George Kerevan: Swinney puts the pieces in place

NEARLY 25 years go, when I was an academic economist, I hired a bright young thing as my research assistant. It was his first job and he was very good at it. Now, a quarter of a century on, John Ramsay Swinney is Scotland’s Cabinet secretary for finance, employment and sustainable growth, aka “Mr Scottish economy”.

On Wednesday, Mr Swinney delivered the majority SNP government’s public spending plans for the next three years, including a detailed budget for 2012-13. The whole document is two and a half inches thick and 262 pages long. The Cabinet secretary has a well-deserved reputation for thoroughness. But has he got his sums right?

Swinney was heavily criticised for delaying the publication of his spending plans till after the May Holyrood elections. John is patently an honest man who normally shuns political games, and I detected a little personal unease at this tactic. But given that Alistair Darling – a politician of similar vein – did exactly the same thing before the 2010 General Election, Labour was in no position to cry foul.

In drawing up his budget, Swinney was heavily boxed in, both by savage cuts to the Treasury block grant, and by the deteriorating global economic situation. This year, Holyrood saw its Treasury subvention slashed by £1.3 billion. Danny Alexander, the Liberal Democrat Treasury Secretary, has also signalled that by 2015, the Scottish Government will see its annual revenue culled by nearly 10 per cent in real terms, and the budget for capital infrastructure felled by 40 per cent.

Swinney’s critics accuse him of refusing to acknowledge this dire fiscal reality. They argue that he has spent on SNP “vanity projects” – eg free NHS prescriptions and free university tuition – to curry votes, ignoring the reckoning to come. Instead, Swinney’s detractors say, he should have cut back early, preparing Scotland’s finances for austerity.

Given that, on Swinney’s watch, Scotland had a shorter time in recession than the UK, and (in the latest quarter) showed strong jobs growth, you might wonder what the incentive was for the financial secretary to pursue his critics’ agenda. Besides, my personal knowledge of John Swinney is that he is actually a fiscal conservative.

Take the issue of PFI, aka financing capital spending off the books by a not so sophisticated form of hire purchase. Gordon Brown used this wheeze, with no regard to the financial consequences. Now there are 60 NHS hospitals in England facing massive cuts to their clinical budgets in order to meet PFI bills.

I mention this because, when the global recession hit in 2008, I felt the situation was dire enough for the SNP government to let rip with PFI-funded capital spending. When the iceberg is looming, who cares how much it costs to rev up the engines. But Swinney rejected this idea (and was not averse to slapping me down). He argued, cogently, that the long-run impact of rising PFI annual interest payments on the Scottish Government’s Treasury constrained budget would be disastrous. In retrospect, he was right, and it has given him more room for fiscal manoeuvre.

Curiously, Swinney’s blinkered critics seem blind to the underlining philosophy behind his budget. This involves negotiating a Social Contract across the various national interest groups, on the model that Ireland once used successfully to promote growth – until Dublin was seduced by the idea that a speculative property boom would make everybody rich overnight.

Swinney knows he has less to spend: hence a second year of public sector wage limits, and a 7 per cent cut in local authority funding. Rather than declare class war, as his right wing critics demand, Swinney has attempted to win support for the budget by offering something in return: ie no compulsory redundancies and a continuing freeze on council tax to boost the social wage. His partnership approach is underpinned by the complex web of consultative bodies set by the SNP government since 2007, which involves unions, churches and business.

Essentially the budget strategy amounts to agreeing to share the fiscal pain in the hope that Swinney and Salmond deliver growth and jobs – and they’ve not done a bad job so far. Yet history tells us that Social Contracts ultimately depend upon the government side delivering economic prosperity in sufficient time before individual patience wears out. Union bosses responded to Swinney’s latest wage freeze by threatening strikes. But this fulminating was ritualistic. With recession looming again, the SNP’s offer of no compulsory redundancies is very attractive. However, no wage freeze is going to last till 2015.

This delicate balance holds for the local authorities. So far, town halls have been willing partners in Swinney’s Social Contract. The SNP has a majority of Scotland’s councillors and looks likely to make further gains in next year’s elections. Swinney’s detractors accuse him of not reforming the public sector. But his tight squeeze on local authority budgets, coupled with a council tax freeze that (cunningly) stops town halls putting their hands in your wallet, forces councillors to seek efficiency savings.

Predictably, two Labour councils – Glasgow and North Lanarkshire – denounced Wednesday’s draft budget. But what’s their alternative – putting up council tax in time for the May elections? When all is said and done, Swinney’s budget is a gigantic, complex jigsaw. All the parts have to fit to make the picture. Lose a piece here and there – through union resistance to efficiency savings, or local authority rejection of the council tax freeze – and his Social Contract starts to unravel. Worse, it would unravel at an accelerating rate, because the finance secretary has front-loaded spending over the next three years to invest heavily on capital projects now, to boost the economy.

If everything goes wrong, that would leave a gaping hole in his budget towards 2014-15, as we enter the next Holyrood election season. If everything goes right (in Swinney’s terms), Scotland by then is either independent or has fiscal autonomy. In which case, Swinney can balance the books.

Here’s one other thing to remember about John Swinney. Critics liken him to a dull accountant. On the contrary, he’s a very subtle politician. Witness the revived “Tesco tax” on supermarkets, artfully booby-trapped by earmarking the revenues for health prevention. Swinney’s Social Contract – sharing pain to promote growth – is more astute than Chancellor Osborne’s mindless austerity, or Vince Cable’s vaudeville act. I’d bet the financial secretary knows where all the jigsaw pieces fit.