By Alistair Davidson
The most useful power the Smith Commission could grant the Scottish Government is the ability to get itself as deeply into debt as possible.
That seems counterintuitive. After all, politicians of all stripes agree that government finances are in crisis. The Conservative’s big pitch for the general election is that only they will take the hard decisions needed reduce the deficit. Labour pair every promise of a spending increase with a commitment to cut spending elsewhere. Uniquely, the SNP pledged that an independent Scotland would borrow more money, but even they felt the need to emphasise that the increase would be “modest.”
Readers who have been paying close attention will have noticed that Britain’s debt has continued to increase even as George Osborne has cut government services further and further (see for example recent LSE research ‘Were we really all in it together?’ with Joseph Rowntree).
The Office for Budget Responsibility reports that public sector net borrowing in September was in fact £1.8 billion higher than a year ago. Osborne’s economic policies are somehow leading to more debt, not less. Thankfully, there is only so much damage he can do, as Britain can currently borrow at a real interest rate of -0.7% after inflation is taken into account. The European economy is in such a dire state that investors will pay the British government to keep their money safe.
It is a mistake to imagine that government finances are are like household finances. When a household is spending more than it earns, the right course of action is to tighten belts, eat out less, take the kids to Banff instead of Benidorm this year. Quite the opposite is true of governments. During a recession, the private sector is cutting back spending, and unless the government plugs the gap the entire economy spirals downwards. As employment falls, so do tax receipts. Welfare spending rises, and the government deficit increases. Austerity reinforces the downturn by throwing yet more people out of work. In a recession, spending cuts and tax rises actually increase the deficit.
We’ve been here before. Throughout the 1920s and 1930s, Britain endeavoured to run a primary budget surplus. In his 1929 budget speech then-Chancellor Winston Churchill famously headed off Liberal demands for public infrastructure spending by claiming that “The Treasury view… is that when the Government borrows in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise”
The “Treasury View” soon became a byword for wrongheaded policy. Britain’s debt stubbornly refused to shrink no matter how many cuts were made. The global economy only recovered from the Great Depression after huge public infrastructure spending. Roosevelt’s New Deal, Chamberlain’s rearmament, Hitler’s autobahns, and World War 2 itself restored employment and hence demand, at the cost of increasing public debt in the short term. With growth back on track, Western economies outgrew their debts in the 1950s and 1960s.
Tax-varying powers are not enough. The Scottish Parliament can only end austerity if it is granted both significant borrowing and taxation powers. Borrowing to invest in infrastructure is the key to growing the economy, and can only be afforded if the Scottish exchequer receives the increased tax take and reduced welfare spending this will bring.
Unlike local councils, the Scottish Parliament cannot borrow through state mechanisms at all. From 2015, it will be allowed to borrow approximately £240 million per year up to a total of £2.2 billion. This is wholly inadequate. The Scottish Government has had to resort to the PFI-lite of the Non Profit Distributing model for its capital borrowing, which incurs higher costs and legal complexity.
When Scots say they want more powers for the Scottish Parliament, they are expressing a desire for their country to follow a fundamentally different path to UK austerity. It is not enough to redistribute the pain, to be allowed to choose between spending cuts and tax rises. If the Smith Commission is to save the Union, only the devolution of full borrowing powers will do.