“It’s time to embrace the harsh light of fiscal reality”—Kier Starmer, Monday, October 28th 2024
Febrile media speculation surrounding this Wednesday’s UK budget has been deafening. Starting with what Rachel Reeves, new Chancellor in a new labour, as opposed to New Labour, government’s “discovery” of a £20 billion ‘black hole’ in the country’s finances, speculation how she might fill it has been rife. She blames difficulties on “fifteen years of Tory mismanagement.”
The shortfall between government income and expenditure has multiple explanations, not least, the cost of Covid, on which an unbudgeted £200 billion was spent, partly on unusable PPE provided by the likes of Michelle Mone’s husband and partly on a non-functional Test-and-Trace system costing £40 billion, run by government darling Dido Harding.
The collapse of major businesses, like Carillion, Thomas Cook and Debenham’s, as well as Brexit effects on exporters have all hit Treasury tax income. Similarly, a rumoured 2% rise in employer NI contribution, seen by business as a “tax on jobs
that willl stifle growth”.
There have been warnings trailed for months about how tight cash is. Jeremy Hunt’s pre-election giveaway of cutting 4% from worker NIC clearly did not woek.With such a huge majority, after 15 years, Labour supporters expect to see a Labour budget. Rather than any populist giveaway we can expect the NHS and Education to receive boosts. But, if taxes are expected to cover outlay, expect cuts in other areas and pity already-strapped councils. The asset value of any HS2 connection from Old Oak Common into central London is debatable.
Some creative accounting will claim that borrowing to cover investment in infrastructure produces assets to offset debt incurred. The UK went £16.5 billion deeper into debt through borrowings made in September. Interest payments on existing debt peaked at £2 billion paid in June. While avoiding a Truss/Kwartang-style panic in financial markets, such borrowing will increase bond interest rates paid and lead to higher mortgage payments. UK Bond yields have grown from 3.7% to 4.2% in the last year. Such fiscal policies may not herald disaster but are unlikely to lead to the growth in GDP and tax take hoped for, unless the UK develops some brilliant products for which the world beats a path to its door. Beyond fintech and Rolls Royce, Brit sin can boast of few other world-beaters.
A similarly dubious situation faces Shona Robison in preparing a budget for the Scottish government on December 4th. To date, economic performance has been sluggish, with councils forced into austerity while spending on notorious shibboleths like still-incomplete ferries at Ferguson’s, or dualling the A9. While tourism remains strong and whisky exports stable around £4 billion, world-beating developments are nowhere in evidence. While the Danes have cornered the wind turbine market, an equivalent Scottish dominance in tidal energy remains unfulfilled. Meantime, once-strong seafood and deli exports have been decimated by post-Brexit bureaucracy.
Rather than exploiting commercial opportunities, and thus tax take, the Scottish government seems focussed on increasing voter giveaways, like free bus travel for youths and asylum-seekers under consideration. These would add to free prescriptions and student fees, plus free personal care and travel for pensioners already in place.
Underperformance in the Scottish NHS may be addressed through their proposed Scottish Care, peoposed to represent around 350 organisations, which totals almost 900 individual services, delivering residential care, nursing care, day care, care at home and housing support services.
Scottish Care faces resistance from both councils and unions, expected to implement this. Joint Boards set up to provide integrated care and avoid bed-blocking have proved ineffectual in breaking down ‘bunker mentality’ of jealously guarded control and budgets and deliver effective joint working.
Citing continued effects of Brexit, the Covid pandemic, the war in Ukraine and the cost-of-living crisis, alongside UK Government spending decisions, echoing Starmer, Finance Secretary Shona Robison said “difficult decisions were required.”
On September 3rd, Robson madea revision to the current 24/25 budget claiming total savings, worth up to £500 million to include:
- Implementing emergency spending controls across the public sector, particularly targeting recruitment, overtime, travel and marketing
- Ending the ScotRail Peak Fares pilot
- Mirroring the UK Government’s policy to means test Winter Fuel Payment
- Making additional savings across portfolios, including in sustainable and active travel and in health and social care
Ms Robson is planning to use £460 million of additional ScotWind revenue to address in-year pressures in 2024-25.
Decisions already taken were unlikely to contribute to the Chancellor’s avowed intent of growth in GDP. As an example, February’s decision by Housing Minister Paul McLennan to cut £196 million (26%) from the affordable housing budget means fewer jobs in construction across Scotland, stilling over 1,800 new affordable homes. This means an inability to house migrant workers the economy needs in agriculture, hospitality and skilled labour.
The way fiscal reality stands, Ms Robson will have trouble persuading any other Scottish party to support her minority budget. With its stonking majority, Ms Reeves’ party will face no such problem. But the question whether either will stimulate their respective ecotones in the right direction appears moot.
Both budgets are shaping up to be political fudges. Neither seem likely to achieve their professed long-term goal.
#1113—872 words
davidsberry 