Tuesday, 17 January 2017

Anyone for Tennis?

Political debates sometimes seem a bit like tennis.

First Minister’s Questions (FMQs) is a serve and volley game: a question is served, the First Minister returns with as much spin as she can muster and her opponent might get just one chance to volley it back. There’s no time for lengthy baseline rallies to expose each other’s weaknesses, the serve dominates the game.

This is why opposition parties who challenge the SNP on why they aren’t raising taxes against the rich make a tactical mistake. The smarter serve would surely be to ask why they don’t reduce taxes for the poor?

The SNP now have the powers to do so if they wanted to. The basic rate of income tax chosen by Westminster is 20% and applies to earnings above £11,000. The Scottish Government could help those subjected to in-work poverty by simply lowering the basic rate* and/or raising the amount you need to earn before you pay it.

So why don’t they? Of course they’d need to make difficult decisions about how to fund that tax cut, but that’s what a party of government is supposed to do.

Maybe they could decide that some higher earners can afford to pay for their prescriptions or their children’s tuition fees, maybe they could have the courage to tax higher earners a bit more. The point is that the debate should start with why the SNP aren’t choosing to do more to help the poor - addressing how that help should be funded is the secondary question, something for later in the rally.

But if FMQs and debates in the chamber are serve and volley tennis, Holyrood’s committee rooms are the clay courts. Dominated by long and often tedious baseline rallies, this is where politicians need to be able to show that they can do more than simply block back questions with well-rehearsed replies.

Which brings us to SNP Finance Secretary Derek Mackay’s rabbit-in-the-headlights performance before last week’s Finance and Constitution Committee.

Regular readers of this blog will know that - despite SNP rhetoric about “Tory cuts” - the total Scottish budget for 2017-18 shows a whopping £371m real-terms year-on-year increase1. It’s even increased in real terms since the pre-austerity peak of 2009-102, despite North Sea oil revenues having declined by nearly £6bn since then3.

Of course this is only possible because we voted against independence and continue to pool and share our resources within the UK. This simple fact bears repeating: taking our fair share of the UK’s costs - as determined by the Scottish Government when compiling the Government Expenditure and Revenue Scotland (GERS) figures - we now effectively get back over £9bn more from Westminster than we send in taxes4. That’s over £1,700 for every man, woman and child in Scotland.

So Derek Mackay is a very lucky man. He has more money to spend and more power than any Finance Secretary before him. He could take pressure off the poorest in our society by topping-up benefits and he could address in-work poverty by shifting some of the tax burden onto those with the broadest shoulders.

When Tory MSP Murdo Fraser asked Mr Mackay to confirm the growth in the Scottish budget, his response was astonishing.

(see here). 

He admitted to the increase this year (how could he not?) but on the longer-term question he kept insisting that there had been a real terms 9.2% reduction. It quickly became embarrassingly clear that Mr Mackay was neither familiar with the various spend categories in the Scottish budget nor with the difference between the actual budget year under discussion and some flaky longer-term forecasts5.

Maybe there aren’t many people who understand the differences between the Total Budget and Departmental Expenditure Limits (DEL), non-cash DEL, financial transactions, capital borrowing and Annually Managed Expenditure (AME)6 – but surely we should expect our Finance Secretary to be one of them?

Here I confess to feeling some human sympathy for Mr Mackay. He is clearly out of his depth, a man promoted well beyond his ability. That’s not his fault, the responsibility for that must lie with the person who promoted him: my new fellow Daily Record columnist, Nicola Sturgeon.

To be fair to our First Minister, it can’t have been easy choosing a Finance Secretary when the talent pool is so shallow. This was illustrated just in the last week, with MSPs Gil Paterson and Sandra White following their colleague Paul Monaghan’s lead by taking to Twitter to advertise their ignorance about how Scottish Export Statistics work7.

I started this blog comparing politics with tennis - but tennis is just a game and politics is about real people’s lives. So I hope Ms Sturgeon uses her new platform in the Daily Record to do more than just deflect blame onto Tories, Westminster and Brexit; I hope she shows the Record's readers enough respect to start honestly addressing the economic realities of the choices we face.


*It's been rightly pointed out by a reader (see comments below) that the Scottish Government does not in fact have power to change the personal allowance (the limit at which you start paying tax). Whilst this is technically true, they *do* however have the power to create new tax bands, so they could simply introduce a new zero-rated band to effectively increase the personal allowance as I hypothesise - my point still stands.

1. £371m real-terms budget increase

See Annex G, Table 4, p172 of the Scottish Draft Budget 2017-18
Total Scottish Budget 2016-17 = £37,031m
Total Scottish Budget 2017-18 = £37,945m
Growth in Nominal Terms = £914m (2.5%)

Applying UK GDP deflator (as used elsewhere in Scottish Budget) of 1.45% for 2017-18
Total Scottish Budget 2016-17 = £37,031m
Total Scottish Budget 2017-18 adjusted for Inflation= £37,403m
Growth in Real Terms = £371m (1.0%)

2. Real-terms budget increase since 2009-10

Using same sources as note 1. above (see Spinning the Scottish Budget part III)

3. £6bn decline in North Sea oil revenues

See GERS 2015-16: Support Tables, Table 2.1
North Sea Revenues 2009-10 = £5990m
North Sea Revenues 2015-16 = £76m

4. £9bn effective fiscal transfer

see The £9bn Fiscal Transfer vs The £15bn GERS Deficit

5. Derek Mackay's "9.2% real-terms decline"

See here: Mackay repeatedly refers to "over a 10 year period a real-terms reduction of 9.2%" and says later "has been reduced" by 9.2%.

As explained in Spinning the Scottish Budget: Part III, the -9.2% is taken from Table 1.01:
As I explain in the above blog post, this figure is based on a frankly flaky forecast to 2019-20 (so Mackay is simply wrong when he says "has been reduced") and even more importantly this figure excludes critical elements of the Scottish Budget (see note 6. below).

6. Here are the various components of the Scottish Budget that Derek Mackay excludes when he erroneously refers to a 9.2% decline (in addition to the fact he uses the flaky 2019-20 forecast year instead of the 2017-18 budget year under discussion):
  1. Annually Managed Expenditure (AME) - which pays, for example, NHS and teachers' pension
  2. Capital Borrowing - an essential part of the Scottish Budget (whether the borrowing is directly by the Scottish Government or by the UK government on our behalf, it's still debt and it still funds our spending)
  3. Net DEL adjustments - the assumed impact of using devolved powers
  4. Financial Transactions (effectively more borrowing) &Non-Cash DEL
More detail can be found in Spinning the Scottish Budget: Part III

7. Some SNP MSPs like to suggest that Scottish goods leaving the UK are not counted as Scottish if they go via English ports. This is simply not true, as the Scottish Government website makes clear on at least three separate occasions

This doesn't stop the likes of Gil Paterson and Sandra White spreading memes that suggest the opposite.

In both cases - when politely made aware of the misleading nature of what they'd shared they made no effort to correct the misconception.

In fact Sandra White thought the whole sorry affair was hilarious
By knowingly perpetuating a lie that helps their argument, these MSPs show total and utter contempt for their followers, for Scottish voters.


soccer doc said...

Some specific points on this one
1. you say "So why don’t they? Of course they’d need to make difficult decisions about how to fund that tax cut, but that’s what a party of government is supposed to do." - but only if they think it best to do so. As you say there would need to be difficult decisions made. Despite all the fluff about free tuition in HE, the fact is that the cost to govt would not immediately go down, for who is going to fund in the immediate future, the fees the students would then have to "pay" if not govt? The Universities would still be looking for their funding now. Prescription charges? How much would that really save given the regime of exemptions, not to mention "season tickets" that would have to be implemented. And for those who cannot afford the up front season ticket charge, most of them will be among the disadvantaged - the elderly on no more than the state pension, as well as those who suffer ill-health. Cut Council tax some more perhaps? Or maybe education? Or maybe the NHS to make it a bit more like the utter chaos there is in England?
2. They could charge higher earners a bit more, but there is a strong possibility that the really higher earners (I dont mean anyone who pays 40% btw) would avoid paying.
3.The Scottish budget "even increased in real terms since the pre-austerity peak of 2009-102, despite North Sea oil revenues having declined by nearly £6bn since then" - that only works if you include AME on which the SG have no influence either on its amount or what can be done with it. This https://www.gov.uk/government/publications/how-to-understand-public-sector-spending/how-to-understand-public-sector-spending confirms that. It is, to quote the document directly "money spent in areas outside budgetary control – this is all spending that is not controlled by a government department and includes welfare, pensions and things such as debt interest payments". In short Kevin, the SG have about as much influence over AME as the Amazon delivery man has over what is contained in the cardboard package he will deliver to me to tomorrow. Isnt it about time you stopped this utterly misleading argument? In that regard your criticism of MacKay for not understanding the difference between AME and DEL is quite astonishing, for you dont seem to have much of a grasp of it either.
4. You say we get £1700 more back than we send in taxes. Could the people on your side come to some sort of agreement on this. A couple of weeks ago Alex Gallagher said in the Heraldn that it was £1500. If you are trying to mislead at least try to be consistent! Moreover, what happened to "pooling and sharing", or is that relevant only when Scotland might be getting more than its population share? Remember, if we go back to 1980 Scotland has been a net contributor, taking a geographic share of oil into account.
As for much of the rest, the reliance on ad hominems is telling - why play the ball when you can boot the man on to the track? Usually indicates a lack of telling argument though.

Kevin Hague said...

1. Oh don't follow your logic at all - I just gave a couple of examples (I could have talked about baby boxes or bridge tolls or much else) - the point is these are offered as universal benefits including to people who could well afford to pay - there is a very real opportunity cost to these things

2. Oh dear - we can never increase taxes because might not pay them? ridiculous argument

3. I fully understand AME from which (for example) NHS and teachers pensions are paid and which is included in the departmental budgets presented - are you suggesting that cost is not relevant to Scotland? Of more importance (and of far bigger impact) is the fact he ignores devolved borrowing - the fact you don't mention that in your scramble defence is - well - astonishing

4. Read the detail I provide - it's in the notes, it's audit-trailed to GERS - as for ad hominem, I am specifically criticising his performance in the committee and his transparent lack of any grasp on the detail

Andy said...

Typical SNP apologist - we cannae dae everything so we're no gonnae dae anything.

Typically ironic assertions about "utterly misleading arguments" and "ad hominems" from a man that looks like he's regurgigated misleading and ad hominem arguments from Wangs.

soccer doc said...

bringing in the cavalry now are we? Pity its a donkey!
Perhaps you could tell me which of my arguments has been made on Wings, with whom I have my own issues.

Unknown said...

The current benefit gained from pooling and sharing from a population base of 64 million would, I suggest, be unsustainable in pooling and sharing from a population base of 5.4 million.

Anonymous said...

The SNP have backed themselves into a rather unusual corner.

Free prescriptions, paid tuition fees et al were essentially bribes to the electorate rather than serious policies - bribes that were supposed to have worked in the referendum of 2014. That they did not work was certainly unfortunate (for the SNP) but removing them would be unpopular. This was not supposed to matter, unpopularity would have been happily accepted in the new independent Scotland that would be faced by some extremely challenging fiscal decisions, after all, job done, no going back. Trouble is unpopularity is kryptonite to the SNP as long as another independence referendum remains a possibility in the short term.

This bleeds over into all of their thinking and compels an extraordinary legislative timidity. This timidity has to be combined with aggressive bombast as a smoke-screen. Hence we find ourselves in a situation where our government loudly demands extra powers - or feet will be held to the coals, apparently - whilst being terrified to use them in case anyone who might be inclined to secession is deterred from voting for it. In other words they crave power shorn of responsibility.

In the long-term this must change but it is where we are for now.


John Silver said...

I'm sure you will correct me if I'm wrong, but I understood that the Scottish government does not have the power to alter the personal allowance. Raising this would be the single most effective way to put more money in the pockets of the lowest paid.

Andrew Veitch said...

The challenge Scottish politicians have is that:

a) People want more government spending, more services, etc.

b) People do not want to pay more tax.

On point b) while this is clear from what people tell social attitude surveys and is even stronger when ballots are actually cast.

So from an electoral point of view the SNP have the right approach: talk lots about good things but don't actually do anything substantial. Conversely Scottish Labour's position while more honest is a guarantee never to be elected.

Kevin Hague said...


That's interesting - you might be right!

"The Scottish Parliament will be given the power to set rates and bands of nonsaving
non-dividend income tax" (from Fiscal Framework Agreemen


The Scottish Parliament will be able to set the rates and band thresholds (excluding the personal allowance) for the first time for tax year 2017/18. from SRIT paper here

I'll ask around

Anonymous said...

"we now effectively get back over £9bn more from Westminster than we send in taxes".

£9bn taxes?

I beg to differ.

HMRC Taxes raised in Scotland (National taxes)


VED (National taxes!)

BBC (National taxes)

Please kindly point out other taxes sent south?

Council taxes + Business rates + Water rates + SDLT + etc arn't sent south.

Kevin Hague said...

John - see revised text in blog above - you're right but by introducing a new zero-rate band can create same effect (so the only thing they can't effectively do is lower the personal allowance)

Kevin Hague said...

Anonymous - please see note 4. and linked blog and various blog posts on here - the £9bn is a very simple and very robust number which I defined carefully in the text - hence reference to GERS allocations and "effective" fiscal transfer

Mark said...

It would be nice to see a more mature conversation about taxation and spending from all of our political parties - I don't think you can just blame the SNP. You undermine your argument a bit when you describe a 1% increase in the budget as "whopping", particularly given that it's barely increased since 2009, while demands on services have increased substantially. The implication is that there's plenty of money, and I don't think that's the case.

At the end of the day, if we want the government to increase spending (I do, and it sounds as if you do), they either need to raise taxes or borrowing (or grow the economy, but that seems remote). Their power to borrow is limited, and not intended to fund deliberate increases in resource spending.

Raising income tax on the highest band is unlikely to raise much I would have thought. Everyone else is probably feeling the pinch to a greater or lesser extent. If you want to increase taxes, it would surely be best to tax wealth, and the wealthiest, as that will deliver most growth. But most of those taxes are reserved (CGT, inheritance, corporation etc).

A compare and contrast blog on the way the main parties propose to address these issues, and how realistic they are, would be nice. It's easy to criticise the government, but what are the alternatives?

Kenny said...

Further to the back-and-forth above:

1. There are some aspects of government policy that are about more than just short-term fixes to political problems. Some are genuinely strategic. Baby boxes, for example, might feel frivolous and maybe the poem was awful, but the impact in Finland seems to have been measurable. If the same is true for us, we won't see that economic impact for years, maybe decades yet. For prescription charges, it's pretty well established that the costs of universalism would not be outweighed substantially by cash raised from means testing. Even if it was, there's still a risk of low income patients skimping there in tough weeks and thus ending up costing the economy more in lost productivity and also costing the NHS more in escalated health problems.

2. Are we rejecting any notion of tax competition now? Interesting. Anyway, you know we're not talking about the difference between income tax rates in Denmark and Scotland here. For a businessman like you, it would be very easy for you to shift the bulk of your income to dividends rather than salary and thus avoid a higher SRIT anyway. I actually would like to see a zero band introduced, with the shortfall made up by ditching Council Tax and introducing LVT (which could be potentially lucrative, given our ratio of land to homes and people.) Given the psychotic media and Opposition responses to the very mildest land reform and tax issues, is it any wonder the SG is so timid though?

3. You know as well as I do that AME can't be laid at Derek McKay's feet. You wouldn't get mad at your Financial Director for not pilfering money from people's pensions to put more cash into R&D. He can only work with the money he's got to work with. What you've done here is make an argument about an independent Scotland. That may be a legitimate argument, but there's no independent Scotland immediately predictable anyway, so why use such sleight of hand to avoid accepting that DEL really has been cut?

4. This is a tired argument. I've gone over the independence dividend here before. The very concept of "getting £1700 per person BACK" is problematic, because you know much of that is money spent "for" Scotland elsewhere - mostly London - and that includes things like debt, state pensions and "imperial services" which are beyond Scotland's control. Again, unless your chief motive is to attack independence rather than actually scrutinise Derek McKay, those things are not really relevant.

Kevin Hague said...


1. they were just a couple of examples - and by the way all the analysis I've read suggests free prescriptions *are* a material net cost, you're comment re it not being a net cost is commonly made but never supported - but the point is that all expenditure and all freebies (toll free roads, council tax freezes etc.) have an opportunity cost and one of those opportunities is reducing taxes for low earners. I wasn't proposing a manifesto, I'm making a broader point about the nature of the debate

2. are we? i don't see where I mentioned that in this piece (although I'm no fan of a race to the bottom on taxes)

3. AME: in addition to the pensions point I've made (its money spent in Scotland, paid to Scots) it also includes Non Domestic Rates Income (NDRI) and - as Fraser of Allander Institute explain - "NDRI is raised through taxing business properties and is ear-marked for local government. As the Scottish Government has full responsibility for NDRI, this element of AME is very much part of the discretionary budget. NDRI has increased by 14% in real terms between 2010/11 and 2017/18.". When you say "DEL has really been cut" - total DEL is also up this year(£346m in real terms). As FofA also point out "It is debateable whether or not comparisons just with 2010/11 are appropriate. 2010/11 marked the year when the Scottish Government’s RDEL budget was at its historic peak following years of significant growth. The 2017/18 RDEL budget in real terms is around that in 2007/08.

4. I was extremely clear to use the words (even in an 800 word tabloid style piece) to say "taking our fair share of the UK’s costs - as determined by the Scottish Government when compiling the Government Expenditure and Revenue Scotland (GERS) figures" - how much more fucking clear do you want me to be?

It's very relevant to the debate when Mackay was a champion of independence, was championing a cause that, given what has happened to oil, even using the optimistic White Papper assumptions would leave us >£6bn pa worse off than we now are ... and he has the cheek to moan about "Tory cuts" that see his budget rising in real terms? Do me a favour.

David GREEN said...

What I have to say will not be very welcome, I'm afraid. Mackay is merely a symptom of the political problem in Scotland. Scottish nationalism, and, by extension, the SNP's reason for existence, is largely a result of heart over head. It is an emotional argument. Where strong economic arguments exist that say that Scottish independence is nuts, the Seps and the SNP shout them down. No-one is dirtier than the SNP in attempting to obfuscate unwelcome economic data.

There is a price to be paid for this. This price is that most Seps are not very bright, and most are economically illiterate to boot. Now try and construct a half-ways competent government out of SNP chancers and seat warmers, and you find the talent pool is as shallow as a meniscus. Derek Mackay is economically illiterate, and clearly out of his depth, but he is the inevitable consequence of a situation where Scotland has accepted the SNP view of itself as competent economic managers. However, the fair winds of oil and Barnett made running the Scottish economy for the past two decades easy. Individuals of doubtful competence could have run it and probably did. The SNP is now stuck with the economic hard stuff and out of its depth. The incompetence goes right to the top, despite all the shouting, and Scotland slowly drifts behind rUK in terms of growth.

I am not a Brexit supporter, and never have been. I see Brexiters and the SNP as intellectually on a par, and I am truly sorry to see the damage that a poorly handled Brexit will cause Scotland. But sadly, the SNP is on course to make matters seriously worse.

Anonymous said...

Interested in your thoughts on this Kevin.


Kevin Hague said...

I think the Fraser of Allander paper supports my conclusions and adds some useful detail to some of the spend category definitions

Drew said...

While I think on the one hand I think basic geography is an argument in favour of Scotland remaining in the UK (the fact that so much of the population lives on one single landmass cut off from the rest of Europe, it makes sense to have a common market and political system) at some point the Unionists who claim to have economics on their side are going to have to confront the question of demographics.

Part of the reason Scotland has suffered through the centuries is that that are large parts of our geography in the North that are not suitably for living off the land or working and so most of the population have either moved to the coasts and lowland areas or they have emigrated.

Immigration and EU immigration to Scotland in particular has boosted our falling population in recent years. We now face a growing older population and a falling working age population. If the UK Government and Brexit cut off Scotland from more immigration, we will face a dire economic and social situation we haven't experienced since the early 20th century.

While independence isn't the answer, Unionists are going to have to find a UK solution and pretty quick.

David GREEN said...

For once, Drew and I are in partial agreement. As the IFS pointed out a few days ago, the UK is facing a decade or more of retrenchment, possibly severe retrenchment. Tax as a percentage of GDP is rising. It is currently at a level not seen for 30 years (yes, 30 years) and still has some way to go. The reason? Demographics. The elderly are increasing as a percentage of the total, and demanding ever more services. And they vote. They vote more conscientiously than the working generation that is slaving to provide for them. Welcome to grey power. The elderly may always be dying off, and they may find it physically challenging to find MPs of their own age to represent them. But don't worry, there are lots of younger chancers who are happy to do the job for them. Although I believe Brexit will be profoundly damaging, there is little doubt that the coming demographic change will have even greater impact.

And Scotland is ill-positioned for such a change. The demographics of its ageing population are worse than for the UK as a whole, and, as Drew has pointed out, Scotland may suffer from higher emigration. We all know that the guy who runs Wings over Scotland has already left (bright boy!). Sturgeon wishes to compound the problem by handing back to rUK the GBP 9 billion it gets under Barnett. Whatever austerity the UK is facing as a whole, the SNP wants to make it far worse for Scotland.

Drew said...

If you agree demographics are a problem David and as you claim Unionists have the economic intelligence and facts on their side, do you have any solutions?

How will Scotland's population and economy be maintained without a net inward flow of migrants?

How can Scotland prosper if the UK Government is hell bent on drastically reducing immigration?

It's all very well saying over and over again that independence will make things worse (which I agree with) but Unionists do actually have to offer up their own solutions to these issues.

David GREEN said...

I intend to keep this reply to Drew brief. Broadly, the problem can be split into two. First, there are the obvious demographic issues of population structure: birth rates, death rates, immigration, emigration, etc. that give the current age structure and lead to future changes. These generate changing demands for government services: education, pensions, health, benefits, etc. Scotland clearly faces changes that are likely, on balance, to increase the demand for many of services, but notably those involving the elderly: a declining ratio of earner to dependant, and greater demands on social care and health services in the elderly. The SNP does a dishonest job in addressing these because it is focused on keeping the population sweet for devolution.

The second aspect of the demographic problem might better be regarded as economic geography. If you were filling up an empty UK from scratch, where would the 60 million go on rational economic grounds? And how would it differ from the current population distribution? Both Australia and the US can teach us some lessons, as examples of how populations distribute on largely economic grounds, without a legacy of history. As a result, the centre of Australia is empty (it's a desert), and the Dakotas, Idaho, Nebraska and Wyoming have a combined population that is similar to Scotland's (that is, they're pretty empty and always have been). Now, here's the rub. The US rust belt, whose voters secured the presidency for Trump, are the legacy of an economic distribution that was rational 100 years' ago, but no longer make sense. Economic migration, even within the US, is difficult for older age groups. Hence, the legacy issue.

Now look at Scotland in the same light. Much of its traditional economic activity (coal, shipbuilding, fishing, even oil) has become much smaller, or disappeared. So, the economic question is: Does it make any economic sense to keep Scotland as populated as it currently is? It costs a lot of money maintaining service distribution that suffers the tyranny of distance and lack of scale. The rational, and possibly the fairest, solution, as an economic Darwinian, is to distribute service resources equally, on a per capita basis, throughout the UK. And, on that basis, much of Scotland would be unsustainable. I have no doubt that the Scottish lowlands would remain important, but there would be net migration from Scotland to England.