turn this into a useful calculator that lets you compare your income to MIS.

The pause in inflation helped people on low incomes to become slightly better off relative to their needs in 2015, despite working-age benefits and tax credits rising by only 1 per cent. However, households on low incomes remain much further behind what they need than before the recession. The gap between family incomes and what the public think people need for an acceptable living standard has grown sharply.

The earnings required to achieve the MIS for a single person stayed stable at £17,100 a year. Earnings requirements fell for families with children, helped by a small increase in Child Benefit and tax credits. A working couple with two children must each earn £20,000 to reach MIS.

A predicted return of modest inflation combined with a planned freeze in benefits, tax credits and Universal Credit will create a less favourable environment for households reliant on help from the state. The July 2015 special Budget is likely to make matters much worse.

The Institute of Fiscal Studies(IFS) has published a short analysis of the annual DWP statistics on the distribution of household income.

After inflation, median (middle) income grew by just under 1% in 2013–14, following a similarly small rise in 2012–13. This represents a slow recovery in average incomes, which follows the sharp decline between 2009–10 and 2011–12 when workers’ real earnings fell rapidly. It did mean that real median income had crept back to within about 1% of its pre-recession (2007–08) level, though it was still almost 3% below its 2009–10 peak.

In 2013–14 incomes grew at a similar rate across almost all of the income distribution, resulting in little change in income inequality. At 0.34, the Gini in 2013–14 remains at around the same level as in the early 1990s, but lower than before the Great Recession. This is largely explained by the fact that while real earnings fell sharply between 2009–10 and 2011–12, benefit incomes were more stable. Since poorer households get a greater share of their income from benefits, their incomes have risen relative to higher-income households. However, once you take account of falling mortgage payments, overall inequality fell less than those numbers suggest since it is largely better off households who benefited from this reduced cost.

The latest data show little or no change in poverty rates, for the population as a whole and for the major demographic groups (pensioners, working-age adults and children). However, as IFS warns, we need to look at trends over several years.

We also need to look at how geographical is the wealth gap. The richest place in Scotland is a third better off than the poorest. ONS data shows that gross disposable income averages just over £20,000 a year in Aberdeen and Aberdeenshire and in Edinburgh, compared to just under £15,000 a year in Glasgow and North Lanarkshire.

As we approach the special budget and the likely attack on social security for working people, the TUC and the Child Poverty Action Group (CPAG) have urged ministers to improve Universal Credit rather than raising the income tax threshold to £12,500. In a study of 13 options, the tax threshold proposal cost the most and came bottom for reducing child poverty. A package of improvements to Universal Credit including increasing work allowances, would reduce child poverty by 460,000.

Alison Garnham, chief executive of the CPAG, said: "This comprehensive analysis shows the Chancellor must be careful not to back the wrong horse when it comes to the Government's flagship policies. Rather than committing billions on the costly and poorly targeted policy of raising the personal tax allowance, the Treasury should stop starving universal credit of the investment it needs to fulfil its poverty-reducing potential and justify the massive upheaval surrounding it. The evidence is clear that investment in tax credits is incredibly effective in lifting children out of poverty."

While increasing wages remains hugely important, these reports highlight the importance of in work benefits to families in particular. Despite the 'strivers' rhetoric, these are likely to be the biggest losers next week.