Fantasy economics: alive and well on both sides of the border

The past few weeks has seen some disturbing events occur with regards to economic and fiscal matters in both Scotland and the UK.

At the UK level the events have been pretty obvious with the new Government doing its best to introduce an extra level of instability to economic conditions. Essentially it was saying:

⁃     we are going to introduce unproven policies to try and raise the growth rate to a level not seen for decades;

⁃     don’t worry about the borrowing gap that emerges as we cut back taxes as this will be remedied by the boost to economic growth;

⁃     we can’t tell you when any of this will happen as we haven’t done the maths and we haven’t asked anyone else to, but trust us it will;

⁃     we kinda want to cut benefits and spending too but let’s leave that for another day, after all we don’t want to spook the markets.

In an ideologue’s head all this makes sense. For anyone else, they’d like a little more convincing. Cue political, economic and market uproar.

At the Scottish level the disturbance has been much more low key. The Scottish Fiscal Commission (SFC) confirmed in August that it now expects a £1 billion budget shortfall as “slower Scottish earnings and employment growth have contributed negatively to the net position (where the ’net position’ is determined by the degree to which Scottish income tax per head grows faster or slower than in the rest of the UK). This is offset by divergence in Scottish and UK income tax policy which has helped keep the net position positive in most years. We estimate that, in the absence of Scottish and UK income tax policy differences, the net position would have been -£1,004 million in 2022-23. By having relatively higher tax rates in Scotland and lower thresholds for higher rate taxpayers, the income tax net position shifts to an expected -£157 million in 2022-23.”

In other words Scotland’s higher tax regime will still lead to a shortfall in the Scottish Budget compared to what it would have been without the devolution of tax powers in 2017. Not only that but the gap is growing and expected to rise to £1.5 billion by 2026-27.

The cause of such a shortfall is the Scottish economy growing more slowly than even the UK, in GDP per capita terms. Part of this can be put down to bad luck, associated with the decline in North Sea related activity in recent years, although even that might have been predicted to some extent. However, much is down to known demographics and some could be blamed on the indolent attitude of the Scottish Government and Parliament towards the economy.

So we have two damning economic and fiscal events but the reaction to them has been very different and tells us quite a lot about the strengths and weaknesses of the two systems of government.

Two sides of the border

At the UK level, we see a relatively healthy wider political system at play. So, in response to a mini- budget and Growth Plan that is unpopular; poorly presented; conviction rather than evidence base led and fiscally irresponsible, the reaction is mayhem. Markets react badly, think tanks highlight the inherent weaknesses, the main opposition gains substantially in support, u-turns quickly emerge.

At the Scottish level, we experience a weak wider political system that barely acknowledges the existence of a problem.

While UK economic and fiscal policies might be seen as inappropriate, biased or, of late, doolally, they are a core part of the political debate. Furthermore, they are critiqued and the government held to account by a variety of commentators, journalists, economists, think tanks, opposing political parties and the markets. In extremis, this leads to what we have seen in recent days, a quick reversal of clearly inappropriate policies.

In Scotland, very little of this scrutiny takes place and so poor policy continues to bumble along. Where’d we go from here?

The UK economic situation will likely resolve itself, hopefully without too much damage. Already the higher tax rate has been re-introduced and a mixture of their own party, public reaction and the OBR/BoE/Treasury triumvirate will push the government towards some form of economic orthodoxy and a proper plan to bring debt back onto a downwards path.

Politically, it looks as if the Tory Party has finally run out of ground and, as happens to any tired administration that has overstayed its welcome, will likely be replaced by another party or a coalition of parties.

Scottish inertia

In Scotland, the catalyst for economic and political change is less clear.

Economically, Scotland remains bereft of any real debate at any level but especially across the political parties. They’re happy to discuss the downsides of economic growth but not growth itself! So: Unemployment – yes. Inequality – yes. Economic growth – no.

It is the fall off in productivity growth, especially post 2000, that needs addressing the most. Without productivity growth it is difficult to achieve real terms growth in the economy or in wages.

Various legitimate ideas for reform exist. I have outlined some in a recent report for ‘Our Scottish Future’ on what might be done to help turn this situation around, which can be found here. (Note that while ‘Our Scottish Future’ is pro Union, the report takes no stance on the issue of independence and its recommendations would apply regardless of the constitutional position.) However, the desire to discuss and debate such economic issues remains frustratingly elusive.

Politics wise, in the SNP we have a tired ruling party – as any political party would be after 15 years in power, three years more than the Tories at Westminster – but with no sign of a lasting revival in opposition parties. Even if that occurred the economic ambitions of such parties are just as vague and their attitude just as disinterested as with the SNP.

Furthermore, the complementary institutions that need to exist alongside a Parliament are still largely missing in Scotland. From without, a dearth of think tanks, academic and business interest and from within a Parliament with no second chamber and a Committee system run along party lines.

Fiscal and intellectual shortfalls

As a result, there was inadequate debate within Scotland over the transfer of tax powers in the first place and this has been compounded by the ‘nothing to see here’ attitude towards the growing hole in our finances that has emerged over time.

If you think none of this matters then the lack of over £1 billion of additional public funding from higher taxes shows that it does.

Politics is about much more than simply political parties and, at present, that broader field is where the UK system still bests the Scottish one. Clearly there is the potential for the Scottish political system to improve on the UK one, which has obvious failings. However, that doesn’t happen by just having different policies in place, those policies need to work.

Where Scotland differs the most is in its lack of engagement on economic issues. If this continues then the £1.5 billion shortfall will continue to grow and taxes will continue to rise to compensate. Surely no-one wants this but then why does no one take it seriously?

Further reading: Scotland likely to enter recession, Fraser of Allander Institute; UK economy in meltdown – what would be different? Robin McAlpine, Common Weal; Economic opportunity for Scotland from renewable energy and green technology, David Skilling, Landfall Strategy Group