Budgetary Control

Published: 11 July 2015
Author: David Bell
The Chancellor has used the Budget to limit the Scottish Government's room for manoeuvre, say David Bell, particularly through changes to Corporation Tax and the National Minimum Wage.
 
Once again, George Osborne has proved himself to be a clever politician.
 
Last year, he forced the Scottish Government to rethink its Stamp Duty Land Tax, bringing it more into line with his proposals for the rest of the UK. Substantially higher taxes on mid to higher range properties in Scotland would have been a political gift to the SNP's opponents.
 
In this Budget, he announced that the rate of corporation tax will fall to 18 per cent by 2020. The lower the UK rate, the less room there is for a Scottish growth strategy based on undercutting UK rates. This would be true for an independent Scotland or for one granted power to set the rate of corporation tax within the UK.
 
But perhaps an even more astute political move was the introduction of the "National Living Wage". This will be set at £7.20 from 2016, rising to £9 by 2020. Payment will be compulsory to those aged over 25. The name National Living Wage (NLW) is easily confused with the Living Wage - another clever political strategy.
 
The Living Wage plays a central part in the latest Scottish Government's Economic Strategy, which focuses more on the reduction of income inequality than its predecessors. And as part of that, the "Business Pledge" makes support to business from the Enterprise agencies conditional on paying the Living Wage.
 
The introduction of the NLW will probably confuse the business sector. It is only 65p less than the Living Wage, whereas the current minimum wage, at £6.50, is £1.25 below the Living Wage. My calculations imply that the introduction of the National Living Wage will increase the earnings of around seven per cent of Scottish workers. This intervention by Mr Osborne will make it more difficult for the Scottish Government to claim the plaudits for raising the incomes of the low-paid.
 
This measure risks the loss of some jobs but the same would be true to a greater extent from a mandatory introduction of the Living Wage. However, given that the academic evidence tends to suggest that job losses will be relatively modest, and that upward pressure on wages will force employers to focus more attention on the UK's lamentable levels of productivity, Mr Osborne obviously thinks the risks are worth taking.
 
This policy has also dispelled the notion that he slavishly follows that stream of Conservative thinking which argues against any intervention in markets. It would have been interesting to observe the reaction of the party had the living wage measure been imposed from Brussels. Nevertheless, it has taken all of the parties of the Left by surprise and left them struggling to form a coherent response.
 
The focus on the NLW has also taken attention away from other Budget measures that will have a much more negative effect on low income families. By 2019-20, benefits spending will be £12 billion per year lower than now. This reduction falls almost entirely on working age families, largely from freezes in benefit rates for the next four years and from further cuts in tax credits. The IFS estimates that the freeze on working age benefits will reduce the annual income of around 13 million families by about £260 per year. Scotland broadly accounts for its population share of working age benefits, which would imply that around 1.1 million Scottish families would be similarly affected.
 
However, Mr Osborne can argue that the reduction in benefit spending is less steep than was set out in his March budget. He can also claim that his deficit reduction strategy is less severe than in his previous plans. This is partly because tax revenues will be £5.8bn higher than anticipated in 2015-16 and partly because he has retreated slightly from imposing massive cuts on departmental spending during this Parliament. This is important for the Scottish Government because its budget will mainly be dependent on the outcome of this autumn's Spending Review, which will allocate funding between UK Government departments for the next few years. The Institute of Fiscal Studies view is that departmental spending will be cut by 3.2 per cent in real terms by 2019-20. And with the health budget guaranteed an extra £8bn, other areas will be cut much more severely.
 
Mr Osborne may once again pull a rabbit out of the hat, but it will be difficult to conceal the message from the Spending Review that public services will be under extreme pressure for the rest of this decade. Perhaps he'll send his deputy. The Scottish Government's response is relatively easy to forecast. 

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