Tuesday, 3 March 2015

New Scottish Government Economic Strategy: Corp Tax and Inequality

There’s much to discuss in the 82 pages of the Scottish Government’s new/updated/refreshed economic strategy published today. I’ll try to return to other stuff over the next few days but confine this blog to two specific issues.

The first is the dropping of the Scottish Government/SNP’s longstanding commitment to a deep, blanket cut in corporation tax (see page 80) in favour of a more nuanced approach targeted at encouraging specific investments (e.g. R&D) and sectors (e.g. manufacturing).

Why focus on a reserved, and therefore for the immediate purposes of this strategy, an irrelevant power? Well, by arguing for years that pulling this single ‘lever’ (yuck!) would have a transformational economic impact, Scottish ministers did the ongoing and essential debate around Scotland’s economic development a huge disservice. This difficult, complex process was reduced to a simple, superficially plausible story of how one tax cut could and would dramatically boost growth and jobs. Risible comparisons with Ireland’s Celtic Tiger crowded out nuanced consideration of how policies successful in other nations might be effectively transplanted into the specific economic, cultural and institutional context of 21st century Scotland.

Now we can hopefully get back to a national debate that embraces the fundamental complexities, difficult decisions and trade-offs intrinsic to economic development policy. For economic development is a tortuous slog – in a modern, advanced economy like Scotland there are no quick big fixes, no single policies that will reliably, significantly and sustainably boost the long-term growth rate. If such policies existed, they would already have been implemented with great gusto across the developed world. 

Politicians are understandably nervous about ‘u-turns’ so the First Minister and her team should be congratulated for having the courage to revisit a once defining policy. It would be pretty churlish to do anything but sincerely and enthusiastically welcome the reversal. It couldn’t have been an easy decision. Let’s just look forward to a better quality debate; one in which fairy stories are eschewed not relentlessly promoted.

The second issue is the scope of measures proposed to reduce inequality. These centre on labour market participation, fair work, childcare, educational attainment and regional development – all laudable and important but in totality insufficient to significantly reduce inequality.

Indeed, reading the strategy today transported me back to November 2013 and publication of the White Paper. While the refrain ‘the UK is the fourth most unequal country in the developed world’ rattled noisily around the campaign, the White Paper singularly failed to address those factorswhich had made it so.

What are the distinguishing features of the UK model? Why did inequalities of income and wealth shoot up in the 1980s and remain relatively high? The explanation is surely to be found in (these are additional to the trends in skill biased technological change and trade which have acted to increase inequality in most of the developed world):

  • A relatively low level of collective bargaining coverage – contributing to trends in both low and high pay;
  • Very lightly regulated labour and product markets;
  • A large and powerful financial sector, a more financialised economy – contributing to inequality through the enrichment of its participants, shifting resources away from the productive economy and by forcing firms to focus on immediate shareholder value;
  • A uniquely febrile market for corporate control and poor corporate governance exacerbate the trends embedded in financialisation – the UK model is quite uniquely short-termist;
  • A uniquely relaxed attitude to ownership (just think - Germany has had only three hostile takeovers since the second world war and all three only proceeded after significant intervention);
  • Tax changes, particularly steep cuts in the higher rate of income tax which have changed incentives at the top i.e. encouraged executives to bargain in their own interests rather than those of the firm; and,
  • Privatisation and outsourcing – pursued with more vigour and to a greater extent in the UK, witness the extent of state ownership of transport and utilities in most other advanced economies.

Now clearly the economic strategy, as far as possible within current powers, tries to steer a different course on industrial relations to which the STUC will endeavour to contribute positively. But the words collective bargaining are absent and the mooted partnership approach – although reasonable and a welcome relief from the Coalition’s aggressive approach to both trade unions and employment legislation - will not reverse the fundamental asymmetries in economic power underlying the growth in inequality. And, unfortunately, the strategy is silent on the other issues raised above.

I was fortunate enough to be present when the First Minister’s gave two excellent speeches to (mainly) business audiences at SSE Glasgow in November and the National Economic Forum in December. Her argument on both occasions can be crudely, but fairly I think, reduced to the following syllogism:

  • Tackling inequality is good for growth
  • Growth is good for business
  • Ergo, tackling inequality is good for business.

The propositions may be true but the conclusion is seriously flawed for inequality in Scotland (or the UK as a whole) will not be tackled without challenging the prevailing business culture. Some may object that the Scottish Government doesn’t have the powers to, for instance, implement structural reform of the financial sector, reform corporate governance or reverse anti-trade union legislation. They would of course be perfectly correct. But not currently possessing a power has never prevented Scottish ministers stating what they would do with it once devolved. The point is that factors fundamental to reducing inequality have been ignored, even in the White Paper. The new economic strategy is similarly myopic.

The Scottish Government claims that ‘increasing competitiveness’ and ‘tackling inequality’ – the ‘twin pillars’ on which the strategy is built – are ‘mutually supportive’. But what does this actually mean? Haven’t the supply side reforms implemented over the past four decades in the name of boosting competitiveness directly exacerbated inequality? Boosting competitiveness has usually been code for deregulation of labour and product markets, tax cuts for business and wealthy individuals and anti-union legislation.

This isn’t the Scottish Government’s agenda and it would be ridiculous to paint the new strategy in this way. But it will be impossible to tackle inequality effectively without implementing measures which have for a long time now been regarded as bad for competitiveness. So big challenges for the Scottish Government, and those organisations like ours that want to see the strategy work and for employer representative organisations who have tended to pursue a very narrow agenda on competitiveness. I'll try to explore some of these issues in future blogs.

Finally, while the Scottish Government has failed to produce a compelling inequality reduction strategy it’s probably worth pointing out that the opposition has hardly covered itself in glory on this issue. If Jim Murphy wants to ‘end inequality’ (an outcome irreconcilable with any functioning economic system ever devised) he might start thinking about how Labour will start to address the issues neglected in today's strategy.
Stephen Boyd, STUC

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