Chancellor must listen to growing opposition to austerity measures
The Scottish Government has consistently demonstrated that the UK’s deficit and debt can be brought down without the need for huge public spending cuts as set out by the UK Government, Deputy First Minister and Finance Secretary John Swinney said today.
In a letter to the Chancellor of the Exchequer Mr Swinney stresses that the UK Government can no longer ignore the growing opposition to their austerity programme.
The letter calls on the Chancellor of the Exchequer to consider concerns across a number of areas, including a sustainable public sector, tax credits, social housing, oil and gas, apprenticeship levy, and the VAT position of the Scottish Police Authority and the Scottish Fire and Rescue Service.
The fiscal targets set out by the UK Government in its summer budget require a significant reduction in public spending, with cuts of £12 billion to welfare and potential cuts of around £20 billion to public services expected by 2019-20. UK Government reductions in spending go beyond what is necessary to balance the budget.
Deputy First Minster John Swinney said: “In years to come, the additional responsibilities we will get through the Scotland Bill will enable this, and future Scottish Governments, to take a distinctive approach to the challenges we face, to design policies and programmes that align with our vision of a stronger, wealthier and fairer society. When we set out our plans on December 16 they will be driven by our principles of establishing a system that is fair and progressive.
“Despite the positive economic outlook in both Scotland and the UK, it is imperative that the UK Government’s Autumn Statement sets out measures to support economic growth and protect households from further austerity.
“With growing opposition – on both sides of the border – to the UK Government’s plan for further cuts to public services and social security, and the subsequent impact that will have on families across the country, I have written to the Chancellor of the Exchequer urging him to change course and relax his fiscal mandate.
“I remain extremely concerned over planned tax credit cuts. Such cuts are unacceptable, not only do they cut the incomes of working families across Scotland, on average £1,500 each, but will damage work incentives and inhibit future economic growth.
“We will continue to mitigate the impacts of tax credit cuts using the full powers and resources at our disposal, but we want to use our powers and resources to lift people out of poverty not just continually mitigate as best we can. It is therefore essential that the Chancellor uses his statement to scrap the planned cuts to tax credits.”
The full text of letter to Chancellor of the Exchequer from the Deputy First Minister reads as follows:
20 November 2015
I am writing to set out the key issues that the Scottish Government wishes to raise ahead of the Autumn Statement and Comprehensive Spending Review on 25th November.
Although the economic outlook remains positive in both Scotland and the UK, there are signs that the pace of growth is slowing, as indicated by the provisional estimate for third quarter growth in the UK. There are also clear global challenges arising from the sharp slowdown in growth in China, and other emerging economies, and muted growth in the Euro Area.
Given the economic outlook, it is imperative that the Autumn Statement sets out measures to support economic growth and protects households from further austerity.
Fiscal Consolidation
Given the growing opposition to your plans for further cuts to public services and social security, and the impact that they are having on families across the country, I urge you to change course.
The Scottish Government has outlined a path for UK fiscal policy that ensures the public finances remain on a sustainable path, reducing the deficit, whilst also allowing for increased investment in public services.
One option would be to target a current budget balance rather than an overall budget surplus from 2019-20 onwards. This target ensures that no borrowing is required to fund day-to-day public services. Limited borrowing would be undertaken only to support capital investment aimed at boosting the UK’s long term productive capacity. Balancing the current budget and increasing public sector net investment to 2% of GDP by 2019-20 (the long run level of capital spending) would allow an additional £150 billion in cumulative investment in public services compared to your current plans. Maintaining these objectives in subsequent years would also ensure that public sector debt continued to fall as a share of GDP and that the public finances remain on a sustainable path.
Given the slowing global economy, and the pain that further cuts will cause families, there is a strong case for a new direction. I have set out how this can be done in a sustainable manner and encourage you to use the Autumn Statement for that purpose.
Tax credits
I remain extremely concerned over your planned tax credit cuts. Approximately 250,000 households in Scotland, many with children and on low incomes, stand to lose on average £1,500 each from next April due to these measures. Such cuts are unacceptable, not only do they cut the incomes of working families across Scotland, but they will damage work incentives and inhibit future economic growth.
It is also clear that the other measures you have announced in no way compensate households for the cuts in tax credits. Both the Resolution Foundation and the Institute for Fiscal Studies have stated that the introduction of the National Living Wage will not compensate those at the bottom end of the income distribution for their loss.
This was reinforced by the Work and Pensions Committee report ‘A reconsideration of tax credit cuts’ (11 November 2015) which says the proposed changes to tax credits go ‘too far and too fast’. I therefore urge you to use your Statement to scrap your planned cuts to tax credits.
Oil and gas sector
As you are fully aware, the offshore oil and gas industry is facing a range of challenges, which have been exacerbated by the low global oil price. The Scottish Government is doing all it can within devolved powers to support the industry, such as the setting up of the Energy Jobs Taskforce at the beginning of this year. The Taskforce brings together the industry, Government, the wider public sector and unions to work together to mitigate the impact of job losses, but also to tackle wider issues such as cost inefficiencies and collaboration.
Initiatives like the Taskforce have been very successful so far, but you will appreciate that the key levers to help support the industry are controlled by the UK Government. We have welcomed the setting up of the Oil & Gas Authority and look forward to working closely with it and other key stakeholders.
However, much more needs to be done if we are to secure the future investment required to maximise economic recovery from the North Sea and prevent premature cessation of production.
For example, the Scottish Government believes that the basin wide Investment Allowance should be improved to more effectively support North Sea infrastructure investment. It is important to ensure that expenditure by companies on equipment or facilities that are not directly related to field production, but which can improve asset integrity, are fully incentivised by the allowance. The allowance should also provide improved support for exploration and include expenditure on activities required for Enhanced Oil Recovery.
Last December the UK Government committed to consider further fiscal support for these activities, but this was not delivered in the March or July Budgets. The UK Government should outline its commitment to further support for this sector in the Autumn Statement, alongside a firm timetable for further policy reforms.
Scottish Police Authority and Scottish Fire and Rescue Service VAT
I have previously raised the VAT position of the Scottish Police Authority and the Scottish Fire and Rescue Service. Scotland’s police and fire services are in the inequitable position of being the only front line emergency services in the UK unable to reclaim VAT resulting in an additional cost to the services of in excess of £30 million per annum. I am also aware that, if adopted, the implementation of the Emergency Services Mobile Communications Programme, a major collaborative procurement initiative to facilitate interoperable communications, could result in an additional £50 million VAT cost to the Scottish public sector as a result of this disparity which will see all other participating emergency services in the UK being able to recover the VAT element of the contract. This inconsistency is indefensible.
The structural changes in the way police and fire services are funded in Scotland and the lack of any power of precept is given as the technical reason for excluding these emergency services from Section 33 of the VAT Act. However, this basis highlights the discrimination in the legislative treatment of public bodies across the UK. The VAT Act has been amended previously to accommodate similar UK Government operational changes including permitting Academy Schools and Highways England to recover VAT when the creation of these bodies did not allow recovery under existing legislation. I would again urge you to consider the necessary changes through the Finance Bill to accommodate the ability of these vital bodies to recover VAT.
Social Housing costs
In your Summer Budget, a commitment was made to a 1% per annum reduction in Social Rents in England over the forthcoming Spending Review period which was designed to reduce Housing Benefit costs. Subsequent communication from the Chief Secretary to the Treasury to me indicated that ‘As rent policy in the social rented sector is a devolved matter, we will need to determine a fair way of resolving the cost implications of any difference in approach, ensuring that proportionate savings can be delivered across the UK’
Since then, Scottish Government officials have had initial discussions with officials in your department, which seem to imply that in the absence of similar change to Social Rents in Scotland, HMT could seek to recover a similar saving from our DEL budget. Social rents in Scotland are already substantially lower than the UK average. Scottish Government housing policy decisions have been a significant factor in maintaining those lower social rents, already driving considerable savings to the Housing Benefit budget over a number of years. It is not possible for the Scottish Government to deliver these cuts in the same manner as in England and a move to seek such a saving would be unacceptable.
Despite several attempts by the Scottish Government to discuss this proposal, HMT have been unable to provide any further detail on what is being proposed, so I remain unclear on when or how these reductions may apply and I have also not had the opportunity to set out a clear case as to why applying any equivalent reduction in budgets for Scotland is not appropriate. I would welcome the opportunity for Scottish Government officials to have detailed discussions with HMT before any proposal is developed further.
Apprenticeship Levy
On the introduction of the Apprenticeship Levy, which you announced at the Summer Budget, it is helpful that we now have meaningful engagement with HMT officials to agree a demonstrably equitable distribution of the levy funding raised in Scotland. It will be important for this engagement to continue to consider the options and implications around this new levy as we work towards finalising a full and fair settlement for Scotland.
I trust that you will consider the issues I have outlined above, and that you will reflect them in your Autumn Statement and Comprehensive Spending Review.
JOHN SWINNEY
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