The greater the challenge is the bigger the policy response. That is the rule of thumb when it comes to developing progressive policies, especially in the face of ecological and labour market instability. Whilst opinion polls show that the Conservatives are on their way out of Downing Street, it is more important than ever to look at where the Scottish National Party and Labour plan to take us.
An indication of their policy travel can be found at their recent party conferences—and it is far from universally good news.
More austerity to come
The Labour Party have already found themselves facing a wave of criticism from leading economic experts. This criticism comes from a long list of policy u-turns, notably their proposals to keep the two-child benefit cap, minimal tax changes and subsidising energy companies with already record breaking profits. Their recent conference cements this.
Shadow Chancellor Rachel Reeves made clear in her speech that the next Labour government would balance all government spending (including interest payments on debt) with all returns in tax—which history shows has brought more instability than not. Whilst Labour would reduce the debt-to-GDP ratio over five years, Reeves stressed that this would not result in austerity as extra spending would come directly from growth. This growth would support Labour’s £28bn green investment plan, one which they had previously dropped just months ago.
It would later be revealed that Labour had not in fact returned to their original £28bn green investment plan, but rather have cut it back by £8bn a year. Over a ten year period this would amount to £200bn in green investment, which is £100bn less than needed to for a green transition for building ecological and labour market stability proposed by the IPPR Environmental Justice Commission. Whilst Labour’s original proposal left them short of £20bn to meet the IPPR’s recommendations they have increased this shortfall by £80bn.
A policy loop doomed to fail
The £20bn figure also relies on the UK economy growing, despite Labour’s strict fiscal rules. Economics Professor Bill Mitchell estimates that since the late 1990s the UK’s average growth has sat around 1.7% (excluding the pandemic). For Labour’s growth plan to work, that figure would need to immediately jump to 2.5% within a year and continue to do so over a 5 year timetable.
With current UK growth sitting at around 0.4%, such an increase is almost impossible without Labour drastically increasing government spending, which they have heavily rejected. Even if Labour were able to increase growth by 1% within a year, this would only amount to £12.5bn annually.
This leaves Labour’s own fiscal rules as completely self-defeating. Growth will be far harder to achieve because of climate change, high interest rates and high living costs. The growth required to investment will not occur quickly enough. To tackle these problems this will require high public investment. But Labour’s own fiscal rules have ruled out progressive spending. It is a policy loop doomed to fail.
Shadow Chancellor explicitly rules out Labour imposing a wealth tax
Labour could reduce costs for households by nationalising the energy sector—allowing increased consumption to be used on goods and services in the private sector to increase growth. Despite Labour members and trade unions democratically passing a motion to do just that, the party leadership dismissed it.
Labour could reduce interest rates. The Bank of England has set rates to 5.25%, thus pressuring households to seek out private liquidity and increase their debts. Increasing interest payments has left lower-income households with less capacity to spend. Whilst a Labour government could instruct the Bank of England to reduce rates, since the UK’s central bank is not independent from government, Rachel Reeves made it abundantly clear that Labour would “protect the independence of the Bank [of England]”.
The International Monetary Fund forecast that interest rates would remain between 5-6% until at least 2028—a full term of Labour strangling its own growth targets by refusing to lower rates. This is again a policy design entirely doomed to fail.
Can Labour’s tax proposals make up for the lack of growth? No. Their most recent proposals would only return £5bn a year for the entirety of the UK. In contrast, the Scottish Trades Union Congress’s proposal for a wealth tax would raise an annual £3.3bn in the long-term in Scotland alone. A one-off UK wealth tax also has the potential to return £260bn or £10bn annually. A wealth tax would open up fiscal space in the economy to invest in utilised resources, reduce abusive price increases from large businesses and build towards a Green New Deal. Labour has ruled out further tax proposals until the general election and firmly ruled out a wealth tax if Labour comes to power.
A step into the bond market?
Before the SNP’s conference had begun, it had already positioned itself on a policy platform that would bring price stability for households. SNP policies that have either been passed at conference or implemented by the Scottish government include a rent cap, rent controls, a wealth tax, a windfall tax, a job guarantee, a living wage, public ownership of energy and banking regulations. The party’s recent announcements leave these policies under question.
First we will address one of the more major announcements at the SNP’s conference—the issuance of a Scottish government bond to fund capital.
This is a positive step for the Scottish government to engage with the international bond market. The expansion of financial institutions through global networks gives will help ease the transition from devolution to independence. But on the practical side there does not seem to be any evidence that borrowing from international markets will support Scotland’s domestic spending.
Currently the Scottish government borrows from the National Loans Fund (i.e., the UK Treasury) at around 4.6% of interest, with the Bank of England’s rate sitting at 5.25%. Scotland entering the international bond market, without its own central bank or currency, will likely see Scottish bonds met with an interest premium. Bond bidders will most likely bid around or above the Bank of England’s rate, not the NLF. If the Scottish government did borrow from international markets this would be more expensive than borrowing from the UK Treasury.
Stark difference between independent Scotland borrowing and monetary sovereign nation
During a cost-of-living crisis, where even tens of millions of pounds can make a huge difference to households, borrowing at a higher rate is a deeply questionable choice.
The Scottish government issuing bonds does not increase the amount Scotland can borrow. Holyrood is still restrained at borrowing an annual £450m and a total of £3bn (which would be roughly adjusted every year). Recent data suggests Scotland has already borrowed between 70-80% of its debt stock.
Who would the Scottish government issue their bond to? The choice sits between Scotland’s domestic finance market or the international market. Most monetary sovereign nations, which an independent Scotland should strive to be for economic stability, bond issuance leans towards domestic buyers. This is the case for Denmark, Sweden, Japan, the UK, Australia, New Zealand and Canada. This protects countries from possible exchange rate or inflation shocks, whilst the interest paid on bonds is more likely to be reinvested within the domestic economy. There is a stark difference between Scotland borrowing as an independent and monetary sovereign nation, compared to a fiscally and monetary restrained devolved state. I explain this difference here.
The Scottish government must also seek assurance that any issuance of a bond must be in line with the principle of lex monetae monetary in international law. Lex monetae would allow an independent Scotland to redenominate its bond payments into the new Scottish currency. Rather than using up Sterling reserves, borrowing in Sterling or raising Sterling funds, an independent Scotland can directly pay back bond holders from the Scottish central bank.
The return of the freeze
One of the more contested announcements from the SNP’s conference was a council tax freeze. This was a policy proposal that was developed only 48 hours before Humza Yousaf’s speech to party members. This was met with clear anger from both COSLA, the Scottish Greens and the Local Government Information Unit. This was in breach of the surprise clause in the Bute House Agreement and the engagement clause within the Verity House Agreement.
The announcement of the freeze did not come with the clear communication if it would be fully funded by the Scottish government. Members of Modern Money Scotland spoke to various politicians and government advisors after Humza Yousaf’s speech, to which we found it would be fully funded.
This policy announcement will bring some financial security for households who will not see an average increase of 5% on their council tax. However, considering the shortfall of tax increases and not taking forward proposals in the most recent council tax consultation, some have estimated the council freeze to cost £448m. This will entirely depend if the Scottish government will increase multipliers on higher earners and the scale of local council budgets.
Whilst Humza Yousaf had cited favourable interest in a wealth tax during his leadership bid, and also cited interest last month, freezing council tax now suggests these plans have been dropped. The original proposal to raise £3.3bn in the long term would have required serious council tax reform. Council tax reform is a subject beyond the scope of this article. I encourage you to read “Council Tax Reform is Necessary — and so is Understanding” by Allan Faulds.
With £1bn being wiped out in real terms from the Scottish budget because of inflation, with a further £600m mitigating conservative policies, it is completely bizarre the Scottish government are not taking advantage of their tax raising powers. If the SNP plan to drop a wealth tax, what other price stability policies could they drop?
Much can change over the coming months, but at the current rate it seems the Scottish parliament is facing serious financial challenges ahead.
SNP’s policy announcement mildly better but leaves a lot to be desired
It is clear Labour’s economic plan is one inspired by caution akin to that of the Conservative government of the early 2010s. This is no secret—rather it is one that shadow ministers have spoken openly about. The institutions that are in need for desperate reforms are now the ones in which Labour are eager to defend. The former leaders of these institutions, ex-Chancellor of the Exchequer George Osborne and ex-Governor of the Bank of England Mark Carney, have publicly backed Labour’s economic plan. Receiving the backing of the leading masterminds of UK austerity, a policy that was attributed to over 300,000 excess deaths and crumbling public services, does not send a message of economic stability.
In its current state, the SNP’s recent policy announcements can only be described as mildly better, but leaves a lot to be desired. Despite many SNP policy motions being passed that would bring major price stability to households via independence, recent announcements could leave Holyrood with more fiscal stress. The long term vision is bolder—the short term vision brings serious risks.
With continued austerity on the horizon with no new economic powers, people in Scotland find themselves trapped. The powers of a normal independent state would give Scotland the ability to take a different path. It’s time for an honest public debate on the scale of the current challenges of the status quo and lay out the policy steps to building an equal, stable and ecologically secure future.
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