Comment: Osborne’s budget law proposal is political gimmickry

Osborne: proposing an act of law. Picture: PA
Osborne: proposing an act of law. Picture: PA
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ROWS over budget deficits have been at the centre of economic policy for decades. The IMF swoon in 1976 was followed by the recession deficit of 1980-81, the budget crises of 1993-94, the recession of 2002-03 and the banking crash, recession and soaring debt of 2008-09.

Now Chancellor George Osborne proposes to achieve by act of law what repeated pledges, assurances and earnest Treasury efforts have failed for decades to achieve: a balanced budget “in normal times”.

‘What might be the implications for Scotland of pursuing a “balanced budget”?’

This begs no end of questions. What is it that passing a law will achieve that the exercise of policy constraint cannot deliver? What is the definition of “normal times” for an economy as open to external influence and as cyclical as ours? Is a “balanced budget” a good thing?

And of particular concern to us here, what might be the implications for Scotland of pursuing a “balanced budget” – and the implications if it doesn’t?

Now I have a bias here towards the principle of balanced budgets, or at least a limit on deficits not exceeding 3 per cent of GDP. Budget shortfalls can strike quickly and can wreak havoc. The argument here is not to do with the aesthetic pleasure of a deficit-less Treasury per se, but to keep the government’s powder dry so that when we hit troubled waters there can be a resort to deficits without tears.

But the problem here is – as it historically has always been – that we are often at the mercy of external events and forces outwith our control. These can demand higher government borrowing to avoid the full blast of a nasty and vicious recession. It is easy to be fiscally chaste when the economy is growing – altogether less so when we hit turbulence.

We might define conditions today as “normal”, requiring us to drive on now with a reduction in the budget deficit. At £80 billion or 5.7 per cent of GDP it is still the third largest in Europe and forecast to persist to £30bn by the end of the decade.

But this deficit reduction programme, widely labelled as “austerity” and involving £12bn of welfare cuts, is strongly opposed by vocal spending lobbies and Labour while the SNP campaigned during the election for a spending spree of £148bn. Passing a law isn’t going to ease this political opposition.

It is unlikely a “balanced budget law” for a fiscally autonomous Scotland will attract much support with the SNP administration. Indeed, it is already agitating for maximum borrowing powers.

First, Scotland has a very small base of higher rate taxpayers which can be squeezed much further without people walking away. Second, it is facing a wholesale collapse in North Sea oil revenues. The Office for Budget Responsibility has already forecast that Scotland’s share of oil revenues would plunge from £2.6bn a year to just £700m – barely 1 per cent of total government spend in Scotland.

Now it has gone further, and estimates that for 2020-21 to 2040-41 the total tax take from offshore oil and gas over those two decades will be just £2.1bn – down by a staggering £34.5bn from its estimate published last year.

It is a shattering blow to the SNP’s ambitions of a revenue-rich Scotland funding higher levels of public spending.

The administration’s problems do not end there. The level of borrowing relative to Scottish government revenues will be closely scrutinised.

Scotland runs a budget deficit of around 10 to 12 per cent, equivalent to the most poorly performing Eurozone members. So far the administration has not clarified how it proposes to balance the books under full fiscal responsibility.

It has also been reticent on whether it will have its own office of budget responsibility under fiscal autonomy. Its fiscal commission is effectively defunct without a budget, and it has been criticised by Andrew Hughes-Hallett, one of its members, for not being properly funded.

These points inevitably arise now that the SNP has tabled a Commons amendment to the Smith Commission proposals demanding full fiscal autonomy. Short of independence, this would involve all tax-raising powers, while paying a fee to Westminster for shared roles, such as defence and foreign affairs.

This would lead to the end of the Barnett Formula and so require either higher taxation or higher growth to maintain fiscal balance.

Says Eben Wilson, director of TaxpayerScotland, “Scottish taxpayers are being taken into an unknown future by a government who have not clearly stated their intentions with respect to their budget balances.”

The administration, he says, “should make clear its intentions on taxation and on spending over the short and medium term, with a declaration of general principle as to budget deficits and surpluses through future business cycles. Only in this way will Scottish businesses and consumers know how to plan their own finances”.

He would like to see a statutory requirement for all parties to declare five-year taxation and spending plans prior to election. These plans should then be analysed by a strengthened independent fiscal commission and its opinion published. Short of a “balanced budget law” this might well provide a useful sanction.

Property ‘inflation’

A BORDERS reader, Iain McDonald, has rightly taken me to task for referring in last week’s column to “house price inflation”.

Iain points out that in Dumfries and Galloway “we have people desperate to sell their houses and we have deflation”.

My apologies for this unqualified reference, which was in the context of the UK overall. And as I have written on many occasions, there are few measures more misleading than “average” house prices.

There are many parts of Scotland where there is no house price inflation – in fact, the opposite. I am grateful to Savills for confirming that while prime values in Scottish city locations improved during 2014, values in rural areas fell.

Its latest research suggests that Scottish mainstream values are set to rise by 17.5 per cent within the next five years, compared to a rise of 19.5 per cent across the UK. But here, too, the caveat still applies of faster price acceleration in urban areas while values in many rural areas are more likely to mark time. «