by Mark McHugh
At the time of the last finance bill, the first in the history of Holyrood which necessitated a reduction in overall spending, there was a lot of noise made about the moves to protect capital spending.
This was predicated on the idea that, in a recession, government should spend on infrastructure projects. Which is true, from an empirical perspective, as far as it goes.
But, and there’s always a but, that’s not the whole story. As the man said “I’ll think you’ll find it’s a bit more complicated than that”.
It’s true that there’s an important role for government spending to play in mitigating the worst effects of an economic downturn through capital spending. When businesses and individuals are reigning in spending and reducing aggregate demand it’s important that the government does as much as it can to avoid what Keynes identified as the paradox of thrift.
It’s also true that the best way for a government to increase the amount of demand it puts into the economy is through capital spending. It’s a very efficient transmission mechanism between government and the private sector and, provided they’re properly considered, the end product of capital investment continues to benefit the country after the recession ends.
Simply, it’s better to pay people to build cycle paths and schools than it is to drop bags of cash from helicopters.
But, I told you there was always a but, that’s not what the Scottish Government did last year.
What happened was that John Swinney diverted revenue spending into the capital budget, essentially relying on the increased efficiency of the transmission mechanism to boost the Scottish economy.
That might work for a year, but the differences in how government spending on services and on infrastructure affect aggregate demand aren’t that large and will even out over time, there’s no real difference in the levels of fiscal entropy. When Keynesian economists argue for increases in government capital spending they’re typically arguing for an increase in the total spent, not in one aspect of spending at the expense of another.
There’s also questions to be asked about whether what’s classed as capital spending really represents a better long term investment than revenue spending. The short term effect of the decision to prioritise, say, duelling the A9 instead of providing college places for thousands of young people is probably negligible but I’m not convinced that building more roads is a better bet for the future than teaching people.
We’ll see what the finance bill proposes soon enough, but I’m not optimistic it will offer more than smoke, mirrors and platitudes. A truly bold budget would use the powers Holyrood has to actually increase government spending rather than shuffling money from column A to column B.
#1 by dcomerf on September 20, 2012 - 9:17 am
1. Deficit financed increases in spending would be optimal here – but currently not allowed under devolution.
2. The scope for balanced budget increases in spending is very limited (though I agree this would be better than no spending increases at all)
3. To the extent that previous levels of revenue spending were ‘living beyond our means’ (because tax revenues from city of London were not a sustainable source of revenue) then this sector of government should be cut with this cut offset as a countercyclical measure through capital spending [I’m not sure I agree with this point though, see e.g. http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2011/01/labour-the-deficit.html%5D
4. Given the constraint of not being able to increase total spending, my priority would be capital spending over revenue spending – but ordered to support low carbon energy generation, digital infrastructure and public transport rather than roads and airports.
#2 by Aidan on September 20, 2012 - 11:11 pm
1. Holyrood can’t borrow, but it can use devices such as NPD to a similar effect.
2. In the long run ricardian equivalence will kick in, sure, but increases in indirect taxation to fund direct spending are probably worth it.
3. I’m not sure how this squares with 1 and 2
4. Even without changing overall expenditure the Scottish Government can make choices about inelastic vs elastic spending such as top rate council tax freeze.
#3 by FormerChampagneSocialist on September 20, 2012 - 10:24 am
Aidan
Er……what powers to increase government spending, exactly? You surely aren’t talking about the current tax powers, which are specifically designed to be useless/counterproductive.
Face facts – the reduced block grant is a direct consequence of the policies of a UK Govt. voted for by a small minority of Scots. And your party wants to perpetuate that forever, for reasons of narrow self-interest i.e “it’s fine for Scotland to have a Tory Govt half the time, as the other half we’ll be in power and we need Scotland to put us there”
If you want to see increased spending, why aren’t you arguing for the Scottisg Govt to get all Scottish tax revenues? That would increase the pot for Swinney to spend. Why the silence about the (inexcusable) decision to claim that the UK spend on the Olympics wasn’t Barnettable?
By the way, you know that we could have dualled the A9 – saving lives, creating jobs and unlocking Inverness’s full economic potential – for the price of Scotland’s share of Labour’s pointless war in Afghanistan – yes? Instead, we have dead soldiers, dead Afghans and shredded international credibility. Another Union dividend……
Independence can’t come soon enough.
FCS
#4 by Steve on September 20, 2012 - 9:01 pm
The current tax powers are fine, we could replace council tax with a new tax (or taxes) that could make the tax burden more progressive (which itself would create an economic boost) and raise more too.
All it takes is a desire to use the powers we already have to maximum effect.
#5 by Doug Daniel on September 21, 2012 - 9:32 am
Aye, but these things take time – the last time a government rushed ahead with reforming local taxation, we ended up with the fudge that is council tax.
According to a Telegraph article in June, plans are still afoot to abolish council tax and replace it with a fairer system: http://www.telegraph.co.uk/news/uknews/scotland/9347772/John-Swinney-to-consider-new-local-income-tax.html
Mr Macintosh tabled a parliamentary question asking Mr Swinney when he will bring forward proposals for a replacement and whether it would be the same plan that was the subject of the secrecy court cases.
In his reply, the Finance Minister said: “The Scottish government believes the current council tax system is unfair and will consult with others later in this Parliament to produce a fairer tax based on the ability to pay.
All potential alternative approaches will be considered as this work is progressed.”
So there’s desire to do this (although the SNP is committed to freezing council tax for five years – to do otherwise would be breaking a manifesto promise). Things might be helped if politicians from a certain party could try playing grown-up politics for once by letting the government and civil service do their job, rather than firing off a gazillion FOI requests to try and find things they can take out of context to use against the SNP.
#6 by JPJ2 on September 20, 2012 - 10:27 am
Aidan, given that the Scottish budget is fixed, anything radical is mathematically impossible until Scottish independence.
“Scottish” Labour need to grow up and recognise that:-)
#7 by Steve on September 20, 2012 - 9:09 pm
Not true, we have local taxation powers, business rates and council tax. There’s loads of things we could do with local taxation to stimulate growth, raise more, etc etc. It’s not the powers that are missing, it’s the political will.
#8 by John Ruddy on September 22, 2012 - 5:19 pm
So why was EGIP cut? Its not even Scottish Government spending – its Network Rail spending.
Theres £350m thats not going to support th economy.
#9 by Jennie Kermode on September 20, 2012 - 11:59 am
As regards teaching vs building infrastructure, I broadly agree with you, but it’s worth noting that the issue isn’t just the effectiveness of the investment, it’s the _perceived_ effectiveness of the investment. That is, because both international monetarists and private investors (here and abroad) have historically perceived infrastructure as a surer bet, it effectively has a higher value as regards how we can bargain against our expected future wealth. It would be nice to see that situation change but we can’t trigger such a change unilaterally.
#10 by Allan on September 20, 2012 - 7:05 pm
To answer your question, the Finance Secretary has more clothes than… say… either Osborne or Lamont. As has been pointed out in previous posts, the current Scottish Government can only spend what they are given until the Scotland Act comes into force and even then it’s hamstrung by tax proposals originally aired in the Calman Fudge proposals.
Of course, the Scottish Government could be aided by full Fiscal Autonomy, but we know that the pro Union parties are unwilling to facilitate this as it is not in their best interests. Even if Scotland voted yes, there is a rumor that Cameron would be unwilling to provide fisacl autonomy.
#11 by John Ruddy on September 22, 2012 - 5:22 pm
So why did he cut the local Government budget by more than his allocation from Westminster was cut?
I think the thing is we were all led to believe that John Swinney was some amazing Finance Secretary. The fact is, he isnt.
#12 by John Ruddy on September 22, 2012 - 5:24 pm
Type your comment here
Remind me how long the SNP have been in power?