Bill Jamieson: More to worry about than small cuts

Swinney: response to cuts was over the top. Picture: Ian Georgeson
Swinney: response to cuts was over the top. Picture: Ian Georgeson
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OH, the cuts, the cuts! Up goes an all-too-familiar wail about the proposed cuts to Scotland’s budget.

“Completely and utterly unacceptable” is how Cabinet Secretary John Swinney has described the £176.8 million reduction.

Now it may be post-election ennui, or the miserable so-called “summer” weather so far that have dulled my senses. But heresy though it is in Scotland not to join in the chorus of outrage and condemnation, I find myself unmoved.

It’s not just that we know off by heart – or should by now – the continuing rises in government debt. And it’s not as if we didn’t well know cuts would be coming.

But £176.8m is hardly an enormous gouge out of a planned Scottish government departmental spending limit this year of £30.2 billion. It is a reduction of just 0.58 per cent.

And as a proportion of total government spending in Scotland – including social security, local authority spending and other public agencies, amounting in all to £66.4bn – it is a reduction of just 0.26 per cent.

It is hard not to feel that the cuts in the wider context of public spending are about as underwhelming as the protests of “completely and utterly unacceptable” are over the top.

Moreover, Chancellor George Osborne has offered to delay the cuts into next year when Scotland has greater control of its budget and will have the ability, should it choose, to raise the amount in extra tax rather than cut the spending total. That may prove an economic lever Holyrood may be somewhat less enthusiastic about pulling.

The point here, surely, is not that spending cuts are always unpopular with voters and will cause discomfort to some. It is that, when we have borrowed to the hilt and beyond, government tax and spending is all about priorities.

Some might feel Swinney and his colleagues have little choice than to denounce the proposed reductions for fear of conceding outrage to Lab­our politicians and political opponents on the Left.

But the problem here is that it does not say much about the resilience of Scotland’s economy and finances that a cut of so small a proportion of the total should trigger such outrage: an “unexpected and unwarranted” imposition of further “austerity”.

Resilience is the word to focus on here. Seven years on from the global financial crisis and five years on from the onset of “recovery”, the UK’s Public Sector Debt total is still rising.

It currently stands at £1.56 trillion, or 81.58 per cent of total GDP, while the annual cost of debt interest now amounts to some £43bn, equivalent to 8 per cent of UK government tax income. This, surely, is where our outrage should be addressed.

And these figures, if not grotesque enough, may be seen as a significant understatement of the UK’s debt total. The more accurate figures are those in the Whole of Government Accounts. These take in debts run up on items such as many of the unfunded promises (ie liabilities) that the baby boomers have been making to themselves, notably unfunded public sector pensions, asset shortfalls in the funded schemes, provisions for items such as nuclear decommissioning, clinical negligence and PFI contracts.

The full extent of the burdening of “Generation Y” (those born between c 1980 and 2000, ie aged between 35 and 15 today) has been brilliantly set out in a Centre for Policy Studies paper by public finance and pensions economist Michael Johnson.

Baby boomers, he says, “have bec­ome masters at perpetrating inter-generational injustice, by making vast unfunded promises to themselves, notably in respect of pensions”. He calculates the gap between the nation’s assets and liabilities grew by an unsustainable 51 per cent in the five years to end-March 2014, to £1,852bn. At 111 per cent of GDP, this is equivalent to £70,000 per household.

If the state pension, the largest of all unfunded liabilities (roughly £4,000bn) is included, the burden per household rises to £221,000. “Reining back on unfunded promises”, he argues, “means either stop making them, or fund them now, which would require higher taxation (or additional cuts in public spending)”.

Pre-election pledges have limited the scope for raising rates of taxation, leaving the Chancellor with little choice but to cut tax reliefs and exemptions. Johnson’s suggestions include all future unfunded spending commitments to carry an inter-generational impact assessment to quantify the impact on the young, ie future taxpayers; an Office of Fiscal Responsibility to scrutinise the effectiveness and value for money of all tax reliefs and exemptions, and all tax reliefs and exemptions made subject to a five-year sunset clause, after which they would cease.

His report makes for grim reading – but a necessary antidote to the mood of euphoria that has beset many Conservative commentators since the election.

No less worrying is our dangerous unpreparedness for an economic slowdown. Features of particular concern include rising house price inflation, a savings ratio well below that required to provide a buttress for household budgets, household debt levels expected to reach record levels by 2020 and persistent (and chronic) trade deficits.

These concerns, some argue, are by no means new, so why worry unduly? The reason, as HSBC economist Stephen King recently set out and which I highlighted here last month, is that, looking to the pattern of previous economic cycles, we could now be closer to the next recession than we are away from the last.

The crisis and recession of 2008-09 ushered in record low interest rates and quantitative easing – “temporary” quick fixes that have proved 
anything but. The result is that we have no ammunition left in the policy locker to fire should a downturn head towards another recession. The traditional response to a downturn is to cut interest rates, but these can scarcely be cut further now.

And another dose of QE would trigger even louder alarm bells than those already ringing about the colossal explosion in asset prices and the mushrooming of giant bond funds. It is these that could prove the catalyst for a crash just as lax bank lending and collateralised debt obligations triggered the global crisis of 2008-09.

Resilience? We are worryingly vulnerable. Here are threats to our economy and our welfare far greater than the mooted £176.8m cut in Scottish public spending, yet they are barely being discussed. It is surely here that our attention should be focused. «