SNP 'not fit to govern'

Published on Sunday 8 April 2007 00:19

SCOTLAND'S leading public finance expert has issued a savage attack on the SNP, accusing it of "lacking the fiscal competence necessary for governing", and describing its plans for tax cuts as "a nonsense".

Professor Arthur Midwinter claims in a new paper that the party's budget plans constitute "an uncosted wish list" with a 1.8bn hole at its heart.

The SNP's plans to fund a cut in class sizes, to pay for more police officers and to freeze local tax, he adds, are "riddled with funding errors and omissions".

He also backs claims that the proposed new local income tax level of 3p in the pound will actually have to rise to 5p if the party is to balance its books. His comments come at the start of a critical week in the Holyrood election campaign, with the SNP, Labour and the Lib Dems all about to launch their manifestos - and with the SNP apparently stretching its lead.

A poll by Scottish Opinion published today has the SNP leading Labour 40% to 28% on the constituency vote, and 39% to 28% on the regional vote. This would give the SNP 56 seats to Labour's 40.

Last night Labour promised to cut council tax for pensioners by a quarter, and the SNP said its own plans to replace council tax with a new local income tax amounted to "the biggest tax cut in a generation".

Midwinter is a highly-respected former adviser to the Scottish Parliament's powerful Finance Committee, and has been a trenchant critic of the Labour-led Scottish Executive.

His paper analyses the pledges already laid out by the SNP, and costs them against the party's budget proposals. The Nationalists say that, over the next three years, they will find 4.3bn from within the Scottish budget, made up mostly of reserves, efficiency savings, and from cash saved through scrapping 'capital projects' such as the new Edinburgh rail link. Of that figure, 3bn will be used to pay for policies such as reducing class sizes and putting more police on streets. The rest will fund the new local income tax cut. But in a damning conclusion to his paper, Midwinter declares: "This package is riddled with funding errors and omissions, indicative of a party lacking the fiscal competence necessary for governing, and offering Scottish electors a misleading prospectus for their income tax bills, and for service developments which, at this time, constitute simply an uncosted wish list.

"The SNP will have to revisit these plans as a matter of urgency."

His paper is particularly scathing of the SNP's claim that it will deliver efficiency savings equivalent to 1.5% of the Scottish budget. The SNP's shadow Finance Minister, John Swinney, set out plans last month to find 2.7bn over three years from 'efficiency savings'. However, Midwinter declares: "No British government has delivered 1% per annum efficiency savings over a sustained period - not even the Thatcher government of the 1980s."

Midwinter told Scotland on Sunday that much of the money the SNP was relying on was one-off cash, which, once spent, would not be replaced in the coming years.

Midwinter is a Visiting Professor at the Institute for Public Sector Accounting at Edinburgh University. He built his reputation as an unforgiving analyst of government budgeting through the Parliament's Finance Committee, which is frequently hailed as the most influential in Holyrood. He insisted last night that he had no political axe to grind.

But the SNP moved quickly to dampen the impact of his claims. Party sources pointed out that Midwinter had been a Labour councillor 30 years ago. It also issued a paper by Professor David Simpson, the former chief economic adviser to Standard Life, rebutting Midwinter's claims.

It declared: "The language and tone of Mr Midwinter's comments on the SNP's financial plans are more appropriate to a press release of a political party rather than a balanced analysis."

The SNP also released a statement from Professor Neil Kay, emeritus professor of Business Economics at Strathclyde University. It said: "A case could equally be made that these proposals were based on overly cautious assumptions by not factoring in estimates of the nearly 2bn extra that will come to Scotland as a side effect of the Chancellor's last budget."

Do the SNP's figures add up?

NO

PROFFESSOR ARTHUR MIDWINTER

1. Last month, the SNP published its financial proposals in which it proposes to save 4.3bn from the Scottish budget, and redistribute it - 3bn to frontline services and 1.3bn to reduce local tax. It plans to replace council tax with a Scotland-wide income tax, set at 3 pence in the 1, and to freeze council tax during the period required to introduce the reform.

2. The SNP claim that this change will benefit pensioners, families and individuals in middle Scotland, whilst only the richest 10% will pay more. This figure is certainly inconsistent with previous independent studies of local income tax, including the most recent paper from the Chartered Institute of Public Finance and Accountancy (CIPFA), which estimated that a 4.5p rate would be necessary to replace council tax in 2003/04.

3. As the SNP is now regarded by psephologists as a serious contender to lead a coalition government in the next parliament, there is a pressing need to consider their financial assumptions and projections closely, given their past record of adopting rosy assumptions (rather than realistic ones) to challenge the official estimates of the structural deficit in the public finances, and their confusion over the student funding issue.

4. The proposal on Local Income Tax does not stand up to serious scrutiny. Firstly, the Scottish Executive does not have the power to freeze council tax across the board. Ministers have reserve powers to cap a local authority’s expenditure – by imposing a reduced council tax level with parliamentary approval if they can demonstrate its planned expenditure or expenditure increase is excessive. In the past, this has required evidence through comparisons with other authorities to demonstrate the case.

5. Such action will undoubtedly result in conflict with local government, endangering jobs and services as occurred in the 1980s. Moreover, they would have to fund any freeze on locally financed expenditure from the block grant, and this will cost around 65m per annum at current prices. But that is only to maintain current service levels. The Nationalists are committed to reduce pupil-teacher ratios, expand nursery education, spend more on free personal care, employ 1,000 more police officers, employ more school nurses, all of which will have to be fully funded by the Executive to maintain a freeze in local taxation. This too is uncosted, but will not be cheap.

6. Similar gaps emerge when the proposals for the tax reform are examined. The 3p rate, plus income on second homes, will raise only 1,300m, to fund the 2,131m raised in council tax in 2006/07. The SNP has assumed, wrongly, that the 381m currently paid as council tax benefit to eligible households in Scotland, will be built into the Scottish block. This is nonsense. The block grant is determined through comparable spending on devolved services in England. Council tax benefit is a reserved function, and if council tax is abolished, will no longer be paid to Scottish residents.

7. This is the same principle which applied to the attendance allowance monies (40m) paid to eligible households prior to free personal care. The Nationalists have been making noises about ‘negotiating’ with the Treasury over both these sums, but this is simply political gamesmanship, for the Treasury does not like ‘exceptions’ to UK wide policy, and will not make them. One of the arguments for devolution was that it would allow Scots to take decisions on their own priorities, and live with the financial consequences. So this 381m will have to be raised from taxpayers in Scotland. This is not ‘Scotland’s money’, but payments made to Scottish residents under UK benefits legislation.

8. The SNP claim to have identified 4.3 billions of savings from the current Scottish Budget, of which 3 billions will be ‘reallocated’ to frontline services, and 1.3 billion for lower taxes to households and business taxpayers. However, the total savings identified is only 3.8 billions – they are 500m adrift (see Table 1).

9. Moreover, 1.1 billions is a straightforward transfer between capital budgets. At this stage, the accounting becomes dangerously inaccurate. Of the 2.7 billions left, 1.4 billions is in non-recurring expenditure, arising from past underspending, mainly on capital, which cannot be used to fund long-term reductions in council tax or business rates.

10. This leaves 1.3 billions of efficiency savings to meet the 1.3 billions of tax cuts – a wholly risky financial assumption. The Nationalists propose to save 1.5% per annum in cash terms, which will all have to fall on resource budgets within the Departmental Expenditure Limit (DEL) to be reallocated for tax reductions. The whole of these savings will have to fall on the resource DEL as savings in the capital DEL cannot be used to fund tax reductions.

11. This creates real problems of delivery. Firstly, at the moment, departments retain any savings for frontline service development. This incentive will be removed if the savings are earmarked for tax reductions. Secondly, Scotland’s councils funding accounts for around a third of the DEL and they suffered higher savings targets last time. Thirdly, no British Government has delivered 1% per annum efficiency savings over a sustained period – not even the Thatcher Government of the 1980s. The current target of 695m has not yet been met, so 1,204m over 3 years is hopelessly unrealistic, and achieving 700m – after three years of savings, would be doing very well indeed.

12. Finally, the SNP claim they will save 150m by streamlining government. As the total budget for administration is only 254m, saving 60% of it is not feasible. My broad judgement is that saving 40m is more realistic.

13. In short, the proposals represent a wholly inadequate basis for tax reductions. The SNP claims that 1.3 billions of tax reductions will be delivered, including 450m in the first year of local income tax. The shortfalls which require funding are for council tax benefit (381m); the shortfall on efficiency gains (600m); the cost of freezing council tax for three years (195m); and the current business rate reduction (180m).

14. The SNP’s estimate of 3 billions for reallocation to the frontline and 1.3 billions for the reductions is nonsense. They have in fact only identified 2.5 billions of funding for services, a significant proportion of which is capital spending and cannot be used for revenue spend; or short-term underspend in EYF. Any growth in frontline services will have to be funded elsewhere.

15. The 1.3 billions estimate of the cost of tax reductions is needed simply to meet the 1,356m shortfall identified in their budget.

16. Overall, these weaknesses show why the Institute of Fiscal Studies identified an 840m funding gap in the proposals. If this is implemented and falls on taxpayers the argument that only the richest 10% of Scots would pay more would be redundant. In fact, it will require a 5p tax rate, not 3p, and the average fall in tax bills of 3.20 per week will become an increase of 2.77 per week. On the basis of the IFS figures, this would result in around half of Scots taxpayers paying more.

17. Moreover, the reforms would not benefit the poorest households or pensioners as distinct groups. Some 20% of Scottish households – many of whom are pensioners – currently claim full council tax benefit, and will be unaffected by the change. That is why comparisons with the poll tax fiasco are valid, as it too was introduced on the basis of flawed calculations of the redistributive effects.

18. But that is not the end of the problems. The SNP has made a number of new spending commitments, which as yet are uncosted, including a new package of business rates relief, expanding nursery education by 50%, 1,000 extra police officers, and additional school nurses. Nursery education cost 280m last year, so a 50% increase could add 140m to the budget. The police budget could increase by at least 25m. And my best estimate of the cost of their new rates relief package would be around 200m per annum.

19. Overall, this package is riddled with funding errors and omissions, indicative of a party lacking the fiscal competence necessary for governing, and offering Scottish electors a misleading prospectus for their income tax bills, and for service developments, which, at this time, constitute simply an uncosted wish list. The SNP will have to revisit these plans as a matter of urgency.

TABLE 1: THE SNP’s SAVINGS PACKAGE

Asset Sales - 350m

Streamlining Government - 150m

Reserves (EYF) - 1,000m

Efficient Government - 1,204m

Capital Spending - 1,100m

Total 3,804m

• EYF (end-year flexibility) allows departments to carry forward unspent monies to the following year.

TABLE 2: THE MISSING MILLIONS

1. Funding shortfall from council tax benefit - 381m

2. Costs of freezing council tax for three years - 195m

3. Annual costs of business rates reduction introduced in 2006/07, but funded by EYF - 180m

4. Estimated shortfall in efficiency savings over 3 years - 600m

5. Shortfall in savings package - 500m

Total 1,856m

• Arthur Midwinter is a Visiting Professor at the Institute for Public Sector Accounting research at the University of Edinburgh, and the author of ‘A Brief History of Local Government Finance’, prepared for the Burt Committee on Local Government Finance. He was Budget Adviser to the Finance Committee of the Scottish Parliament from 2002 to 2007, and has advised several local authorities on financial issues.

YES

PROFESSOR DAVID SIMPSON

THE language and tone of Mr Midwinter’s comments on the SNP’s financial plans are more appropriate to a press release of a political party rather than a balanced analysis. He is absolutely right about one point, however; all financial assumptions – new or old, whether proposed by the SNP or anyone else – deserve careful scrutiny.

What are the two central propositions to which Mr. Midwinter objects?

The two issues relate to proposed efficiency savings in Government and a move from council tax to local income tax..

Public sector efficiencies are certainly necessary and perfectly possible. Indeed, the counter argument – that any efficiencies are impossible – suggests a nihilist position that progress is never achievable.

The SNP has set a target of 1.5% annual efficiency savings. To judge whether that is reasonable let us consider both targets and achievements.

It is sensible to have targets for improvement. Just as it is right for Gordon Brown to have efficiency targets – and subsequent savings – for the UK, so it is right for politicians to have them in Scotland. Gordon Brown is proposing that across the UK the public sector achieve 3% annual efficiency savings. The SNP’s proposed 1.5% is well within the Chancellor’s own target.

Second, and perhaps even more importantly, the 1.5% efficiency savings are of the same order as has been achieved in cash and time over the last three years by the current Scottish Executive.

So, it seems that the SNP 1.5% target – set to save 2.7 billion over the three years of the next spending review period 2008-2011– is certainly reasonable, and perhaps even modest. The SNP projects that this 2.7 billion will be added to by 500 million from smaller government, (fewer departments and fewer quangos There are around 150 quangos at the moment : do we really need all of them?) as well as asset sales,together with a further 1.1 billion from re-prioritising capital expenditure (e.g. not proceeding with the current Edinburgh Airport Rail Link proposals).

Having identified 4.3 billion in savings, the question then becomes, what would a new administration do with these savings? The SNP proposes splitting these savings between funding frontline services and tax cuts. At a 70 %– 30% split this means 3 billion for frontline services and 1.3 billion returned to the Scottish taxpayer.

This brings us to Mr. Midwinter’s second main argument concerning the abolition of the council tax in favour of a move to a local income tax. Here he seems to have missed a rather basic point. The SNP are proposing a tax cut. They have made that point clear, describing it as the largest tax cut in a generation.

Mr. Midwinter says that moving from the council tax to the local income tax will raise 831 million less in tax than at present. That is half true. 450 million less will be raised. Put another way (and one I suspect that will ring more true to taxpayers) that means 450 million will be returned to Scottish taxpayers. That is a central feature of the SNP plans.

This leaves 381 million in dispute. This 381 million is the amount of the current council tax rebate. Mr. Midwinter assumes that this money would be lost to Scotland in the maw of the Treasury.

What we know from the Burt Review is that arrangements are flexible enough to deal with their proposed alternative to Council Tax. As the Burt Review said: “following discussion with DWP officials and receipt of legal advice, we would not expect eligibility for Council Tax Benefit to be affected by the proposed changes.” So it seems Mr Midwinter is pre-judging negotiations between the Scottish Executive and the UK government. The results of the recent negotiations between the Treasury and the politicians representing the future Northern Ireland Executive are instructive.

Of course, the Burt Commission’s observation makes perfect sense. For if this was not the position, how could any government ever make a change from the current council tax? After all, despite Mr. Midwinter’s protestations to the contrary, the money does not belong to the Treasury – it belongs to the people of Scotland and Scots have a right to choose how to dispose of it.

Many things are changing in Scotland at present, and some things are certainly changing for the better. One is a serious discussion about what forms of tax are acceptable and fair. The SNP and the Liberal Democrats have helped to lead this debate with a serious discussion about local income tax. If other parties have better ideas, they should put them forward, instead of constantly carping that nothing can be done, and that the status quo represents the best of all possible worlds.

Finally, on a point of arithmetic, Mr Midwinter takes exception to what he terms a 150 million saving the SNP identifies in plans to streamline government – writing that 40 million is “more realistic.” It seems that Mr. Midwinter has missed the fairly basic point that this saving is to take place over three years. So, if there is a difference of opinion, it is of the order of 10 million a year – or less than 5% of the Executive’s underspend from last year.

• Professor David Simpson is the former chief economic adviser to Standard Life and founding director of Fraser of Allander Institute