THE CHALLENGE FOR SCOTLAND
By John Mclaren of CPPR
George Osborne’s Spending Review speech last Wednesday may have been tedious in its delivery but it lit the fuse on a powder keg of problems for the Scottish Government.
It’s not that a lot changed in the grand scheme of things -- Scotland’s budget profile is not that different now to what was expected in the independent review of Scottish finances earlier this year. The cut in year one, 2011-12, is a little higher and now stands at £1.3 billion, but by year four, 2014-15, the position has improved a little over what was expected.
So why do things seem bleaker now than they did a week ago?
The answer seems to be that the UK coalition government has finally outlined how it intends to cut back spending in England in all -- or at least some -- of its gruesome glory.
This has meant cuts in departmental capital spending (ie investment) of 60% in education, 74% in communities, 52% in business, innovation and skills, 49% in the Home Office, and 50% in justice. There are also cuts in resource (ie day-to-day) spending of 21% in transport, 51% in communities, 27% in local government, 25% in business, innovation and skills, 23% in the Home Office and 23% in justice.
Beneath these deep cuts lie difficult and unpopular decisions: increasing the cost of post-school education for students; decimating the building programme for affordable housing and schools; cutting back on police numbers.
Even those that did well didn’t get much. The overall increase for the NHS and school running costs rises in real terms -- but only by an average 0.1% a year, the absolute minimum possible.
Fast forward four weeks to when John Swinney has to make a speech on his proposed plans for the Scottish Budget for 2011-12. What might we expect?
Here’s where the problems start -- potentially bigger problems even than Osborne had to deal with.
First of all, the Scottish Budget cut in 2011-12 is 4.2%, almost double Osborne’s overall cut of 2.2%. Why is it so much tougher for Scotland? Firstly it is because not only does Scotland have to deal with last Wednesday’s cuts, but it also has to accommodate the cut for 2010-11 that the Scottish Government decided to delay implementing, plus it has run out of savings built up in the good years when Scotland was getting big increases in its budget that were temporarily being used to boost our budget bottom line. Add those together and you get a triple whammy.
Secondly, Scotland has ruled out in principle a number of areas where savings have been made in England. Neither the SNP nor the two biggest opposition parties have expressed any interest in increasing the cost of post-school education for students. Both Alex Salmond and Swinney have expressed grave doubts over the wisdom of drastically cutting capital spending, and this capital cut got even worse last Wednesday.
Third, the Scottish Government is still adding to its commitments to spend more, for example on making prescriptions free, a policy set to arrive in April.
If we step back to think about how Scotland might accommodate its £1.3bn cut next year what are we faced with?
There is an NHS budget worth more than one-third of the total Budget, that is ring-fenced. Even if it doesn’t get the full 0.1% real-terms increase, it is still likely to rise by more than 1.5% in cash terms, or by around £150 million. Health capital spending may be one area that could contribute, but with little knowledge about where the Scottish Government is with its hospital building programme it is difficult to know if there is much spare to be cut.
Then there is a large schools running costs budget that is also likely to be protected, possibly even to rise a little in cash terms, and a commitment to keep Scottish Water in the public sector -- although any contribution towards lessening next year’s budget challenge from changing its ownership structure would be most probably be small, at best, but rising for later years.
And there is a commitment to freeze council tax revenues, disallowing local authorities a potential source of increased income to offset spending cuts, plus repeated commitments to a variety of large infrastructure projects -- even the less cost-efficient element of the Borders Rail link is still on the books.
So what is left to cut? The non-schools local government budget, consisting mainly of social work, police, roads and culture will offer some scope, but there are also rising pressures, in particular in relation to rising demand for social care services.
There is also the justice budget -- but this flies in the face of repeated political promises on police numbers, so seems limited in the scope available.
The capital budget is an option, but this is only just over £3bn and will presumably include ongoing commitments that will be difficult to avoid. It also contains much in the way of maintenance spending that could prove a false saving even by 2014-15.
The two enterprise bodies -- Scottish Enterprise and Highlands and Islands Enterprise -- look like very exposed targets, despite their potential role in helping Scotland’s economy to keep growing. There is what’s left of social housing, although it isn’t much these days, and culture, but you need to cause a lot of pain to make serious savings.
Then there are rail services, which account for more than £500m of the budget -- but would large train fare rises sit well against no bridge tolls or congestion charges for drivers and widespread free bus travel?
So what sort of a strategy can get us out of this mess?
First of all, we need to restrict spending pressures as much as possible next year. Primarily that means as close to a pay freeze in the public sector as possible, on the assumption that a cash-terms pay cut is out of bounds (although it wasn’t in Ireland).
Second, limit health budget ring-fencing as far as possible. This would mean NHS capital spending facing a cut. And if there is a general wage freeze across the public sector then why should this not include NHS staff? If it does, then the only element of the NHS budget that needs to rise is the non-wages element. This would minimise the overall cash increase needing to be found.
Third, raise more revenues -- if not through council tax then through business rates or the temporary use of the tax-varying power on income tax. At least in this first year of dramatic cutbacks such a revenue element would be a useful tool to utilise, although if the government is seeking to replace public sector jobs with private sector ones, business rate increases could prove to be counter-productive.
Fourth, move away from the universal provision of free or subsidised services to more targeted ones, concentrating these benefits on those who are likely to suffer most from other cuts in spending. It would need to be recognised that targeting will bring its own implementation challenges and possible additional operational costs. And uncomfortable though it will be, cutting services altogether may prove more cost-effective in some circumstances.
Fifth, do a deal: Ask the Treasury to reprofile the Scottish budget to allow for the cuts to be implemented more gradually. If the two sides could reach an agreement whereby the same end position by 2014-15 could be reached, then the existing spending profile of a 6% cut next year followed by a 1.5% rise in cash in 2012-13 could be smoothed out.
All of this would help, but it would still call for difficult decisions to be made.
I imagine that something has to give on university funding; local government also looks unlikely to avoid a big hit. Capital expenditure (mainly transport, prisons and housing), even if protected to some extent, will still be slashed. The enterprise bodies risk being pared back to the bare bones of what is known to give good returns. Rail and ferry services may see some decline in standards, or a rise in prices.
There will inevitably be a lot of talk of “efficiency savings” and of “restructuring” for savings, but without audited evidence to the contrary, it is hard to view additional efficiency measures as anything other than a cut and public service reform offers little prospect of significant savings in 2011-12, after taking into account redundancy payments and implementation lags.
If the UK Spending Review is anything to go by there will be a lot of talk of “fairness” when the Scottish budget is presented. There are many aspects to this term -- almost as many as there are interpretations of what it means: geographical fairness; fairness across the sexes; across age groups; across income groups.
In making its decisions the Scottish Government needs to remember that with a £28bn budget it has a lot of influence on how “fair” the final allocation of these cuts will be.
Does it aim to offer greater protection to all pensioners, regardless of their circumstances or does it side with young children in deprived circumstances who will gain enormously from effective early-years interventions? Does it aim to support long-term economic growth measures over short-term job retention measures?
Decisions like these are not easy and whatever way the decision goes it will be criticised by some. Fortunately for Scotland, such decisions have not had to be made post-devolution until now. For the first decade of devolution the Scottish budget rose by more than 5% a year on average, enough to accommodate almost any increase in demand for funds. Now we face an end to those times of plenty and must face up to, and defend, the difficult decisions which are to come.
The Scottish Parliament is facing a genuine crisis point. It needs to agree a new budget for 2011-12 quickly, in order to allow those in the public, the private and the third sectors who have to implement major changes in the next three to six months to do so in a planned manner.
Thus far there has been little or no co-operation in striving to reach any sort of consensus. The blame game continues. But in a Parliament that is voted in by a proportional representation system, no one party is ever likely to be able to have its own way. At some point compromises need to be made.
If the political parties in Scotland remain stubbornly resistant to genuine negotiation simply because they think it will aid them at the ballot box next May, the Parliament’s reputation will suffer. But even more importantly, Scotland will suffer as such a zombie Parliament commits us to enter a new financial year being run on the basis of a month-by-month crisis budget.
John McLaren is a senior researcher at the Centre for Public Policy for Regions (CPPR)
Too far, too fast... now we have to protect services
THE SCOTTISH GOVERNMENT VIEW
By Finance Secretary John Swinney
On Wednesday, the Chancellor delivered an ideological Tory cuts programme -- and I believe that Danny Alexander will long rue the day he patted George Osborne on the back on behalf of the Lib Dems.
The swingeing public spending cuts go too far, too fast, and threaten to choke off the economic recovery that the Scottish Government and others in Scotland have worked so hard to build.
The full details, that Westminster is to cut next year’s Scottish budget by £1.3 billion -- including a massive £800 million, or one quarter, drop in our capital budget -- came just hours after the welcome news that Scotland’s economy grew by 1.3% in the second quarter of 2010 -- exceeding the growth rate in the same quarter of the G7, EU, and OECD averages, as well as the UK as a whole.
This strong evidence of economic recovery was driven largely by increased output in the construction sector -- a beneficiary of targeted support through the Scottish Government’s Economic Recovery Plan, which has delivered accelerated capital investment, and an infrastructure programme worth £3.3 billion this year.
But the Chancellor’s pronouncement exceeded our worst expectations on the capital budget, and alone threatens another 12,000 jobs in Scotland next year, risking all that we have done to build a sustained recovery.
The key lesson of the Comprehensive Spending Review is that we cannot leave responsibility for economic policy in Scotland to Westminster.
As well as being wrong for our economy, the “too far, too fast” Tory cuts agenda is rejected across Scottish society, and backed by just a dozen of Scotland’s 59 MPs, and barely a quarter of MSPs.
Economic and financial responsibilities for the Scottish Parliament -- including real borrowing powers -- were always a good idea so that we could optimise economic policy, as well as accountability at Holyrood. The CSR demonstrates that these powers are now essential for the sake of jobs, opportunity and growth in the Scottish economy. They cannot solve the whole problem, but would enable us to prioritise growing our way out of the situation, instead of the Tory/Lib Dem priority of cuts which threaten to destroy growth.
When it became clear that Scotland would suffer deep Westminster cuts, I said that our focus would be to protect frontline services, sustain economic recovery and build a low carbon economy.
We have made clear our determination to protect those who rely most heavily on vital front line public services. Among a range of measures, we will apply the Barnett consequentials arising out of the increase given to the NHS in England -- notwithstanding the cut in the English health capital budget -- to the NHS in Scotland, and fund the council-tax freeze for the next two years to provide relief to households suffering from pay restraint and the VAT increase.
There is no doubt that significant pay restraint is necessary in the public sector to help us meet the challenges, and we have already announced measures such as reducing the number of senior NHS managers by a quarter over the spending period.
And we have demonstrated our ability to deliver efficient government by exceeding our target of £1 billion of efficiencies in 2009/10 by some £400 million.
In recent months we have also listened to the views of the people of Scotland -- following publication of July’s Independent Budget Review (IBR) report, I have held a series of engagement events around the country to listen to people’s concerns.
At each event there was understandable anxiety at the prospect of deep Westminster cuts next year. The sessions focused on recommendations made by the IBR, which have given us much to consider in a landscape that results from years of financial mismanagement of public spending by Westminster. The IBR recognised the actions that the Scottish Government is already taking to deliver greater efficiencies across the public sector.
Now that we know the extent of the cuts and our resources for next year, we will work to build consensus on budget proposals which enable us to deliver our priorities, and meet people’s expectations.
There is so much more we can achieve as a nation, and what the Comprehensive Spending Review demonstrates beyond all doubt is that Scotland must have the same powers as other nations. The economic and financial powers of independence would give us the levers needed to build on our fragile growth, create jobs and opportunity, and chart a better course for Scotland than the dismal prospect from Westminster.
Is Osborne’s plan driven by Conservative philosophy ... or pure pragmatism?
THE TORIES AND THE STATE
By Westminster Editor, James Cusick
This morning at 11.30 in Redbud Park, Abilene, in Texas, the Tea Party Express battle bus will pull into town and begin another rally. From Reno, Nevada, last week to the closing event in New Hampshire the night before the United States’ mid-term elections on November 1, the tour message will have been the same: forget spending cuts to help ease the US debt, forget government healthcare -- end higher taxes.
Those disillusioned Republicans who support the Tea Party want the size of their government cut back, want to end welfare spending and they believe lower taxes are their right.
Few, if any, in Abilene will have heard the Chancellor’s spending review last week. But they would have recognised his stated ambitions. George Osborne said waste needed to be cut and the welfare system reformed because “our country can no longer afford it”. And they would have applauded Osborne’s promise to “bring the years of ever-rising borrowing to an end”, simply because they have been applauding the same theme since the Tea Party Express left Reno.
Old-fashioned fiscal conservatism is said to be the foundation of the American right’s post-Bush revival. And just as Barack Obama’s stalled stimulus package has re-energised the debate on the role of the state, the scale of the debt inherited by Britain’s Conservatives has prompted critics to label Osborne’s cuts package as less about pure economic remedy, and more a case of an opportunity to bring back a Tory ideology centred on the minimum state, last seen when Margaret Thatcher was in her prime.
The big question, then, is whether Osborne and Cameron are driven by a desire to tackle the debt burden or a desire the roll back the state.
Treasury aides denied the Comprehensive Spending Review was driven by Tory ideology. But Osborne’s arithmetic points to more responsibility falling on individuals to create wealth in the private sector, and to a reduced reliance on the state’s safety net. In effect, the state is now in a state of retreat.
Professor John Van Reenen, director of the Centre for Economic Performance at the London School of Economics, told the Sunday Herald that the coalition government looks “wedded” to the idea of a smaller state. “The tax increase plans are the same as Labour’s, but the cuts to spending are much swifter and deeper. It is difficult to rationalise this on economics grounds, so I think the reasons are political and ideological.”
But Professor Van Reenen was less clear as to what ideology is driving the decisions. “The CSR did not seem to have a clear philosophy of a different form of state. Rather the chancellor looked to cut as much as he could find politically from different departments. And the Big Society theme seems very vague.”
Tory ambivalence towards the state goes back to the very roots of the party. Tories regard the 18th-century Irish statesman Edmund Burke as a decent place to begin exploring their psyche. Burke thought the state should have limited interests and influence, focusing on established religion, law, public peace, revenue, the military for security. But he also had a fear of revolutionary politics, and thought the “totalitarian” revolution in France threatened “individuality”. American Republicans connect with Burke in the same way.
It is a long way from Burke to Cameron, whose focus seems to have been to persuade his party that it needs to reform and realign to the centre-right. Professor John Charmley, head of history at the University of East Anglia, sees the direct connection. “Traditionally, the Conservatives have been in favour of a low-tax state. This started for obvious reasons. Whig leaders tended to be grandees who owned vast acreages and could afford tax rises for foreign wars, whereas Tories were squires with fewer acres who were hard-pressed by tax rises.”
The philosopher Ted Honderich, in his book Conservatism, goes deeper. “It is a large truth that Conservatism is indelibly distinguished by its commitment to its favoured incentive system -- a large property-freedom and market-freedom.”
This is the foundation of Thatcherism, which eventually ripped up the old 20th-century consensus on the role of the state and its responsibilities of welfare protection. Charmley believes the Tories have never queried the principle of the welfare state, “just the extent and organisation of it”.
He believes that between the wars Conservative welfare measures helped ameliorate the worst of the depression years. “But they had no vision of anything larger. In that sense they were where some Republicans in the USA still are: the virtues of self-reliance, thrift and a small tax burden, were emphasised.”
Churchill, Eden and Macmillan all signed up to the welfare system so, as Charmley argues, “It would not be true to say the Tories have always been ideologically opposed to a large state”.
According to some commentators Osborne’s cuts tore up that Tory tradition, effectively ending the “cradle to grave” welfare system brought in by the Attlee government in 1945.
In reality, the change in philosophy dates back to Thatcher, who worshipped the free-market economics of the Chicago School and thought she could end Britain’s decline by importing US-style liberalism.
Eventually her influenced faded enough for Cameron to say, just after he was elected leader, that he was a fan of Mrs Thatcher “but that doesn’t make me a Thatcherite”. Today’s Tories no longer need to dismiss Thatcherism quite so quickly as they have in the past. Thatcher tried to redraw the role of the state, and Osborne’s cuts package has ambitions to go further than even she dared.
Osborne’s CSR is likely to be the defining event of the coalition’s administration. If it is successful, and growth in the private sector booms, the public jobs cut will simply shift and lessen the responsibilities of the state.
The Chancellor has therefore bet the house on good times arriving, through events that he hasn’t actually engineered. In that sense, all the CSR may have revealed was a new Tory risk strategy, rather than the return of the new Right. Other ideological tests will follow in the next four years: the test on Europe and EU policy, for example.
There are political advantages for Cameron and Osborne to be portrayed as the latest evolutionary branch of Tory ideology, stretching back to Peel’s Tamworth Declaration in 1834 and the beginning of the modern Conservative Party. The traditionalists on the Tory benches will be happy to make that assumption.
Charmley, however, advises a bit of historical caution on this view. “I think it is probably a mistake, but one Cameron and Osborne are happy to see others make, to see their deficit-reduction plan as Thatcherite ideology. Labour seem bent on making that mistake. This means they miss seeing Cameron and Osborne as old-fashioned Tory pragmatists. I doubt they are committed to much ideology. But if Redwood and company [those on the Tory right] buy it because they think it is Thatcherite, Cameron and Osborne aren’t going to complain.”
For Professor Charmley, old-fashioned Tory pragmatism isn’t that far from old-fashioned New Labour Blair-driven pragmatism -- namely the pursuit of power.
“Thirteen years in the wilderness convinced some Tories that ideology is not that useful. Cameron and Osborne have simply guided the party back to the idea that the pursuit of power -- and its retention -- is what matters,” he said.
Britannia no longer rules the waves
THE ARMED FORCES
By Diplomatic Editor Trevor Royle
The sight of the nuclear submarine HMS Astute stranded off the coast of Skye last Friday was a fitting image for the fate of the Royal Navy after publication of the Strategic Defence and Security Review (SDSR).
On the previous day the navy had celebrated the 205th anniversary of the Battle of Trafalgar, its greatest-ever victory, yet here was its latest vessel in full public view as helpless as a beached whale. Coming on top of the cut in its surface fleet to 19 warships and the unwise decision to bring two carriers into service before their aircraft are available, it was the final humiliation for the navy, which prides itself on being the “senior service”.
But it is not just sailors who are suffering pain. When David Cameron presented the SDSR in parliament last week he gave notice that the country was giving up its role as a first-class military power and would no longer be able to mount global operations without the help of a serious ally, either France or the US. The joint Harrier force has been axed, the RAF has lost its only reliable reconnaissance aircraft, armour and artillery will be cut and the army has been reduced by the equivalent of a brigade.
In a move that has enraged Conservative MPs, Britain’s nuclear deterrent will be cut in capacity and its replacement delayed. It is even possible the existing Vanguard submarines will never be replaced. After the decision to axe the Nimrod MRA4 spy plane it will be difficult for the navy to detect hostile submarines.
As a naval commander remarked: “From Buenos Aires to Moscow naval staff officers will be rubbing their hands in glee as they work out exactly how emasculated our defence policy has become.”
Inevitably the cuts are being hailed as a victory for those who want to see the armed forces take their share of financial cuts or who want their offensive capabilities reined in. Up to 8% of the Ministry of Defence’s budget will be whittled away over the next five years and critics fear there is a danger this will mean the country failing to meet Nato’s target of 2% of GDP for defence spending.
“No matter what the prime minister says, the nice words and the playing with figures, this country is disarming,” claims Commander John Muxworthy of the UK National Defence Association. “This was not a strategic defence review, it was a strategic cuts review.”
In the run-up to the SDSR the government made much of the fact that it had to address the £38 billion “black hole” in defence spending created by the previous administration.
This has helped to reinforce the idea that the decisions were driven by saving money, not dealing with the country’s global commitments.
Within all three armed forces there is thinly disguised dismay at many of the decisions. Although the Government probably had no option but to press ahead with the £5.2bn contract for the construction of the carriers HMS Queen Elizabeth and HMS Prince of Wales, there is widespread stupefaction at the decision to bring them into service before their aircraft are built.
“Harrier could have filled that gap but they have been sacrificed to save the air force’s Tornado fleet,” said a naval source. “Yes, the carriers can carry helicopters which makes them perfect for both offensive amphibious and humanitarian aid operations but they won’t have any air cover. No captain would ever risk his ship under those circumstances.”
Now that the small print has been read it is clear SDSR has effectively reduced the country’s deployable forces by around 30%. In the event of a major intervention the limit for a six-month deployment will be 30,000 troops. For “enduring operations” such as Afghanistan, which is due to end in 2015, the army will only be able to deploy 6,500 troops, well below the 10,000 currently in Helmand.
To sweeten the pill -- at least as far as the armed forces are concerned -- the Government has also brought forward a major rethink of how it influences the rest of the world.
Before the publication of SDSR Chancellor of the Exchequer George Osborne announced he would find an additional £3bn for the Department of International Development, and that these new funds would be used for conflict resolution.
This will give the UK some leverage in potentially unstable countries but senior commanders have been quick to point out that interventions of this kind usually need a military or naval component.
There is also some relief that the National Security Committee responsible for evolving policy is taking seriously the threat posed by cyber attacks. Last year Russia showed what could be achieved by shutting down internet access in neighbouring Estonia during a period of tension, and China’s armed forces have established dedicated cyber commands.
But the armed forces still fear the government is taking a major risk in making deep cuts in their capability at a time when Britain is engaged in a war in Afghanistan and faces an uncertain future before the balance will be redressed in 2020. “A lot can happen in that time,” says an army source. “Three years after we conducted our last review in 1998 al Qaeda suddenly came out of the shadows and changed the world as we know it.”
A criminal attack on our life blood
THE EFFECT ON THE ARTS
By Brian Cox
Some of the cuts handed out to the arts from Westminster on Wednesday were criminal. This time of paring back spending should be an opportunity to examine our practices to make sure we never get in this state again. Instead, like a scalpel-happy surgeon, the Government’s attitude is, if it is infected, cut it off. This is very dangerous.
It’s like cancer. You have to be very careful in how you operate on a cancerous growth. If you just cut it out, it spreads, and you do more damage. That is what they are not thinking about. There is no vision in these cuts. It’s purely a stop gap, a sticking plaster. They are not thinking about growth. And you have to grow, you need to grow. And we need culture and the arts to grow. If you put that off, the damage you can do is unthinkable.
On Wednesday Arts Council England received a 30% cut to its budget, one of the largest drops announced. This comes after the abolition of the UK Film Council. Yes, the arts should take a hit, but this level of cuts is criminal. It shows a lack of understanding of our fiscal viability. The arts have always been fiscally viable. The money that is invested always comes back, in more than one way. So it is crazy to slash and burn on this scale.
These straightened times should help us to look at our own housekeeping. We need to look at what our priorities are in how we spend our money in the arts. That should be about creating work. Look at the BBC, for example, and its over-abundance of middle managers. The money spent on them which could be spent on programmes.
Ahead of John Swinney’s Scottish budget next month we must remind ourselves of the power of the arts. On one hand it is a philosophical argument. Cutting the arts is cutting the life blood of people. People need culture to celebrate their life blood. They need that sense of aspiration. One of the things the arts do is show the community what it is capable of.
Times like this help us realise what our cultural life brings. One very good example of that is in Dundee, with the DCA, the Dundee Rep, and even the video games industry, despite its recent rough patch. It is a city and community that has shown itself through the arts. And that is why the Victoria & Albert museum is going there. It will regenerate the whole city.
The arts have proven their financial worth. The National Theatre of Scotland has proven its worth.
For example, there are more tickets sold for theatre in Scotland than anywhere else. The work of the likes of the Lyceum or Dundee Rep is extremely successful. We should be very proud. We deserve the audiences we get. Let’s put it this way, we get less subsidy in the theatre than we pay in VAT.
So the arts are vital. It is part of what people are. It’s what people talk about: movies, shows, last night’s TV. It’s not extracurricular. That kind of attitude has permeated through our culture, unfortunately, since time immemorial. But I believe we understand it better in Scotland.
Sadly the arts have always paid a price. We have never been taken seriously enough. We still see the arts as a luxury item, despite constantly proving it is the opposite. It is an endless battle.
The draconian cuts unveiled last week suggest Scotland has got the tap end of the bath. What’s happened in the south is probably the thin end of a very nasty wedge for Scotland. But look around Dundee, Glasgow, across Scotland and remember: the arts does regeneration, the arts does growth, the arts are useful. They deserve the subsidy.
