Tories two faced on austerity

In this year’s Spring Statement, the Chancellor had an opportunity to address the devastating impact of eight years of austerity on public services. However, he rejected calls to announce the end of austerity. In Scotland, Ruth Davidson hailed the budget as a ‘win’ for her MPs.

Some argue that the Conservatives' historic strength has been their adaptability. Depending on circumstance, they have been Europhile and Eurosceptic, statist and laissez-faire, isolationist and interventionist. The challenge in Scotland, is trying to convince us they support better public services while saying nothing about austerity.

My local Tory MSP’s newsletter is full of his campaigns to get the Scottish Government and the local council to improve various local services. More should be spent on this, that or another public service. Absolutely right, but you won’t find a similar plea for the Chancellor to end austerity, the underlying cause of all these spending cuts.

The Scottish Conservatives at a national level are not exempt from this double-speak. I have gone back through their press releases over the past six months.

There are numerous calls for more spending on NHS Scotland. Spending on mental health services, particularly services for children, is apparently inadequate. So is spending on GP services, A&E departments, doctor training, smoking cessation, care of veterans, ambulances, drug and alcohol services, cancer services and various drug treatments. Not to mention complaining about bed cuts in several hospitals. Thanking our members for their efforts during the 70th anniversary celebrations is all well and good, but ending austerity funding would be even better.

Local government is also underfunded according to the Scottish Conservatives. It is, but austerity isn’t going to pay for their £100m ‘pothole fund’, or stop councils having to dig into their reserves, as the Tories have helpfully highlighted! It is also somewhat less than credible to argue for a cut in business rates and complain about Council tax increases – all of which would add to council cuts.

In education, they have complained about falling teacher numbers, cuts in FE colleges, while also asking for extra spending on textbooks. They want to ensure that foundation apprenticeships are a part of every single Scottish school’s offer by 2020. They have also highlighted underfunding of the early years expansion, which although true, will not be solved under the austerity policies of their party.

There are regular press releases claiming the Scottish Government is ‘soft on crime’, calling for longer sentences without any understanding that prison spending is way above the European average and a huge wasteful burden on public spending. They attack community alternatives to prison that actually work and are more cost effective. They complain about police numbers falling and the fire service budget, but not about austerity.

Of course, the Scottish Government now has the powers to address austerity. However, the Scottish Conservatives haven’t urged them to do so, instead they have opposed tax increases for the better off. If parliament had voted for their tax policies, funding for public services would be cut by £335m. 

I understand the de-toxification strategy and many of the press releases highlight legitimate concerns about public services. However, you cannot avoid the reality that services are stretched largely because of austerity. An unwillingness to say anything about that is simply hypocritical. Facing two ways might make a nice local leaflet, but it does nothing for political credibility.

Council funding - a step forward, but not out of the woods

The Scottish Budget dance has taken another swirl as the Bill passes its first stage. Let’s have a look at what the changes mean for local government and pay.

First a quick recap. The draft budget proposed no cash increase for local government, which meant a ‘real terms’ cut in council budgets of around £153m. This was in a year when the Scottish Government had a cash increase in its own budget from Westminster of £188m. They also announced a new pay policy, but allocated nothing in the budget to pay for it.

After the Finance Settlement was published with details of individual local authority allocations, councils spotted an ‘accounting error’, which after the government correction resulted in a number of winners and losers.

On the day of the Stage 1 debate this week, the Government announced that an agreement had been reached with the Greens to support the budget, in return for an additional £159.5m of revenue funding. No repeat of last year’s padding the numbers by mixing capital and revenue. They also improved the pay policy by extending the 3% band to those earning up to £36,500. It remains at 2% for those earning above that.

Dealing first with the revenue funding, this roughly means that councils are now getting a standstill budget in ‘real terms’. However, that does not mean there won’t be more cuts in the coming year. 

That’s because ‘real terms’ means an assumption that inflation will be 1.4% next year. No one really believes this will happen, certainly not a prudent council finance director. The OBR has forecast that the CPI will be 2.4% next year and the RPI 3.3%. Pay alone, which is 55% of the budget, will be around double the government’s inflation assumption according to the pay policy.

Then there will be the usual round of ‘unavoidable commitments’. These include demographic change, which IJBs alone calculate at 2% per annum. Most IJBs are already reporting big shortfalls in their planned budgets for next year and will be looking for additional financial support. Not helped by the £66m allocated for the living wage and other new care duties only being ‘support’, not the full cost.

COSLA calculated all these demands at 2.6%, plus 3% for a realistic inflation estimate. That’s where their £545m figure comes from, which was the basis for Scottish Labour’s budget proposal.

That leaves pay. Does the revised budget meet the Scottish Government pay policy, let alone the trade union side claim?

A 3% pay increase costs councils around £210m. As pay makes up around 55% of the revenue budget, £88m of the new money is for pay. Then councils can increase the council tax by 3% raising £77m, which by the same proportions is £42m for pay. That’s a total of £130m, or a shortfall of £80m. They could of course meet the cost by spending almost all the new money on pay, but that leaves almost nothing for inflation and those unavoidable commitments.

Councils also have less flexibility in other areas. They can increase charges again, but the income is dropping off every year they do this, quite apart from the regressive nature of many charges. Councils took £79m from their reserves last year, not something they can continue to do.

In summary, the extra money is very welcome and makes a significant contribution to the draft budget shortfall. It also means that local government is suffering as badly, but not much worse (this year at least), as other departments outwith the protected spending areas. However, it still means an underfunded pay policy and service cuts.

Budget wash up

I set out our immediate reaction to the UK Budget in Briefing 91 on Wednesday. In the light of day, the numbers are if anything slightly worse, although a real terms revenue cut of £199m, remains the bottom line.




The SPICe briefing calculates that the DEL Resource figures (that’s revenue or day to day spending) have increased by £347m over the period to 2020 compared with the plans set out in March. DEL Capital plans have increased by £509m over the period to 2021 compared with March plans. £1,115m in Barnett consequentials derive from Financial Transactions, which must ultimately be repaid to HM Treasury.




Overall, the DEL Resource budget will increase in cash terms in 2018-19 by 0.7%, which represents a real terms fall of 0.8%. This real terms figure is also based on a pretty optimistic view of inflation and the GDP Deflator in the OBR report. With CPI currently at 3%, getting down to 1.5-2%% next year looks overly ambitious.




We can also see who gains the most from this budget and it’s not the working poor. As JRF put it:
“Today’s announcement will help to ease the initial problems that many people face when moving over to Universal Credit, but the Government has decided to push ahead with big cuts to the amount of money people will receive. By failing to end the benefits freeze, the Government will oversee almost half a million extra people in poverty by the end of this Parliament. The Government’s big spending commitments for stamp duty giveaways and tax cuts prioritised higher earning households, with little support for people who need it most”


And it looks like any pay increase will have to be funded from existing budgets.

On public spending the IFS calculates that day to day spending on public services outside of the NHS is due to fall by yet another 7% over the next five years. Even the NHS is being squeezed as this table shows.

And no, austerity isn't coming to an end any time soon. The Chancellor clearly hasn't heard of the adage, 'when in a hole stop digging!'

The one positive from the UK Budget is the VAT exemption for police and fire services that provides around £37m extra for those services, but no backdating. There was an entertaining spat between the SNP and the Tories on this issue in the Scottish Parliament, but the truth is that neither of them have much to shout about.




In short, it was UNISON that first highlighted the risk of losing this exemption when national services were first proposed. The faces and frantic scribbling at the meeting, showed that few if any officials had considered this.




We were then told it would be sorted with HMRC and the Treasury. After some time and no response, we used Freedom of Information requests to tease out what was going on. It turned out that not only had the Treasury said that the s33 exemption would not apply, but the Scottish Government had been told that before they issued the final consultation.




We then proposed a way of structuring national services, which would have retained the exemption. However, that was also ignored by both the Scottish Government and the Tories who voted the Bill through.




As I said at the FBU lobby of parliament yesterday - the result is the loss of some £140m of revenue that could be used to keep emergency services going and award our members a decent pay rise.




So, the UK Budget wash up remains pretty grim - over to the finance secretary for the draft Scottish Budget on 14 December. Not an easy task as I explain in the Scotsman, and not made any easier by Wednesday’s smoke and mirrors.

Barclay review - mostly sensible reforms to business rates

The long awaited Barclay review of business rates hasn't exactly set the heather alight, but its recommendations are, in the main, pretty sensible.

The reviews main recommendations are set out in this helpful infographic.

The remit for the review was that the recommendations had to be revenue neutral. This means there are gainers and losers from the changes in both the structure and the reliefs.

The business lobby has long argued that business rates are too high in Scotland. However, they conveniently ignore the wider picture of business taxation. As this chart shows, businesses generally pay less taxation than their OECD counterparts.

The report recommends a number of administrative improvements such as three yearly revaluations. This is something UNISON has long argued for and the same should apply to the council tax on domestic properties. Better information, transparency and speeding up appeals and repayments are all reasonable. Plugging the many tax loopholes and a general anti-avoidance rule is a long overdue reform.

Big companies have obviously lobbied for consistency, but while the report supports standardisation, it doesn't recommend centralisation through another quango. This should remain a local system, reflecting local knowledge and that fact that most businesses in Scotland are local. The disappointment is that the review should have gone one stage further and returned the decision making on the level of business rates to councils.

The review also questions the effectiveness of the Small Business Bonus Scheme. The government has thrown huge sums of money at this scheme that could have gone into councils. A review in Northern Ireland has found that this relief could be better directed. Reform would also pay for the generous recommended changes in business support costing £45m.

There are winners and losers of reliefs. Town centres and day nurseries get new relief from business rates. It is perfectly reasonable to use tax reliefs to encourage particular policies and early years provision is a key element of tackling inequality. However, such support should come with at least some strings. The Scottish Living Wage would be a good start for the notoriously poor employment practices in many day nurseries.

The losers come in recommendations to restrict charitable relief. Private schools have come out with a predictable defence of their status. However, it’s not the purpose of charitable status to perpetuate the inequalities in our society that private schools sustain.

 

The other is sport and leisure facilities including council leisure trusts. Despite the claimed benefits of these organisations, the primary driver was tax dodging. If this loophole is plugged, as we warned it might, then councils should be taking these services back under direct control. However, this was one of the ways that councils coped with cuts to their budgets, therefore there would need to be compensatory budget uplift from the Scottish Government.

Supporters of Land Value Tax won't be pleased with the review, even if the door is partly ajar. They came to “An over-arching conclusion that we reached is that some form of property tax is still an appropriate way to fund the local services provided by councils”. While there may be a role for Land Value Tax as part of a basket of taxation, this is the right call.

Finally, the impact of the council tax freeze is highlighted in the revenue data. This chart shows how the council tax and business rates used to raise similar levels of revenue. Hopefully, ending the freeze will start to redress this imbalance once again.

While I might have wished for something a bit more radical, the review overall recommends some pretty sensible reforms. Not without some political challenges for the finance minister!

UK Budget 2017 - still no coherent economic plan

The UK Budget does little for hard pressed households in the short-term, and even less for the long-term health of the economy.

Let’s look at the issues that matter to UNISON members.

Austerity is supposed to be driven by the budget deficit, so some good news that deficit is reducing this year. However, the Office of Budget Responsibility (OBR) forecasts that it will go back up next year, instead of shrinking as planned. There is a modest short-term giveaway of around £1.7 billion in 2017-18, dominated by additional funding for local authorities in England to deliver adult social care. This is followed by a modest medium-term takeaway averaging around £750 million a year from 2019-20 onwards. So this is probably the best year we can expect for public spending for a while.

The Barnett consequential for Scotland of all this adds up to £350m. Very welcome relief, although still only a dent in the austerity cuts. It’s a bit like having your pocket picked and the thief returns part of his ill gotten gains.

Looking ahead, the OBR expects real GDP growth to moderate during the first half of 2017, as rising inflation squeezes household budgets and real consumer spending. The relatively strong start to the year implies 2.0 per cent growth in real GDP in 2017 as a whole (still very modest by historical standards), up from 1.4 per cent in November, with small downward revisions thereafter. Most experts think even these forecasts will be optimistic against most Brexit scenarios.

As always the devil is in the detail. For example, the OBR notes the decision to reduce the personal injury discount rate, which will substantially increase the size of one-off settlement payments. The Government has set aside an extra £1.2 billion a year to meet the expected costs to the public sector, notably to the NHS. Health Boards in Scotland take note!

Next, members will be concerned about wages. The OBR has made a downward revision to earnings growth of 0.1 percentage points over the forecast period, with the growth rate rising progressively from 2.6 per cent this year to 3.6 per cent in 2021. Wages are still below 2008 levels in real terms. Even this is a fantasy for public sector workers because of the UK and Scottish government’s 1% pay policy.

The OBR believes that additional employer costs such as the apprenticeship levy and pension auto-enrolment will be borne by the workforce through lower wages. Even though the latest data indicate that corporate profits have risen strongly in recent quarters. Non-oil corporate profits are estimated to have increased by just under 11 per cent in the year to the third quarter of 2016.

The headlines in the budget relate to the less favourable tax treatment of the self-employed. In fairness, there is some justification for these changes and it might make bogus self-employment marginally less attractive. However, there is no justification for the cuts in Corporation Tax, given the growth in corporate profits. Anyone who still believes in the Laffer curve should look at this chart.

So what does this mean for household incomes? According to the latest National Accounts, the headline saving ratio fell to 5.6 per cent in the third quarter of 2016 as consumer spending growth outpaced household disposable income growth. In effect the Chancellors increased revenues are being paid for out of squeezed household incomes and falling savings. Not a basis for a long term economic plan. This chart makes the point graphically.

Overall, while there is some short term public spending relief, the economy is currently being sustained by debt-driven consumption and a low exchange rate, and the Chancellor has done little to address the long-term challenges.

Council budget cuts - cutting through the spin

This year’s local government budget allocation has been subjected to even more political spin than usual. So here is my attempt at a bit of clarity.

The war of words in the Scottish Parliament chamber is about the Scottish Government’s draft budget and how much they have allocated to local government. That is a very important part of any council’s finances, but it isn’t the whole picture. 

Lets start with the Scottish Government’s budget allocation to local government. The 2017-18 draft budget will cut the local government budget by £327m.  

The detail of that is set out in parliament’s independent information service report and this chart shows very graphically how badly local government is hit. 

COSLA also fairly put local government funding into context when they say:

”The financial facts are straightforward on this matter:

• In 2017/18 the revenue settlement for Local Government fell by 3.6% (£349m)
• In 2017/18 Local Government’s share of the Scottish budget fell from 30.6% to 29.7%
• LG Revenue Funding as a share of SG funding has decreased by 3.7% (£1bn) between 2010/11 and 2017/18 

Make no mistake the Scottish Government has a political choice here and with additional cash of £418m for next year there was no need for such a drastic cut to Local Government.”

The Scottish government responds to attacks about cuts to local government budgets by listing funding for their key policy initiatives for example:

• £120m for pupil equality scheme 
• £140m for energy efficiency 
• £47m to mitigate the bedroom tax 
• £470m for capital funding for housing 
• £107m social care funding 

Worthy though this spending is, it has little impact on the £327m budget cut. This is because this money is ring-fenced – it’s to pay for new initiatives and so can’t be used to plug the gap caused by the budget cut. The pupil equality scheme will go straight to schools; the social care funding is to pay for the living wage in social care, much of which is provided by the third and private sectors. Capital funding doesn’t pay for day-to-day services and so on. 

The one additional source of revenue that the Scottish Government can fairly refer to (although not include in their budget) is the £111m extra revenue generated by changing the council tax bands. In addition, any council that decides to increase the council tax (capped at 3%) will also generate real income (up to £70m nationally) that will mitigate the budget cut. 

I think councils should use these powers to mitigate austerity. I understand the argument that the Scottish Government is not increasing its basic rate of income tax, but expects councils to increase the basic rate of council tax. However, as my old gran used to say, ‘two wrongs don’t make a right’ – councils should not be the local  ‘administrators of austerity’.

Even this additional council tax funding will vary council by council, depending on their housing mix. For some authorities the number of households paying more tax will outweigh those paying less through the changes to the council tax reduction scheme. In other councils with a higher proportion of low-income families and fewer expensive homes, the picture will be more challenging. 

When UNISON branches sit down with their council finance directors they will find the reality of the local budget bears little relationship to the claims made in parliament. 

The council budget starts with their allocation (in itself controversial) of the Scottish Government cuts, mitigated by the extra council tax revenue and other modest income sources. Then they will be faced with what are described as ‘unavoidable commitments’. This year the biggest of these is likely to be the Apprenticeships Levy and it is as yet unclear how much of that money, if any, will come back to local authorities to support their apprenticeship schemes. In fairness, some of the ring-fenced grants will obviate some of what would have been unavoidable commitments, like the social care living wage costs. The result of this calculation will be budget deficit.

In conclusion, the finance minister’s spin simply doesn’t match the budget reality on the ground, but opposition parties also have to accept that there is some mitigation. However, the net result will be a big cut in the real budget for every local authority, although the scale will vary between councils. This will result in service cuts and even more job losses. 

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!

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.

       

             

Scotland's Budget 2016

The Fraser of Allander Institute has published a report; Scotland’s Budget 2016, which analyses the outlook for Scotland’s public finances.

 

Around 50% of the Scottish budget will now be funded directly by the revenues raised in Scotland, rather than simply relying on a block grant from Westminster. This requires new arrangements for managing economic risks that might impact the annual budget. Fiscal devolution on this scale is largely unprecedented internationally and certainly within the UK. Therefore independent analysis of this sort is very welcome.

 

As more revenues are raised in Scotland we need to take a closer look at the economy. The report highlights fragile economic growth that has lagged behind that in the UK as a whole over the past year with growth of just 0.6%, compared to UK growth of 1.7%.

 

The outlook for the Scottish budget to 2020-21 is not encouraging. The Scottish budget has faced unprecedented cuts since 2010. This year, Scotland’s resource budget is around 5% lower in real terms than it was in 2010-11. Capital spending has been hit particularly hard, down 12% in real terms since 2010-11. While we need to await the UK Autumn Statement to see what a ‘reset’ for UK fiscal policy actually means – it is unlikely to mean an end to austerity. The report suggest that the Scottish budget could be cut by between 3% – 4% in real terms by 2020-21 and up to 6% – around £1.6 billion – under a worst case scenario. The Scottish Government has decided to make only a modest use of its new powers, totalling less than 1% of the overall budget.

 

Despite this difficult financial position, the Scottish Government has announced plans to increase health spending by £500m more than inflation by the end of the parliament. It has also committed to maintain real terms spending on policing and has a flagship policy of doubling the provision of free childcare with a £500m price tag. The report says that delivering these commitments will require difficult decisions and a serious re-prioritisation of existing spending. This means that other ‘unprotected’ public services could face an average reduction of 10% to 17% (2.6% to 4.5% annually) in real terms by 2020-21.

 

Local government is likely to yet again face the brunt of the cuts. As an area of ‘unprotected spend’, the report suggests that the grant to local government could be reduced by around £1 billion on a like-for-like basis by 2020-21 – with increases in business rate and council tax income only partially offsetting these cuts.

 

As the report concludes, the scale of the challenges facing the public finances means that bold and radical solutions will be needed. Business-as-usual is not an option.

Under Pressure

The latest Audit Scotland report on local government: An overview of local government in Scotland 2016, does not make for cheery reading. Revenue funding is now 11% lower than 2010/11 at a time of increasing demand. The report points out that, so far, councils have focused on “incremental savings to existing service” but with more cuts in the pipeline “councils should be evaluating options more significant changes to delivering services”
This confirms, albeit in management speak, what UNISON has been saying: that salami slicing is no longer an option and that without increased funding local government will no longer be able to deliver its current level of services.

The report confirms that savings have been made through job cuts and that more are planned due to the “significant funding reductions to come” and again confirms UNISON’s concerns about the impact of the loss of skilled staff on service delivery now and in the future:
The report calls on authorities to ensure that they have
“people with the knowledge, skills and time to design develop and deliver effective services in the future”
Public satisfaction with services is already dropping as the cuts begin to bite.

Key financial pressure on local government

Funding reductions
Increasing pensions costs
Reduced financial flexibility
Equal pay and the living wage

Key service pressures
Increased demand through demographic change
Health and social care integration
Service performance
Staff reductions

Local government delivers essential services across Scotland and requires adequate funding. The Scottish Government needs to ensure that local government is funded properly to meet the priorities the Scottish Government sets for it (e.g. expanding childcare hours, teacher numbers) and has access to raise money locally through fair taxation to meet their own local priorities

The report contains lots of useful information for UNISON campaigns against cuts and a self assessment tool for councillors to support them in their work. This is a useful tool for branches in analysing management plans and will be added to the UNISON anti-cuts toolkit.

The Scottish Budget and those job losses

In recent days there have been many political exchanges over job losses as a consequence of the cuts to council grant allocations in the Scottish Budget for 2016/17. Let’s look at the issue calmly.

John Swinney’s view is that job losses have been “utterly exaggerated”. Christina McKelvie MSP says, “But there are not 1,000’s losing jobs, that’s just made up”.

The most widely quoted estimate for job losses is 15,000. This figure doesn’t come from the trade unions; it comes from COSLA. They do after all after access to most of the councils and their senior officials that actually have to deliver the cuts. I am not a party to their calculations, but it is clear that they are based on the consequences of both the grant allocation cut and the additional unavoidable commitments councils have to finance next year. 

What we do know for certain is the combined General Resource Grant + Non-Domestic Rates Income figure, which is used to calculate local government’s total revenue settlement, falls by 5.2%, or more than £500 million, in real terms (the equivalent figure in cash terms is a reduction of 3.6%, or £349m). We don’t know the sum total of the additional commitments, although the largest element is likely to be the increase in National Insurance contributions that COSLA estimates at £125m. That alone takes the cash cut to £474m, but in practice it will be much higher when you take account of other service pressures.

If we look back historically, SPICe calculates that the local government budget fell by 6% between 2008/9 and 2015/16. We also know that local government employment during that period fell from 314000 to 244,800 (latest figure). Allowing for police and fire transfers that means at 42,400 jobs were lost during that period. We generally round that figure down to 40,000.

It isn’t a linear calculation to say a 6% cut equals 40,000 job losses, but it does give you an idea of the scale of the employment challenge when councils are facing at least a 5.2% cut in the coming financial year.

The reason no one can give a precise figure is because councils will use a variety of measures to make the cuts. Some will use reserves or other financial instruments to mitigate some of the cuts. Some service cuts are more staff intensive than others, although council services by their nature are staff intensive. The proportion of the budget that constitutes staff costs depends on how you calculate total expenditure, but a rough figure for most councils would be around 60%.

From local budget consultations that have taken place, we do have some idea of job losses. Several councils have provided estimates although they should be used with caution given that they depend on negotiations and other savings assumptions, including cuts in terms and conditions. However, some 8000 job losses have been identified so far and we expect that number to grow as budgets are finalised.

So, are the job loss estimates ‘utterly exaggerated’. Historical precedent would say they are not. At best you could say they might be less than 15,000. Our more optimistic estimate has been 10-12,000 and those may not all be implemented the coming financial year. Our estimates have proved to be fairly accurate in the past, but there are too many variables at present to be sure. We can be pretty certain that the number will be many thousands - so I’m afraid Christina McKelvie needs a reality check.

The bottom line is this. If anyone can explain how you can cut over £600m from council budgets, when 60% of spending goes on staffing, without job losses – then I would love to hear from them. Our local government members across Scotland would be delighted to see that magic trick.

Budget Bill - Stage 3

The Scottish Budget is debated at Stage 3 in parliament tomorrow. While there is plenty of pain for all public services, it is local government that is bearing the brunt of austerity in Scotland.

 

In our MSP briefing, I set out the implications of the budget for all public services - little of it is positive. However, the focus of the debate inside and outside parliament has rightly been on the local government budget settlement.

 

The budget allocation to local government in 2016-17 will be £10,152.3m, a substantial reduction on the 2015-16 allocation of £10,756.7m, even allowing for some reprofiling of capital expenditure. Within this allocation, the combined General Resource Grant + Non-Domestic Rates Income figure, which is used to calculate local government’s total revenue settlement, falls by 5.2%, or more than £500 million, in real terms (GDP deflator - inflation). The equivalent figure in cash terms is a reduction of 3.6%, or £349m. Both numbers are often bandied about, so it is important to differentiate them.

 

It is worth mentioning that the income from non-domestic rates is the second largest source of revenue after the Scottish Rate of Income Tax (SRIT). This year the estimated revenue is down by £31m, 2.8% in real terms. This decrease does not reflect the Scottish Government’s optimism about economic growth and in previous years the estimated income has risen considerably, e.g. by £150m last year. We can only hope that this isn’t a backdoor way of creating an under spend to the Scottish Government budget.

 

Scottish ministers often argue that local government has had a fair share of the Scottish budget over the years. This is a dubious claim when you consider that councils are the only main spending portfolio to have suffered a cash cut. However, it certainly isn’t true this coming year. Local government’s percentage share of the Scottish budget also falls 1.7% from 32.3% to 30.6% in 2016-17 (although on a like for like comparison, the percentage share falls by 1.1%).

 

If we take a slightly longer look, we can see that the Scottish Government is cutting councils more than itself. Since the 2013-14 transfer of police and fire, the local government settlement has fallen by 1.9% in real terms (-£200.9m), whereas the Scottish Government’s DEL+NDRI has increased by 3.2% in real terms (+£1,018.8m). This chart from SPICe illustrates this point.

 

In addition, councils have been blocked from increasing the Council Tax. This brings the total cost of the freeze in 2015-16 to £630m, and the total cumulative cost from 2008-09 to 2016-17 to £3,150m. Just imagine how many services and jobs could have been saved with this resource.

 

COSLA has estimated that this settlement will result in 15,000 job losses. It is difficult to estimate actual losses because it depends on the services councils decide to cut and how they use reserves and other financial instruments. Unavoidable commitments, such as employer National Insurance contribution increases (£125m for councils alone), will add to the pressure. Even if 15,000 is at the higher end, we know for certain that of the 50,000 jobs lost in devolved services since the crash, 40,000 of those are in local government. That certainly feels like councils are taking the brunt of austerity.

 

As the First Minister has fairly pointed out, unless you increase the overall budget available, protecting one service area inevitably means cuts to another. It used to be the case that the Scottish Parliament didn’t decide the size of the budget; it was largely limited to how it is divided up. That is no longer the case, because Parliament now has the Scottish Rate of Income Tax. We agree that the Calman powers are flawed, but they are still progressive and there will be an opportunity to make it more progressive when the new Scotland Bill’s powers are implemented.

 

I fully accept that the root cause of these cuts is the UK Government’s ideological attack on public services. However, devolution is about doing things differently in Scotland. We have the powers to mitigate austerity as we outlined in our report last year and by using the new tax powers. MSP’s should choose to combat austerity, not simply pass it on to community services.

 

Using procurement to tackle the tax dodgers

The tax dodging activities of companies has come under a lot of scrutiny, but we could do more to tackle this abuse in Scotland with existing powers. Companies who want to bid for taxpayer funded contracts should pay all their taxes.

 

The recent focus has been on Google, following a deal with HMRC to pay £130m in back taxes and bear a greater tax burden in future. This constitutes a 3% tax rate, something small and medium size business across Scotland can only dream of. As Richard Murphy of Tax research put it: “George Osborne is not getting the deal the UK tax payer will be expecting. It is a special rate of tax that would not be available to anyone else.”

 

Even the EU has been shocked over the methods used by multinationals minimise their tax liabilities in Europe. We have had the Luxleaks revelations, media exposure of how hundreds of global companies including Pepsi, Ikea and FedEx had secured secret sweetheart tax deals with Luxembourg, allowing them to save billions of euros in taxes. Before that it was transfer pricing and investment loopholes that allow big companies to pay less tax.

 

This abuse also has an impact on global poverty. Just 62 billionaires own the same wealth as half the world’s population – that's 3.6 billion people. This extreme inequality is being fuelled by a global network of tax dodging. Poor countries are losing at least $170 billion a year to tax havens – money that is desperately needed for vital services like healthcare and education.

 

We don’t tend to think of Scotland when tax havens are discussed. However, as the Sunday Herald recently reported, Scotland is being advertised as a tax haven across Eastern Europe. As one advert proclaims; "Having registered a company in Scotland, by using offshore rules, you do not need to carry out any audits and, furthermore, there is no requirement to provide financial reports."

 

The number of limited partnerships in Scotland has more than doubled from just over 6,000 to nearly 15,000 since 2009. We now have more of these firms than England and Wales put together.

 

Scottish Labour raised questions about this last summer after an international investigation into the alleged fraud of three Moldovan banks uncovered that some of the companies used were in Scotland. Labour's Jackie Baillie said: "It is extraordinary that Scotland is being described as an offshore tax zone. Somebody should be looking long and hard at how to close this loophole."

 

The Scottish Government has urged Westminster to simplify the UK tax system and abandon what it claims is; “the unnecessary complexity which creates opportunities for tax avoidance through countless exemptions, reliefs, deductions and allowances”. The House of Commons Treasury Committee has launched an investigation, with the Chair making similar observations about complexity.

 

Nicola Sturgeon has described tax dodging as “obscene, immoral and downright wrong”. In response to a question on Amazon from Liberal Democrat leader Willie Rennie she said: “All companies should pay the tax that they are due to pay. The Scottish Government, with the limited tax responsibilities that we have, takes tax avoidance very seriously.”

 

The Scottish Government’s tax avoidance measure used by Revenue Scotland is better than the UK approach. However, the same cannot be said of procurement. The public sector spends some £11bn each year in the private sector and this should be used as part of stronger efforts to tackle tax dodging and tax avoidance. It is entirely wrong that companies seeking to avoid paying their fair share of tax should be awarded public contracts.

 

The Public Contracts (Scotland) Regulations 2015 were considered by the Infrastructure and Capital Investment Committee last week. UNISON’s briefing to MSPs questioned why the Scottish Government is not using powers that it has for mandatory, rather than discretionary, exclusion of companies that have not met their tax obligations and /or breached environmental, social and labour laws, and to exclude companies involved in aggressive tax avoidance? If we had these provisions in place, Anglian Water, or almost any of the privatised UK water companies, would be highly unlikely to have even bid for the public sector water contract.

 

Dave Stewart MSP highlighted this to the committee last week, he said: “there is a big gap in that there is no reference to or substantial action on tax dodging. I support the moves by Christian Aid, the Scottish Trades Union Congress, Unison and others to restrict from Government procurement companies that avoid paying tax.”

 

We have demonstrated how this can be done (including a 2014 proposed amendment to the Procurement Bill). It has been argued that it is too complex for procurement managers. The solution is to require companies to sign up to the Fair Tax Mark. A Scottish firm, SSE was the first company to do so.

 

Given the Scottish Government’s rhetoric on tax dodging and the practical steps in the Revenue Scotland and Tax Powers Act, I am at a loss to understand why they are not taking action on procurement. Local and regional authorities across Europe are taking a stronger line than Scotland.

 

The bottom line should be – companies who take the taxpayers pound, should pay their taxes in full.

Scottish Budget: getting serious about tackling austerity

In tomorrow’s Scottish budget debate, if they are serious about opposing austerity, MSPs need to do more than badly administer George Osborne’s efforts to wreck our public services.

The Scottish Parliament will debate the Budget Bill on Wednesday. The big loser in that budget is local community services with a cash cut of 3.5% or £350m in 2016-17 - that's 5.2% or £500m in real terms. On top of that there are additional commitments like the NI increases that could double the cuts. As well as the loss of valued local services, there could be as many as 15,000 job losses, with the consequential impact on the local economy.

This has inevitably resulted in a fraught discussion between CoSLA and the Scottish Government over the grant allocation. Not helped by John Swinney’s draconian penalties for any council daring to consider an increase in the Council Tax. CoSLA voted to reject the package last Friday, a position supported by those authorities not in CoSLA.

The one positive element from the budget discussions is an allocation from the £250m identified for social care, to pay the Scottish Living Wage to care workers. There still needs to be clarity over how this money is allocated, but this would make a significant contribution towards the staffing crisis in Scotland’s social care provision.

The problem with an austerity budget is that unless you expand the spending envelope, the debate simply deteriorates into robbing Peter to pay Paul, as the First Minister has fairly pointed out. The departing CoSLA Chief Executive Rory Mair hit the nail on the head in his parting interview in the Sunday Herald, he said:

“Scotland and local government have the power to raise more tax. So why are we keeping tax the same and making public service cuts? That’s the very definition of an austerity budget. If you self-deny the ability to raise more money and you decide that the way to deal with a downturn in resources is to cut, however you dress it up, that’s an austerity budget.”

Today, Scottish Labour leader Kezia Dugdale took a bold move to break away from austerity economics. She proposes increasing the Scottish Rate of Income Tax (SRIT) by 1p. This will raise around £480m, less a £50m rebate to ensure that low paid workers under £20,000 per year don’t lose out.

The reluctance to use the SRIT is in part because of our criticism of the Calman report on these powers. We have allowed a narrative to develop that, because we can’t have different rates or change the income tax bands, any use of these powers is not progressive. I confess that I have been one of those who has allowed my criticism of Calman to allow this narrative to develop.

The Calman tax powers are certainly flawed, but that doesn’t mean they are not progressive. As David Eiser from Stirling University explains, "the poorest fifth of Scottish households would experience a fall in net income of slightly less than 0.2%, whereas the richest fifth of households would experience income falls greater than 1%. So a rise in the SRIT is slightly progressive". And of course Labour’s plan means that low income earners are protected, making it even more progressive. In addition, the Calman restrictions on bands and rates will end when the Smith Commission powers are implemented, probably in 2017.

Research by the IFS into raising the basic rate of income tax across the UK found that the top half of the income distribution; “would contribute 84% of the revenue from an increase in the basic rate of income tax.”

In fairness, John Swinney accepted this in his evidence to the Finance Committee last month, when he said: “I view the Scottish rate of income tax as a progressive power... Clearly, people on higher incomes will pay comparatively more than people on lower incomes.”

There is growing evidence that people understand that if we are going to avoid these cuts, and protect the things we value, the money has to come from somewhere. Previous proposals to increase income tax have been in very different circumstances.

Scotland now has a real opportunity to break away from austerity. I hope the Scottish Government will take this opportunity to build a cross party consensus that stops the savage cuts to the services which vulnerable people rely on. That's what being an anti-austerity party really means.