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By stewartb – a long read

Amongst the political noise generated by the UK Chancellor’s budget, one remark hit home. On the Radio 4 Today programme (7 March), Jeremy Hunt when asked about the ‘losers’ from his budget, remarked in reply: ‘I’ve asked the Scottish oil & gas industry to make an additional contribution …’. (https://www.bbc.co.uk/sounds/play/m001wymc – at c. 2:17 in – with my emphasis)

This is referring to an extension of the period of windfall taxation for another year, the tax that Labour proposes to increase and potentially extend throughout the next parliament if it comes to power. For those in Scotland still clinging to the Unionist trope of a Scotland ‘too wee’ and ‘too poor’, at some point they must surely ponder this: how is it that the ‘Scottish oil & gas industry’ is still a big enough cash cow for both Tory and Labour parties to rely on it so much to help achieve their holy grail of sound public finances for the whole of the UK?

From a Scotland perspective, obvious questions arise:

• what percentage of total windfall revenues will derive from companies operating in Scotland’s offshore area i.e. exploiting Scotland’s intrinsic and never to be replicated natural resources? – the Chancellor’s remark seems to provide the answer!
• what will Westminster – with a Tory or a Labour government – spend windfall tax revenues on? Will the government making these decisions have a democratic mandate in Scotland for its spending priorities?
• what percentage of total windfall tax revenues will be spent directly within Scotland?
• what percentage of total windfall tax revenues will be available to the Scottish Government to be spent within Scotland on priorities endorsed by the Scottish electorate?

Whatever one thinks about windfall taxation – perhaps a sustained, more stable and higher tax regime similar to Norway’s may have been preferable over past decades – the availability of such substantial sums to HM Treasury rather than solely to a Scottish government constitutes an opportunity cost.

A budget critique from the IFS

It will be well known to many readers of TuS the high regard – to put it mildly – BBC news and current affairs journalists have for the Institute for Fiscal Studies (IFS). The ‘independent’ IFS seems to be regarded by the BBC as the fount of unchallengeable wisdom!  It is therefore ‘interesting’ to review the IFS’ take on the state of the nation-state in the wake of the latest Tory budget! After a lengthy period of Tory rule from Westminster how are things in ‘better together’ land when viewed from the IFS’ neoliberal vantage point?

Source: Opening Remarks for IFS Post Budget presentation by Paul Johnson, Director, IFS (https://ifs.org.uk/collections/spring-budget-2024)

Given the ‘authoritative’ status conferred on the IFS, what follows quotes extensively from the director’s presentation (with my emphasis).

‘Nothing that Jeremy Hunt did yesterday, nor anything the OBR said, changes anything very significantly. Which is a shame. Because that means we are still:

• heading for a parliament in which people will on average be worse off at the end than at the start
• looking at a debt to GDP ratio that is at its highest level in 70 years and is showing no signs of falling
• facing debt interest payments at close to all time highs
• seeing worrying increases in the number of individuals moving onto health and disability related benefits, bringing huge challenges for those households and rising costs for the public purse
• (despite the genuinely significant cuts in NICs) stuck with a situation where tax revenues will have risen by a record amount as a share of national income over this parliament and still heading towards UK record levels
• implicitly planning on big cuts in public investment spending overall and cuts to many areas of day-to-day spending on public services despite very obvious signs of strain in many areas.’

And referring to the Office for Budget Responsibility (OBR): ‘.. it reiterated that 2022-23 was the worst year for household incomes since records began in the 1950s …’

We also gain an insight into the Tories’ great immigration clampdown con: ‘In his speech Mr Hunt, on several occasions, stressed that his growth plans were not predicated on high levels of migration. Yet the OBR are quite clear. Higher immigration will offset a greater than previously expected fall in labour force participation. The number of inactive working age adults has climbed by 700,000 since before the pandemic to 9.3 million. And Mr Hunt’s boasts about higher GDP growth in the UK relative to other countries also depend on high population growth. We have not had good growth in GDP per person.’

And then to the characteristically IFS diagnosis and cure: ‘All that said, this is a difficult position for any chancellor to be in. The combination of elevated debt, low nominal growth and high interest rates means that we need to be running much tighter fiscal policy than usual if we want to get the debt down. Just to stop debt rising, we need to run a substantial primary surplus – that is, to raise more in tax and other revenues than we spend on everything other than debt interest. That’s something we haven’t done as a country since 2001. It’s a tough ask.’ 

So here comes ‘austerity’ – yet again – but with much less resilience and much less scope for efficiency savings across public services this time around! Scotland’s government and its electorate will again be spectators as we suffer the real costs of the Union and contemplate the opportunity costs we have been incurring, certainly since 2014 but actually for very much longer!

The IFS Director goes on: ‘The combination of high debt interest payments and low forecast nominal growth means that the next parliament could well prove to be the most difficult of any in 80 years for a chancellor wanting to bring debt down. Even stabilising debt as a fraction of national income is likely to mean some eye wateringly tough choices – and we are talking tens of billions of pounds worth of tough choices – on tax and spending.’ 

Who is best placed to make these ‘eye wateringly tough choices’ on behalf of Scotland, its citizens and businesses? Those that choose to live and work here? Those whose votes can hold directly and effectively decision makers in their government in Edinburgh to account?

‘… looking at what Mr Hunt says he is planning. On his figures, debt is rising slowly to 2027-28 before falling by a minuscule amount as a share of national income in the following year. But that requires him to assume a whole series of unlikely, or undesirable things. 

‘… Perhaps least desirable is that investment spending will fall by £18 billion a year in real terms.’ (We shouldn’t forget the big green investment pledge that Labour ditched only a few weeks ago!)

And more from the IFS: ‘.. the effective promise that day-to-day spending on a range of public services outside of health, defence and education, will fall by something like £20 billion. Maybe that is possible, but keeping to these plans would require some staggeringly hard choices which the government has not been willing to lay out. Indeed, we heard yesterday that the next spending review, in which these choices will have to be announced, will rather conveniently not happen until after the election.’

And more IFS evidence on how good it is to be a part of this Union: ‘One only has to look at the scale of NHS waiting lists, the number of local authorities at or near bankruptcy, the backlogs in the justice system, the long-term cuts to university funding, the struggles of the social care system, to wonder where these cuts will really, credibly come from.’

Of course, this illustrative list used by the IFS to emphasise the dire state of public services in advance of what it regards as inevitable austerity i.e. in advance of matters getting even worse, are all devolved matters. The implications for Barnett Formula-based budget allocations for Scotland, regardless of Tory or Labour in power in Westminster, is clear. More real harm – and a prolonged period of yet more ‘opportunity costs’?

This is an interesting characterisation of the UK: ‘But context is all. And the context remains one of very big increases in tax over this parliament, and more forecast over the next few years. A majority of that increase has come, rather fortunately for the chancellor, not from active policy choices but because the growth we have had has been rather tax rich – growth in high incomes and in profits for example.’

Johnson notes: ‘I’ve said it before, and I’ll say it again. Tax has risen to a higher fraction of national income than it has ever been in my lifetime, and I don’t expect it to return to its previous level for the rest of my lifetime.’ 

He is frank about the ‘game’ being played: ‘In this context talk of abolishing National Insurance does not look realistic. Of course, the chancellor is only talking about the part paid by employees (and the self-employed) not the much bigger part paid by employers. But this pledge to cut taxes by more than £40 billion goes in the same bucket as pledges to increase defence spending – not worth the paper its written on unless accompanied by some sense of how it will be afforded.’ 

‘We also got some rather uncertain and future focused tax increases. The change to the “non-dom” regime might net £2.7 billion in 2028-29 as the red book suggests. But it might not. You could say the same for the £1.2 billion of additional revenue for that year claimed from extending the energy profits levy. Contrast that uncertainty with the certainty with which we can say that cutting the rate of NI will cost in the order of £10 billion a year right away. We got some immediate, definite, tax cuts part paid for by a smorgasbord of future, uncertain tax rises.’ 

So more ‘spectating’ upcoming for the Scottish Government as Westminster’s tax and spend contortions play out. This is no way for a future Scotland to be governed!

Turning to Labour

The IFS Director states: ‘In an election year one can’t help but note that the non dom changes and the extension of the energy profits levy were Labour policies. In the through-the-looking-glass world of pre-election argy-bargy this will appear to make Labour’s job more difficult. They want to earmark the extra revenue from these taxes to fund some of their spending plans. A moment’s thought should show this for the nonsense that it is, at least in the real world of fiscal constraints and trade-offs, if not in the rhetorical world of electoral politics.

‘.. the numbers involved are trivially small by comparison with the fiscal challenges. Three or four billion of revenues a year don’t even count as a drop in the fiscal ocean when it comes to the scale of the challenges facing us.’

And on clarity of intent? – ’The opposition have been just as shy as the chancellor about telling us what they actually intend to do on taxes and spending after the election. If I am sceptical about Mr Hunt’s ability to stick to his current spending plans, I am at least that sceptical that Rachel Reeves will preside over deep cuts in public service spending.

Yet another sort of ‘lost opportunity’? –  ’.. this was not a budget which addressed the real challenges we are facing because it was not transparent about what those challenges are.’ 

So if persuaded to vote Tory or Labour in the upcoming General Election, if persuaded to stick with the notion of being ‘better together’ within this Union despite all the foregoing, what will such voters in Scotland actually be voting for? Even the IFS thus far has little idea: ’Government and opposition are joining in a conspiracy of silence in not acknowledging the scale of the choices and trade-offs that will face us after the election. They, and we, could be in for a rude awakening when those choices become unavoidable.’ 

Doesn’t this bring back memories from 2014 of all the dire warnings of what an independent Scotland would face and by contrast, all the ‘better togetherness’ we would enjoy if only we did the ‘right’ thing and vote to forego the agency of a normal independent nation-state?

And to repeat myself: if ‘the scale of the choices and trade-offs’ to be faced are so momentous, who is best placed to make them in ways to protect Scotland’s interests? The two main UK political parties responsible for the present state of the UK nation-state’s democracy, economy and public services? The two main UK parties who are joined in a ‘conspiracy of silence’?  What was it someone said about doing the same thing over and over again and expecting different results?

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