05 August 2010

Budget cuts, Beveridge and devolution

Just as one Beveridge defined a new welfare state 65 years ago, another – Crawford Beveridge, former boss at Scottish Enterprise – shows how to bring the curtain down on an era of public spending growth during the devolution years with his Independent Budget Review for the Scottish Government. It is the result of an inquiry which included former JRF Scotland Adviser Sir Neil McIntosh.

Unlike England, budget cuts north of the border have been deferred until Spring 2011, storing up a double dose to coincide with the next Scottish Parliament election. Scottish politicians won’t find it easy to avoid hard choices before voting takes place. There are no easy Scottish budget targets for cuts, like Trident and ID cards, examples usually offered by Scottish politicians when asked where UK cuts should fall. And there is no comfort to be found in extra borrowing, since this power is not devolved to Holyrood. Instead, Scotland’s advantage is having a few extra months to decide how to cut.

The scale of budget reduction won’t be known until the UK Government's Spending Review is announced in October. But recent analysis by the Scottish Government's Chief Economist points to a 12.5 per cent cut over four years, £3.7 billion in real terms. This winds the clock back to 2006 spending levels – a big departure from the long-term path we're familiar with and could impact on the future of poverty in Scotland, as in the UK.

So, does Beveridge's report bridge the chasm between the current Scottish budget and those for the coming years? Perhaps. It certainly offers comprehensive options to reduce spending by that £3.7 billion. Finance Secretary John Swinney has made clear that all of the cuts outlined would deliver far more savings than needed. The task for the minority Scottish Government is to decide soon on how cuts should be made and to attract enough support from other parties to agree a Budget next Spring.

The report stops short of making firm recommendations, but the main choices are clear:

On ring-fencing, the review says no area of public spending should escape scrutiny. It is hard to disagree when the NHS accounts for a much higher budget share than in England, where it is to be ring-fenced. Protecting the NHS budget would put a huge strain on local government.
The public sector accounts for about 3% more of Scotland’s workforce than in England. The scale of job losses will depend on how far wage restraint is achieved. The report floats options going beyond the UK plan to freeze public sector pay above £21,000, including an all-out two year freeze . This might reduce job losses, but would have a huge regressive impact on almost half (47 per cent) of public sector workers who earn below £21,000. Pursuing the UK approach would still mean up to one in ten public sector jobs (50,000) being cut. That's equivalent to the number lost during the recession, confirming the risk of a public-sector recession that’s just as large still to come.
The report supports an urgent review of entitlement to universal benefits extended under devolution. (In 2008 the Scottish Government acknowledged that 'Benefits in kind, such as public transport and free prescriptions, have the potential to alleviate poverty'.)
- The Scottish Government's manifesto pledge to abolish prescription charges (currently £3) is almost certain to be dropped.
- Free bus travel throughout Scotland for over-60s is a doubtful priority with the state pension age rising. Eligibility could begin at 65 and be restricted to local travel without serious damage to equity. But savings would be well out of proportion to the attention it attracts: only tens of millions towards the £1.7 billion cuts needed by the end of next year. Notably, the Finance Secretary quickly ruled out any change to entitlement. The pain would just not be worth the gain.
- Free Personal & Nursing Care (FPNC) is regarded as a flagship achievement of Scottish devolution. Its impact is better understood as a result of analysis by David Bell of Stirling University , supported by JRF and cited in the Beveridge report. There is a growing mood that better-off older people should again contribute to care costs. Perhaps the Welsh approach of enabling people on modest incomes to keep more of their money before contributing towards care will prove more sustainable and fairer. But any savings here need to be kept in perspective. It costs four times as much (£1.2 billion) to take care of older people admitted to hospital through A&E, when better and cheaper responses might be found nearer home. In ruling out any changes to free care, the Finance Secretary will need to sharpen efforts to find savings in health through preventative work.
Finally, there are options to raise more money. There will be three cheers from local government for the report's sceptical take on freezing Council Tax. Since 2007, this policy has been worth far more to better-off households and been a poor substitute for reforming local government taxation. While plans for a Local Income Tax were shelved after the SNP and Liberal Democrats could not reach agreement, there are other ways to improve the Council Tax. Freezing lower bands, increasing top bands and creating new bands for the most expensive properties would be both just and efficient. No one has yet proposed varying the basic rate of income tax, an almost-forgotten power backed by two-thirds of voters in the 1997 referendum. Free university education for Scots is unlikely to survive. Returning to a Graduate Endowment charge could secure cross-party support. Up-front tuition fees won't.

Scotland's policy-makers are committed to social justice and sustainable economic growth. The real test will be achieving fairness in the midst of cuts. In the end, deciding how to cut spending and who should take more of the strain is even more important than deciding by how much. It is a reality check for devolution – and a chance to prove the new reality matches the rhetoric.