This is an election without economic substance

by | 28 May 2024

All the main parties are parroting exactly the same line about how they will save the economy, and it is easy to prove that the line is a fiction. When will Britain have a proper economic debate?

The fundamental problem with this election? No-one will talk about the underlying real issues facing Scotland and the UK with any seriousness. Everything is talked about in various combinations of political cliché which now have almost the specific purpose of preventing the debate we need to have. One in particular is dominating.

So what is it, from what root does it emerge and what would we do about it if we were trying? To explain this all properly, it is best to begin with the core cliché – that both Labour and the SNP will solve the financial crisis in government (and it is a crisis, both in Westminster and Holyrood) by growing GDP.

I’ve explained before that the simplest way to discredit this idea is empirically to ask ‘if rising GDP solves these problems, why has 40 years of barely-interrupted rising GDP not solved those problems already?’. If a socialist proposed doing something for 40 years and the more it was done, the worse things got, we wouldn’t still be talking about it.

But let me take the politicians at face value and ask the question people seem never to ask – how realistic is the claim? Let’s do some basic arithmetic (see note at bottom on my crude simplifications). This is easier at the Scottish level since government accounts are a good deal simpler, but the principle is the same for both.

Forget ‘invest for the future’ or any of that stuff; depending on who you’re listening to, the ‘black hole’ in Scotland’s finances (the sum we are short of being able to sustain services at current levels) is between £1bn and £2bn. So let’s be really modest and call it £1.5bn. Plugging that only stops things getting measurably worse, nothing gets better.

Government in Scotland spends about £60bn. Of that about 50 per cent is raised from Scottish taxes, so no matter what the Scottish Government does to GDP, no matter how much it improves Scottish GDP figures in comparison to the UK average, the Scottish Government would only gain 50 per cent of the benefit.

And of course the Scottish Government doesn’t take all GDP – at the moment about 30 per cent of Scotland’s GDP makes its way into the Scottish budget (the total budget-to-GDP ratio give or take, with about another eight per cent ending up in Westminster’s budget). What that means is that, in theory, growing the economy by £1bn generates about £300m of new spending power.

This means that to close the ‘budget black hole’, GDP in Scotland would need to rise by about £5 billion or so. Except in the Scottish Government’s case it is going to fix this problem over and above whatever Westminster delivers for Scotland. And since only 50 per cent of Scotland’s budget is delivered by taxes raised in Scotland, only 50 per cent of any gain from economic growth in Scotland makes its way to the Scottish Government.

That means that we need the economy to grow by about £10bn to close that fiscal black hole. That’s basically a GDP bump of about five per cent above inflation. Let me just put that in perspective for you; the last time the UK came anywhere near that rate of GDP growth was quarter of a century ago at the peak of an unsustainable financial bubble. Realistically, right now developed economies are mostly happy if they hit two per cent growth.

Though the proportion of taxes coming from citizens is gently increasing, the proportion from business is gently decreasing

But – and this is what I want to hammer home here – nearly 20 years of two per cent growth is not making this problem go away. It is getting worse. Two per cent growth is insufficient to stand still. To understand that you need to have a look at where ‘growth’ occurs, because it really isn’t even.

Take a look at these graphs. They show you the rate in change of proportion of GDP taken in various taxes over the last 20 years. What you’ll see is that the taxes that come from you and me – Income Tax, National Insurance and (possibly like you but definitely not like me) Capital Gains Tax – are pretty steady with a slight long-term uplift but with dips whenever we get an economic crisis.

You see basically the same pattern with VAT, but exaggerated – when income is squeezed we cut back on discretionary spending most. But what you see with all business taxes is different; it is much more erratic. The amount business contributes in tax is volatile and, more than that, over the piece, though the proportion of taxes coming from citizens is gently increasing, the proportion from business is gently decreasing (on average).

You are paying a larger proportion of GDP for public services (on average) but business isn’t. This is because over the last half-century the processes which ‘maximised growth’ did so by concentrating economic power in fewer hands. This has weakened workers and greatly strengthened big business when it comes to wage negotiations.

But it is also this monopolisation of power which has led to the apparent GDP growth. People in power have rewritten the financial rules to enable a kind of wild, speculative financial market which defies the logic of classic capitalism, with phenomenon like ‘profitless giants’ (companies worth billions of dollars but which haven’t made a profit in a decade). Speculation will make you richer, faster than productivity growth these days.

Yet the Scottish Government is almost wholly reliant on various taxes on income, which means even a five point bump in GDP won’t be enough unless it all makes its way down to wages, which it won’t because it never does.

This is why the Director of the Institute of Fiscal Studies keeps warning that all the parties are effectively lying-by-omission and simply refusing to admit that they have giant fiscal problems which there is no way they’re going to grow their way out of.

Where I part sharply with the IFS is in their analysis of causes and options. They reduce the whole issue to ‘ageing population makes public services more expensive’, but that’s hardly sufficient. And their solutions are reduced to ‘raise income tax or cut spending’. The IFS is every bit as trapped in this failing cliché as the politicians it criticises.

These three factors – rapidly-increasing externalities from the way modern capitalism works, the tax impacts of the increasingly unequal distributions of the fruits of economic growth and the inordinate amount of Scottish wealth lost to the overseas owners of our economy – explain the deficit many, many times over

It is not even nearly just age that is increasing the burden on public services – obesity, mental health and increasing poverty rates alone account for big increases in costs and have nothing to do with us getting older and everything to do with modern capitalism.

In fact let me give you a clearer example; the increased cost to the public purse of dealing with the negative environmental impacts of the actions of big business are nowhere near the additional tax contribution those businesses paid over the same period. This ‘fiscal black hole’ is all of us who warned about ‘uncounted externalities’ being proved right.

The rapid rise in apparent GDP growth masked the fact that it was achieved while doing enormous damage that would dwarf the tax benefits of the growth. And now we’re paying the price in poor health, environmental collapse and inequality.

Because that’s the second major factor; inequality makes the tax system highly inefficient. Those at the top have gained stupendous amounts of wealth through a process of policy interventions which also enabled them to pay much less of it as tax through avoidance; those at the bottom have lost enormously and now pay no tax at all.

I’ve shown you before the effect of this by pointing you to a report I commissioned which showed that Scotland on the same average wages, GDP size and tax rates as now would generate £5bn of additional tax if we had the income distribution of a Nordic country (at the time). The reverse of that is that UK inequality is robbing Scotland of £5bn of tax income a year. For the Scottish Government’s plan to achieve the equivalent it would need to achieve a real-terms increase in Scottish GDP of coming on for 17 per cent.

Finally, a lot of the rest of the difference can be understood from Common Weal’s recent report on wealth extraction. That showed that Scotland’s economy is so overwhelmingly owned overseas (in comparison with other countries) that we export massively more than our share in GDP wealth. We leaked something like the current ‘fiscal black hole’ amount more than 180 times over in the last 20 years.

That is a cumulative lost of well over quarter of a trillion pounds or a cumulative loss of tax revenue in the order of £80bn. Yet we simply don’t talk about it, as if it isn’t happening – because it contradicts the cliché.

These three factors – rapidly-increasing externalities from the way modern capitalism works, the tax impacts of the increasingly unequal distributions of the fruits of economic growth and the inordinate amount of Scottish wealth lost to the overseas owners of our economy – explain the deficit many, many times over. Yet no-one at all is talking about it; not Swinney, not Starmer, not the IFS, not the CBI or the FSB or the IOD or any of the other business lobbyists.

Every single one of them has done pretty well out of this ‘we’ll grow our way out of our problems’ myth and all of them continue to promote it. It’s garbage; unless we fundamentally reform the economy and the tax system, declining service quality on increasing tax burdens is our future.

And yet you will almost certainly see this election come and go without anyone mentioning this, and almost everyone you will see on TV will parrot this same line again and again. It is the biggest political lie of our era. What did the damage will not repair the damage by being repeated for the hundredth time, whether promised by Rachael Reeves, John Swinney, echoed by some right wing commentator or mainstream journalist who buys the myth, or by the tooth fairy or Santa Claus.

But if you are a journalist reading this and you think for a second ‘actually, it might be legitimate to ask some probing questions of the main economic claim being made by all the parties in this election’, you could always just ask this; to close Scotland’s fiscal gap you effectively need to increase Scottish GDP by not less than two per cent per year plus an additional five per cent, or about 15 per cent in this parliament, just to stop things getting worse.

So how exactly are you going to achieve that by doing exactly the same things you’ve been doing for the last quarter century with nowhere near that level of success? Credible and costed my arse.

Technical note

OK, for pedants; there is much crude simplification in this piece for a reason, but it is there. First, generally at the moment you kind of need to stop data series analysis at 2020 because the pandemic distorted statistics in a way that doesn’t make any sense in the timeline and which hasn’t yet corrected itself into steady state. Not all the data in this is from the same original source and not all of it is for the same year. I’m also not going to get into the wars over the allocation of government income and expenditure cross-border because it is an endless and fairly pointless partisan battle which gets you nowhere much and isn’t even necessary to demonstrate the points I make here. Equally, I have just jumped over the post-Smith Commission changes in the calculations for the Scottish Block Grant which punish Scotland for having lower average GDP than the UK as a whole and rewards us for having higher GDP. If Scotland could overtake the UK average it would not only shake off a penalty reduction but get a bonus. This was agreed to by the UK because it was clearly in its interests since no region of the UK outside the south of England ever exceeds the UK average GDP. This was agreed to by John Swinney (who negotiated on behalf of the Scottish Government) for reasons neither man nor beast has ever been able to explain to me in rational terms. There are plenty other roundings-up, lazy uses of terminology and other rough working methods used here, and yet none of this makes a blind bit of difference to the point. Four point nine per cent over current growth trends or five point seven per cent – both are fantasy.

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