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In our last blog post we spoke of the poor policy vision of the UK Labour Party and how it would not meet the needs of people living in Scotland during the cost-of-living crisis. Whilst Labour's most recent conference cements these worries, the SNP's annual gathering also leaves more questions than answers.
For our analysis we start off with the constitutional question.
Devolution and Independence - Expectation vs Reality
An element of Scottish constitutional debate that voters can agree on, be it leaning to independence or leaning towards the status quo, is that the Scottish parliament should have more powers. Polling suggests just over 50% of Scottish voters want more powers, whilst only 21% believe the status quo is about right.
Similar attitudes were also found by Survation. More people living in Scotland trusted Holyrood on the issues of energy security, employment law and the cost-of-living crisis than they did with Westminster.
Further power to the Scottish parliament has been a long standing Labour policy, though one lacking specific details on what powers would be devolved. This could not be more evident from the pro-union think tank Our Scottish Future's event in Edinburgh in July this year. The event gathered current and former Labour leaders across the UK to demand radical constitutional change.
One of the key proposals from Our Scottish Future and Labour figures was to "to devolve effective economic and social powers to the regions and nations". This is not a new proposal, as it was also stressed by the Scottish Labour leader Anas Sarwar who said in 2021:
"Whether we call it radical federalism or not, let’s push for further devolution, not as some kind of quick political fix, but because we mean it and we are truly the champions of devolution."
Yet before Labour conference had even started the UK Labour leadership had suggested a rollback on this policy. Despite Scottish Labour's manifesto pledge to support the devolution of employment law, Labour MSPs were instructed by party heads to oppose this move. This was in large due to the deputy leader of the UK Labour Party, Angela Rayner, arguing that Scotland did not need further devolution on employment law as Labour's "new deal" for workers would be enough.
A month earlier UK Labour had U-turned on many of their commitments to workers rights.
Days after the devolution U-turn, Scottish Labour's general secretary described the move as a "slap in the face" to trade unions over the issue of worker's rights.
The general secretary's position is a hard one to disagree with, as trade unions across the entirety of the UK back the pledge to devolve employment to the Scottish parliament.
Then on the 13th of October Labour rolled back their pledge of devolution further, arguing that no more powers would be arriving at the Scottish parliament.
Whilst devolution for Scotland is currently on hold, Labour's National Policy Forum had details, though vague, for devolution in the rest of the UK.
The structure of the UK economy is one of the most unequal in the developed world. It is a highly centralised one that has seen growing child poverty, declining health expectancy, increasing foodbanks, increasing suicide rates, increasing household debt and declining happiness. It is an economy had has fallen victim to the Victorian attitudes of policy makers stuck in Whitehall and Westminster. Further devolution by itself may not be progressive change, but it enables a more localised policy response to those who better understand the challenges they face. Labour's rolling back of devolving powers to Holyrood is a major blow to building a more equitable and decentralised economy.
This then brings us to the SNP and their new strategy on independence. To say you could summerise it within a single sentence would be a stretch. You can read the full text that was passed a conference by clicking here.
The strategy can be summerised in a few steps.
1) The SNP winning a majority of seats in the general election will give Holyrood the mandate to negotaite independence with Westminster.
2) This would be led by a Constitutional Convention of MPs, MSPs and civic Scotland.
3) A majority of seats would also see the demand for powers covering Scotland's constitutional future being permanently devolved to Scotland.
4) If the UK government refuses these demands then the 2026 Holyrood election might become a de-facto independence referendum.
5) By the end of 2023 there will be a national independence campaign that will work with Yes organisations and focus on the "cost-of-Westminster-crisis".
Putting aside the wider general strategy, the focus of a new independence campaign being on the cost-of-living is vital in addressing the serious challenges households face. Previous SNP policies that have either been passed at conference of implemented by the Scottish government include a rent cap, rent controls, a wealth tax, a windfall tax, a Job Guarantee, a living wage, public ownership of energy and banking regulations. These combined policies are vital to bringing price stability to households and the wider Scottish economy - but will they be campaigned on? We will touch on this as we cover further policy annoucements from SNP conference.
This strategy does not address the biggest hurdle that faces devolving greater economic powers to Holyrood or full independence - Westminster continuously saying no. The institutional power of the constitution entirely lays in the hands of the UK government, without a single card for Holyrood to play. How this is overcome to help reduce economic centralisation still needs to be addressed.
More Austerity To Come
Rachel Reeves made clear in her speech that the next Labour government would balance all government spending (including interest payments on debt) with all returns in tax. In other words the next Labour government will directly balance the budget, which history shows has brought more instability than not. Whilst Labour would reduce the debt-to-GDP ratio over five years, Reeves stressed that this would not result in austerity as extra spending would come directly from growth. This growth would support Labour's £28 billion green investment plan, one which they had previously dropped just months ago.
Following the Shadow Chancellor's speech many were left with questions and surprises. First, it would later be revealed that Labour had not in fact returned to their original £28 billion green investment plan, but rather have cut it back by £8 billion a year. Over a ten year period this would amount to £200 billion in green investment, which is £100 billion less than needed to for a green transition for building ecological and labour market stability as proposed by the IPPR Environmental Justice Commission. Whilst Labour's original proposal left them short of £20 billion to meet the IPPR's recommendations they have increased this shortfall by £80 billion.
The £20 billion figure also relies on the UK economy growing, despite Labour's strict fiscal rules. Economics Professor Bill Mitchell estimates that since the late 1990s the UK's average growth has sat around 1.7% (excluding the pandemic). Mitchell argues that for Labour's growth plan to work, that figure would need to immediately jump to 2.5% within a year and continue to do so over a 5 year timetable.
With current UK growth sitting at around 0.4%, such an increase is almost impossible without Labour U-turning of their own fiscal rules and drastically increasing government spending, which they have said is non-negotiable. Even if Labour were able to increase growth by 1% within a year, this would only see a tax return of £12.5 billion a year.
This leaves Labour's own fiscal rules as completely self-defeating. Growth will be far harder to achieve because of climate change, poor market feedback loops and high living costs. Therefore the growth required to investment will not arrive in time. To tackle both climate change and the cost-of-living crisis this will require high public investment. But Labour's own fiscal rules have ruled out progressive spending. It is a policy loop doomed to fail.
One way in which Labour could have reduced costs for households is to nationalise the energy sector - allowing increased consumption to be used on goods and services in the private sector to increase growth. Despite Labour members and trade unions democratically passing a motion to do just that, the party leadership dismissed the motion.
Another way to encourage growth would be to reduce interest rates. Currently the Bank of England has set rates to 5.25%, which is pressuring households to seek out private liquidity and increase their debts. The increasing interest payments on households has left lower-income households less capacity to consume on goods and services. Whilst a Labour government could instruct the Bank of England to reduce rates, since the UK's central bank is not actually independent from government, Rachel Reeves made it abundantly clear that Labour would "protect the independence of the Bank [of England]".
The International Monetary Fund forecast that interest rates would remain between 5-6% until at least 2028. That is a full term of a Labour government that would strangle its own growth targets by refusing to lower rates. This is again a policy design entirely doomed to fail unless further U-turns are made.
Can Labour's tax proposals make up for the lack of growth? No. Their most recent proposals would only return approximately £5 billion a year for the entirety of the UK. In contrast, the Scottish Trade Union Congress' proposal for a wealth tax would raise an annual £1.3 billion in the short-term and £3.3 billion in the long-term in Scotland alone. A one-off UK wealth tax also has the potential to return £260 billion or £10 billion as an annual payment. A wealth tax would open up fiscal space in the economy to invest in utilised resources, reduce abusive price increases from large businesses and build towards a Green New Deal. But Labour has ruled out further tax proposals until the general election next year and firmly ruled out a wealth tax if Labour comes to power.
A Step into the Bond Market?
One of the more major announcements at the Scottish National Party conference was the future issue of a Scottish government bond to fund capital.
One one hand, this is a positive step for the Scottish government to engage with the international bond market. The expansion of financial institutions through global networks gives will help ease the transition from Scotland to devolution to independence. But on the practical side there does not seem to be any evidence that borrowing from international markets will support Scotland's domestic spending.
Currently the Scottish government borrows from the National Loans Fund (i.e. the UK Treasury) at around 4.6% of interest, with the Bank of England's rate sitting at 5.25%. Scotland entering the international bond market, without its own central bank or currency, will most likely see any Scottish bonds met with an interest premium. On top of that, bond bidders will most likely bid around or above the Bank of England's interest rate, not the National Loans Fund. What this means is that if the Scottish government did borrow from international markets this would be more expensive than borrowing from the UK Treausry.
During a cost-of-living crisis, where even tens of millions of pounds in government spending can make a huge difference to households, borrowing at a higher rate is a deeply questionable choice.
On top of this, the Scottish government isssuing bonds does not actually increase the amount Scotland can borrow. Holyrood is still restrained at borrowing an annual £450 million and a total of £3 billion (which would be roughly adjusted every year or so). The borrowing cap has already been largely used up, with recent data suggesting Scotland has already borrowed between 70-80% of its debt stock.
If the Scottish government did decide to sell of a Scottish bond, who would they sell it to? The choice largely sits between Scotland's domestic finance market or the international market. For most monetary sovereign nations, which an independent Scotland should strive to be for economic stability, bond issuance is in favour for domestic buyers. This is the case for Denmark, Sweden, Japan, the UK, Australia, New Zealand and Canada. This better protects countries from possible exchange rate or inflation shocks, whilst the interest paid on bonds is more likely to be reinvested within the domestic economy. However, there is a stark difference between Scotland borrowing as an independent and monetary sovereign nation, compared to a fiscally and monetary restrained devolved state. We explain this different in our article here.
The Scottish government must also seek assurance that any issuance of a bond must be in line with the principle of lex monetae in international law. Lex monetae would allow an independent Scotland to redenominate its bond payments into the new Scottish currency. Rather than using up Sterling reserves, borrowing in Sterling or raising Sterling funds, an independent Scotland can directly pay back bond holders from the Scottish central bank.
The Return of the Freeze
One of the more contested announcements from the SNP's conference was a council tax freeze. This was a policy proposal that was developed only 48 hours before Humza Yousaf's speech to party members. This was met with clear anger from both COSLA, the Scottish Greens and the Local Government Infrormation Unite, as it was in breach of the surprise clause in the Bute House Agreement and and the engagement clause within the Verity House Agreement.
Confusingly, the announcement of the freeze did not come with clear communication if it would be fully funded by the Scottish government. Members of Modern Money Scotland spoke to various politicians and government advisors after Humza Yousaf's speech for clarity, to which we found it would be fully funded. If this funding is significant enough we will find out in the future.
On the one hand, this policy announcement will bring some sense of security for households who will not see their council tax increase next year (whilst recently seeing their bills increase on average by 5%). However, considering the shortfall of tax increases and not taking forward proposals in the most recent council tax consultation, some have estaimed the council freeze to cost around £448 million. This will entirely depend if the Scottish government will increase multipliers on higher earners and the scale of local council budgets.
This takes us to the STUC's proposed wealth tax. Whilst Humza Yousaf had cited favourable interest in his leadership bid for the tax proposal, and also cited interest just last month, freezing council tax now suggests these plans have been dropped. The original proposal to raise an innitial £1.3 billion by 2026 and then increase to £3.3 billion in the long term would have required serious council tax reform. Council tax reform is a subject beyond the scope of this article. However, we encourage you to read "Council Tax Reform is Necessary — and so is Understanding" by Allan Faulds.
With £1 billion being wiped out in real terms from the Scottish budget because of inflation, with a further £600 million mitigating conservative policies, it is completely bizarre the Scottish government are not taking advantage of their tax raising powers. It then begs the question - if the SNP plan to drop a wealth tax, what other price stability policies could they drop?
Much can change over the coming months, but at the current rate it seems the Scottish parliament is facing serious financial challenges ahead.
Conclusion
It is clear Labour's economic plan is one inspired by caution akin to that of Conservative government of the early 2010s. This is no secret - rather it is one that shadow ministers have spoken openly about. The institutions that are in need for desperate reforms are now the ones in which Labour are eager to defend. The former leaders of these institutions, ex-Chancellor of the Exchequer George Osborne and ex-Governor of the Bank of England Mark Carney, have publicly backed Labour's economic plan. Receiving the backing of the leading masterminds of UK austerity, a project that was responsible for 300,000 excess deaths and crumbling public services, does not send a message of economic stability.
Whilst Scots may hope that a change of government in Westminster might bring the relief they desperately need, this is unfortunately a distant prospect. This is made worse with Labour's recent U-turn of further devolution, leaving most Scots is a similar situation of increasing instability they saw over a decade ago.
In its current state, the SNP's recent policy annoucements can only be described as midly better, but leaves a lot to be desried. Despite many SNP policy motions being passed that would bring major price stability to households via independence, recent annoucements from council tax and bond issuance could leave Holyrood with more fiscal stress than is necessary. The long term vision is bolder, but the short term vision brings serious risks.
With continued austerity on the horizon with no new economic powers, people in Scotland find themselves trapped. But as we explained in our last article the powers of a normal independent state would give Scotland the ability to take a different path. It's time for an honest public debate on the scale of the current challenges of the status quo and lay out the policy steps to building an equal, stable and ecologically secure future.
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