Chancellor George Osborne’s austerity axe did not, after all, swing as ferociously as widely feared. Working tax credits will be curbed, but the £12 billion of welfare savings will be spread over three years, not two. Government departments face further cuts – but the savings target has been lowered. Indeed, the Office for Budget Responsibility says public spending will be £83 billion higher over the next five years than Osborne indicated in his March Budget. The household benefits cap has been brought down, but a new National Living Wage introduced. And the tax-free personal allowance is being raised to £11,000, taking tens of thousands of low income earners out of tax.
This complex Budget, with a heavier touch on tax but an altogether lighter one on spending and welfare, was largely made possible by a better-than-expected reduction in government borrowing at the start of the fiscal year and the target of a balanced budget being pushed back a year 2019-20.
Little of this, however, has softened the SNP critique. Throughout the general election campaign it laid down a barrage of hostile fire against the Chancellor’s austerity economics and in particular his outline plans to cut the welfare bill.
This critique continued after the Chancellor delivered the Budget yesterday, with Stewart Hosie, the party’s finance spokesman in Westminster, describing it as “very bad for Scotland”. And while it is only to be expected that opposition parties should oppose, the SNP now risks walking into two traps, one existential, the other strategic.
In portraying Scotland as a country especially vulnerable to public expenditure constraint and to welfare savings, it diminishes the potency of the SNP’s other critical message: that Scotland is a resilient country, one of opportunity and aspiration and well capable of running a prudent budget under “full fiscal powers”. And, in its central accusation that “austerity” has failed in its objectives, it puts a question mark against the Holyrood administration’s claims to have contributed to the recovery in employment and performance since 2009-10.
Only last week, in a cogent speech to the Chartered Institute of Public Finance and Accountancy (Cipfa), Deputy First Minister John Swinney reminded us that Scotland’s economy grew at its fastest rate since 2006, that the number of people in employment increased by 53,000 over the past year, and that we continue to have the highest employment rate of any UK nation.
Yet ahead of the Budget, the SNP also portrayed a different Scotland. It said a 10 per cent cut in child tax credit would cost Scottish families £150 million a year, while a 10 per cent cut in all tax credits would leave Scots households £250m worse off. First Minister Nicola Sturgeon said that reducing child tax credits to 2003 levels would result in the loss of £650m. Tax credits, she insisted, “form an important part of the tax and welfare system, designed particularly to support working families on low incomes”.
So are we doing better or doing worse? Are we prospering or are we poorer? By banging the anti-austerity drum so relentlessly and positioning the party well to the political Left, it has certainly succeeded in drawing support from tens of thousands of previous Labour supporters. But this shift from being a national party to a sectional party is fraught with risk.
Once on this square, it is difficult to move off when circumstances change. And it is a stance that risks branding Scotland and its economy as one incapable of improvement and permanently reliant on ever rising welfare support.
Such a perception does Scotland no favours in seeking to attract new investment and entrepreneurial talent from elsewhere. The SNP would loudly protest that it remains the party of aspiration, with appeal to all Scots whatever their income or life situation. But it has boxed itself in to an existential problem: what broader appeal can it offer outside of a particular demographic section that many would dispute is typical of Scotland as a whole?
It is this paradox that fuels a strategic problem for the party in the longer term. It is campaigning loudly for amendments to the Scotland Bill that would remove Westminster vetoes over using welfare powers, give the Scottish Parliament additional powers including devolving working age benefits and benefits relating to children; devolving power to legislate for employment support programmes, control over National Insurance, including employers’ National Insurance contributions; employment law; and equal opportunities.
This reinforces the perception of a party intensely focused on the politics of welfare without acknowledgement of the central problem of such a focus: that the growth in welfare spending is unsustainable without either raiding other departmental budgets, by raising tax or by borrowing more. It is not clear yet that the party has a reform agenda in mind, indeed, any definable policy in this area other than simply spending more.
It is also liable to catch the party flat-footed in the face of change. For example, yesterday’s Budget undermined three of the SNP’s key policies. It flagged a reduction in corporation tax (long an SNP article of faith) from 20 per cent currently to 18 per cent. It introduced a new National Living Wage and set a target of £9 an hour by 2020 – higher, in fact, than the rise in the National Minimum Wage envisaged by the SNP. And it cut the tax burden for low income households.
All this presents strategic problems in terms of party policy in the approach to the Holyrood elections next year. Having denounced welfare savings so insistently, the party will now be under pressure to mitigate or reverse these with the new powers granted under Calman and Smith.
But such a populist platform sets up pressures for Scotland’s budget in future years – both in servicing its share of UK debt and dealing with the potential fiscal gap left in the event of ‘full fiscal powers’ and the ending of the Barnett Formula.
Higher taxes not just on top earners, but also on middle income households would be needed to fund welfare restoration. Alternatively, there is resort to higher borrowing. But if George Osborne’s forecast of a balanced UK budget by 2019-20 proves accurate, this sets a high bar for Scotland, which would suffer from negative comparisons if Holyrood opts for the borrowing route.
Of course, yesterday’s Budget projections could fail, with lower growth than forecast, higher borrowing and higher debt interest payments. Scotland would find itself in a fiscal policy trap if Osborne’s Budget fails – but no less a trap if it succeeds.