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Austerity: £100billion loss to UK economy

Published: 14 Mar 2016 00:01
Part of:
Economy

DFM points to research showing damaging effects on growth

The UK Government's fiscal consolidation programme has already led to an estimated 5% fall in UK GDP, Deputy First Minister and Finance Secretary John Swinney has warned Chancellor George Osborne ahead of this week's UK Budget.

Mr Swinney highlighted an independent study by Oxford University Professor of Economic Policy, Simon Wren-Lewis, which found that the impact of the UK Government's fiscal consolidation programme, and the subsequent delayed recovery, could be a £100billion loss.

Professor Wren-Lewis has subsequently reported that, even following the upward revision to GDP, the UK's growth performance has been poor, at a time when the economy has been recovering from a deep recession. During this stage of the economic cycle, per-head growth rates would usually be expected to be well in excess to those that have occurred,

Mr Swinney has written to the Chancellor highlighting the research and calling on him to end the "damaging and needlessly restrictive" adherence to his fiscal rules and reminding Mr Osborne of the Scottish Government's alternative to austerity, which would balance the current budget and release around £150 billion for investment.

The Deputy First Minister also used the letter to reinforce his call for greater help for the North Sea Oil & Gas sector, action to tackle fiscal barriers to exploration in the North Sea, an easing of the tax burden on the industry, improved access to decommissioning tax relief and urgent consideration of non-fiscal support, such as government loan guarantees.

And he asked that Mr Osborne highlight the joint aim of both governments to reduce rail journey times between Scotland and London to three hours or less, and free up more capacity on the network.

The Deputy First Minister wrote:

"Since the Autumn, the global outlook has weakened and independent forecasters have downgraded growth prospects across the world economies. Although the UK and Scotland have shown some resilience, growth rates have slowed and our economies are clearly not immune to global headwinds.

"It is therefore imperative that the Chancellor uses the Budget to set out measures to stimulate the economy and support growth rather than continuing to abide by fiscal rules that are damaging and needlessly restrictive."

And he added:

"Last autumn, the OBR published estimates showing how your consolidation programme has reduced GDP. This has also been highlighted by academics. For example, Simon Wren-Lewis, Professor of Economic Policy at the University of Oxford, estimated in February 2015 that "in total, resources worth around 5 per cent of GDP will have been lost for ever by delaying the recovery".[1] That is equivalent to around £100 billion.

"As the IFS outlined, running a surplus is not necessary to bring debt down as a share of national income. This is especially true if this target is damaging growth. "


[1] http://www.lrb.co.uk/v37/n04/simon-wren-lewis/the-austerity-con

Notes to editors

Full text of the letter –

Dear George

I am writing to set out the key issues that the Scottish Government wishes to raise ahead of the Budget on 16th March.

Since the Autumn, the global outlook has weakened and independent forecasters have downgraded growth prospects across the world economies. Although UK and Scotland have shown some resilience, growth rates have slowed and our economies are clearly not immune to global headwinds.

It is therefore imperative that the Budget sets out measures to stimulate the economy to support growth rather than continuing to abide by fiscal rules that are damaging and needlessly restrictive.

Fiscal Consolidation

I am aware of your recent comments that further spending cuts may be announced next week, in an attempt to ensure you continue to meet your fiscal targets.

However, given the uncertain global environment, and in view of the additional pressures that this is placing on households, producers and exporters, this is not the right time to undertake more austerity. Additional austerity, by slowing growth further, will only reduce tax revenues worsening the fiscal position.

Under your current plans, the Scottish Government is already facing cuts of £1.2 billion between now and 2019-20. Taken together with the cuts implemented in the previous Parliament, this means our discretionary budget will have been cut by £3.9 billion in real terms, or 12.5%, since 2010-11. Within this, our capital budget will have fallen by £600 million or 17%. By continuing to pursue unnecessarily stringent fiscal targets, the danger is that worthwhile investments, which would stimulate growth, are being overlooked. Given the continued low cost of public sector borrowing, this is an ideal time for limited borrowing to support capital investment which will boost the country's long term productive capacity and in turn its ability to create jobs and future tax revenues.

Last autumn, the OBR published estimates showing how your consolidation programme has reduced GDP. This has also been highlighted by academics. For example, Simon Wren-Lewis, Professor of Economic Policy at the University of Oxford, estimated in February 2015 that "in total, resources worth around 5 per cent of GDP will have been lost for ever by delaying the recovery".[1] That is equivalent to around £100 billion.

As the IFS outlined, running a surplus is not necessary to bring debt down as a share of national income. This is especially true if this target is damaging growth. The Scottish Government has previously set out an alternative course to target a current budget balance rather than a fiscal surplus which would release around a hundred and fifty billion pounds for investment in public infrastructure. I hope that you use the Budget to take a fresh approach to your targets in the light of current global economic challenges.

Welfare Cuts

You have previously announced a £12 billion reduction in UK welfare spending. Our initial estimates indicate that this will result in benefit expenditure in Scotland being further reduced by around £1 billion per year by 2019-20. Although the Scottish Government has invested £296 million over the three years to 2015-16 to mitigate cuts, it is clear we cannot protect children and low income households from reductions of this magnitude.

I have previously written to you asking you to reconsider your plans to: lower the benefit cap; cut tax credit eligibility; and, withdraw automatic entitlement for help with housing costs for 18-21 year olds from April 2017. I am equally concerned at the cuts you announced in your November 2015 statement to funding to help people to find work, and stay in work. This will impact dramatically on future devolved employability services. I would again urge you to reverse these decisions in your Budget Statement. In addition, I am very concerned about the proposals made in your Autumn Statement to reduce the scope and levels of work allowances in Universal Credit from April 2016. This damages the ethos of Universal Credit as a work incentive and I ask that you reconsider the severity of the proposed change.

I welcome the announcement of a year-long exception from the cap to social sector housing benefit for all tenants of supported accommodation in the social sector. I also look forward to seeing the outcome of the subsequent policy review, following the findings of the Supported Accommodation research project which the Scottish Government is involved with. However, I remain concerned about the potential impact on vulnerable people, particularly those in supported accommodation, and the impact the existence of a cap will have on planning for future developments and securing current ones. I urge you to use your influence on the policy review to ensure that these adverse consequences do not arise.

I trust you will ensure that the Scottish Government is engaged at an early stage in any planned changes to benefits that will be devolved following enactment of the Scotland Bill 2015-16. This will help both Governments meet their commitment to work together to protect claimants during the transition phase.

High Speed Rail Network

I am pleased to note that the Secretary of State for Transport and the Cabinet Secretary for Infrastructure, Investment and Cities will later this month announce their commitment to continue to work in partnership towards reducing rail journey times to three hours between Scotland's central belt and London.

That announcement will be a powerful statement of intent which will reaffirm and build on your commitment to rebalancing the UK economy by improving transport connectivity. There is clearly fresh thinking and renewed dynamism in the north of England, manifest most notably in the creation of Transport for the North, focusing on economic growth through improved connectivity.

Highlighting our jointly-held aim for Scotland's inclusion within a Britain-wide high speed rail network, together with a three hour journey time between Edinburgh/Glasgow and London, in your Budget speech would reinforce your personal commitment to rebalancing Britain's economy. It would also provide additional support to the statement of cooperation and intent already expressed by the Secretary of State and the Cabinet Secretary for Infrastructure, Investment and Cities.

City Deals

I welcome the recent City Deals announced for Aberdeen and Inverness and believe that these should be available to all Scotland's cities.

You will be aware that our respective officials are currently finalising the deal for Aberdeen and working on the next stage of the deal for Inverness and I trust that we will be able to come to a speedy and satisfactory conclusion on both of these. In addition to this, I seek your confirmation that the UK Government will join us in tripartite discussions with regional partners about a city region deal for Edinburgh and South East Scotland. I believe that a shared approach offers the best opportunity to deliver a package of measures for the region that will result in better regional economic outcomes for the benefit of both the Scottish and the UK economies.

North Sea Fiscal Regime

The North Sea oil and gas industry is facing substantial challenges. My detailed letter of 12 February sets out the urgent action the UK Government must take at the Budget to support this critical industry and its highly skilled workforce. This includes: immediate action to substantially reduce the overall tax burden in the industry; the removal of fiscal barriers to exploration and enhanced oil recovery; improved access to decommissioning tax relief; and, urgent consideration of non-fiscal support, such as government loan guarantees.

Industry analysis has since confirmed the serious challenges the sector faces, and the stark drop off in investment over the previous year. The Scottish Government is continuing to do all that we can to support the sector, and the sector itself is working hard to adapt to lower oil prices. However, the UK Government retains the key economic levers affecting the oil and gas industry and I repeat my calls for immediate action at your March Budget to ensure it is in a position to compete and the significant potential of the North Sea is realised.

Fiscal Framework

Finally I am pleased that our governments agreed a fiscal framework for the devolution of further powers to Scotland following the Smith Commission recommendations. I look forward to working with you to ensure smooth implementation of these.

I trust that you will consider the issues I have outlined above, and that you will reflect them in your Budget next week.


[1] http://www.lrb.co.uk/v37/n04/simon-wren-lewis/the-austerity-con