Friday 26 September 2014

Job Creating Powers

Scottish ministers stress that the standard by which they will judge any enhanced devolution package is the extent of the ‘job creating powers’ contained therein. The assumption is that Scotland currently possesses too few such powers and that the potential to create more jobs in Scotland would necessarily be increased through their devolution.

The detail has however been sadly lacking. Advocates have failed to specify which new powers they believe possess job creating properties or the mechanisms by which these powers will interact with existing responsibilities of the Scottish Government to boost the employment rate.

So it leaves us to ask: what new powers could be devolved to the Scottish Parliament that could accurately be described as job creating? How might these be wielded to develop more effective policy? Does it even make sense to frame debate about enhanced devolution in this way?

Some job creating powers are not up for negotiation. The most important short term job creating power is surely monetary policy. If the economy looks to be heading for a downturn expansionary policy should ensure that employment remains higher than would otherwise be the case.

But there is no prospect of monetary policy being devolved; it will remain the responsibility of the Bank of England as it would have done even under the Scottish Government’s own White Paper proposals.

Fiscal powers are another story and it’s reasonable to anticipate tax and borrowing being central to debate over the coming weeks and months. Fiscal policy can certainly play a key role in short term job creation which is why the STUC, the Scottish Government and many economists argued strongly for more stimulus in the period between 2009-2013: interest rates were at a historically low level yet investment remained very weak and unemployment high.

But again, some things are off the table. The main (I’m not arguing it was the best or most appropriate!) fiscal measure introduced to stimulate the economy in late 2008 was a 2p cut in the rate of VAT. This power can’t be devolved to Scotland under EU rules. There are likely to be other constraints – not least borrowing limits – on Scotland’s ability to introduce expansionary fiscal policy under enhanced devolution.

At this point it’s important to draw a distinction between the short and long-term. In a blog written just before the referendum, Professor David Bell of Stirling University argued that:

“ is not clear that monetary and fiscal policies have a long-run role in increasing employment. Some economists argue that lower taxes and lower public spending will unleash the ‘animal spirits’ that make for faster economic growth. However, among more developed economies, this case is not particularly persuasive. Germany is Europe’s largest and most resilient economy. It is certainly not characterised by low taxes and low public spending”.

So what powers might be devolved that help grow the employment rate in the longer-term? Remember Scotland already possesses powers which profoundly influence longer term job creation: full control of economic development, the education system, skills and training and transport. Of course all powers – health, the legal system and so on – contribute in some shape or form to the long-term economic development of the nation.

It’s also worth considering some of the policy commitments made by Scottish Ministers during the campaign. Most of the policies (innovation agency, Scottish Business Development Bank, skills, strengthening collaboration etc) mooted in the Scottish Government’s Reindustrialising Scotland paper could be delivered with current powers.

So what’s left?

Certainly a case can be made that further fiscal devolution can, if used cleverly, assist in boosting job creation. Devolution of R&D tax credits – currently irrelevant to most of Scottish industry – could enable financial incentives more appropriate to Scotland’s industrial structure to be developed. Devolving National Insurance may not be as radical as some argue and could create potential for boosting job creation through targeted derogations. Borrowing powers could be more flexible than those currently proposed – with incentives to fund good projects that will facilitate further development rather than incentives to spend an annual sum on shovel ready projects that may do little to enhance long term job creation. As for Corporation Tax? I truly don't have the energy to go there again. (if you must, here's submission and blogpost)

Devolving the Work Programme may lead to more effective active labour market interventions in Scotland – especially if they’re more generously and consistently funded than has been the case in the UK. Although not necessarily job creating, this should allow for a better functioning labour market in the longer term.

Interestingly, despite many on the Yes side arguing that the UK is a failed economic model, there has been no reference as yet to the devolution of powers with the potential to fundamentally alter the prevailing short termist business culture: responsibility for the structure and regulation of the financial sector (to be fair this would be very difficult if not impossible under devolution) corporate governance and company law.

I guess my problem is that the job creating powers meme creates a false view of the process of economic development. It would be lovely if the process simply involved obtaining and then pulling the requisite ‘levers’. Jobs would flow and all would be happy.

It isn’t difficult to identify a range of policies that would provide an immediate and powerful boost to the North Korean economy. But the long–term economic development of an advanced developed economy like Scotland, with already comparatively (too) lightly regulated labour and product markets, is an altogether more complex matter. In trying to boost the long-term employment rate there are no silver bullets. Indeed, it is contestable whether Government policy has much of an influence at all.

For Scotland and other advanced economies, long-term economic development is likely to be a tortuous slog. Small steps in mundane areas of policy will prove more effective than sexy big ticket programmes. Jobs will be created and sustained if new powers are used cleverly in conjunction with existing powers. As a small open economy we also require global economic conditions to be kind to us. There are no powers whose job creating properties are a given.

Stephen Boyd