7 Feb 2017
I want to start by quoting from a half-forgotten publication by well-known economist.
It sets out a centrist approach to the economy, with a number of themes.
First, that the best way to increase public spending is to grow the economy.
It said, and I quote:
Economic growth means more resources in the public purse – more money for schools, health and crime prevention. In fact just matching the UK’s growth over the next 10 years would mean almost £4bn more in government revenues.
And it went on, to make a critical point for Scotland’s economy – that we are bound, by geography, history and culture to see our economy in light of what’s happening elsewhere in the UK.
Scottish business rates…are 9 per cent higher than in England. This sends the wrong message for indigenous businesses and businesses coming to Scotland
So he understood that it’s not just a question of what happens in Scotland – but that our relative competitiveness is crucial.
And then finally, he summarised with a rousing call to see the big picture, to go beyond simply talking about what Westminster gives Scotland, to take responsibility – to take back control, you might say.
Our opponents would have us focus on block grants from the Treasury, chasing bigger shares of public spending to combat growing social problems. But we need more than just plans for spending; we also need plans for the kind of growth that will allow us to fund our … ambitions for Scotland…The real debate at this election should be about what is required to achieve Scottish ambitions for growth and prosperity’
So there we have a three-point plan for a modern Scottish economy – to realise the link between growth and public services, to focus on relative competitiveness, and to think big about what is possible.
So who was this strong voice from the centre-right?
Who was this moderate, pragmatic economist who chartered a course for growth?
It was Alex Salmond.
In a 2005 publication under his leadership, entitled Let Scotland Flourish, his party set out this argument for a dynamic, lively Scottish economy.
And to it’s not often I say this – so you know I mean it when I do – but Alex Salmond was right. We should let Scotland flourish.
Cut to 2016, and it should now feel like we are entering a new age for economic debate in Scotland.
After the end of a bitterly-fought referendum in 2014, all the Scottish parties agreed a package of powers.
This year, new responsibilities over tax, welfare and borrowing kick in properly.
And for many of us, this is an electrifying moment.
Instead of simply spending money, we have choices over raising it.
The Scottish Parliament is no longer to be handed a credit card and asked to put the bill in the post.
It is asked to earn its own money, too.
This is a seminal moments in our nation’s history – and it is a profoundly exciting time for anyone like me – or like Alex Salmond – who wants to seize the chance for a fast-growing economy.
Or rather, it should be.
Because instead of that vital debate, that cut and thrust and sense of ambition – we have… Derek Mackay’s budget.
At the end of the budget publication, I was left thinking not how do we tackle this, not how do we engage in the big political questions in poses.
I was left thinking – why, given the powers at our disposal, was that such a damp squib?
Today, I want to set out the way the Scottish Conservatives see the Scottish budget.
To outline our own economic view, based on an understanding of the Scottish economy and the times we face.
And to set out what we think are spending priorities.
But above all else, I want to rekindle that sense of excitement – and show why in different hands, this really could be the most explosive budget for growth Scotland has seen.
The state of Scotland’s economy
The starting point is the current Scottish economy.
And I believe it has three distinctive features.
First, we have a number of stand-out sectors of critical importance.
Oil and gas, finance, tourism, food and drink: collectively they employ over 250,000 people.
This is both a blessing and a curse. It means that we are vulnerable to external shocks – like the oil price crash John Swinney assured us in 2014 wasn’t coming – but also means that designing good policy for the current economy should, in theory, be easier.
And we also have totemic sectors, such as fishing, manufacturing and shipbuilding, or arts and media.
These industries might be smaller in economic terms, but they are critical to their communities – and loom large in our history, and sense of what Scotland is.
The second feature of the Scottish economy is increasing divergence from the performance of the rest of the UK.
At a macro level, growth in Scotland has lagged behind the rest of the UK since the fourth quarter of 2009.
In our labour market, we have lower employment, higher unemployment, a higher claimant count and a higher inactivity rate than the UK average.
In business confidence, the Bank of Scotland PMI is lower for Scotland than the rest of the UK – and has been lower for 5 of the past 6 months.
The Institute for Chartered Accountants, the FSB and the Chambers of Commerce have all found lower business confidence in Scotland than the rest of the UK, since 2014.
The retail sales index has been lower in Scotland than the rest of the UK, since 2014.
And the latest RICS found that last quarter, Scotland was the only part of the UK to see a drop in its construction market survey.
The picture is clear – across a host of indicators, the Scottish economy is underperforming relative to the rest of the UK.
Third and finally, our economy is completely enmeshed with the rest of the UK.
This is much more than a unionist cliché. We have, as a rule, grown by selling to the rest of the UK rather than selling abroad.
We all saw the figures published by the Scottish Government: even after 40 years of EU membership, the EU accounts for 16% of our trade, the rest of the world 21, and the UK, nearly two-thirds.
The SNP response to this is that the EU single market is 8 times larger than the UK.
This is laughable. That actually shows just how connected our economy is with the UK – that even with 8 times the population, we still sell four times as much within the UK.
And even with all the benefits of the EU single market, we sell more outside Europe than we do within it.
Impact of Brexit
These features of the Scottish economy – the outsize importance of a few sectors, of relative underperformance compared to the UK, and of deep integration with the rest of the UK – should lead us to a balanced assessment of Brexit.
There is no real doubt that Brexit poses challenges.
It is clear we need to preserve the most open trade possible with all our international partners.
But paradoxically, because Scotland’s main trading partner is the rest of the UK, we are actually more insulated from Brexit than the rest of the UK.
The Fraser of Allander Institute found that, and I quote:
That the impact on Scotland, whilst significant, is estimated to be smaller than for the UK as a whole.
And some of our important industrires, like food and drink or manufacturing, are acutely sensitive to changes in their competitive landscape – such as a drop in sterling, or small reductions in tariffs or regulatory barriers in markets outwith the EU.
Much remains to be seen and agreed on these factors. But for our most important sectors, the Brexit scorecard of potential risk and reward is not one-sided.
And finally, it is also clear that many of the most important challenges pre-date Brexit – and whatever questions leaving the EU creates, leaving the UK would be the worst possible answer.
That background economic picture is one important context for this year’s budget.
The second is the path of public spending in Scotland.
We should be absolutely clear on this.
Scotland has not been subject to Tory austerity.
The total budget next year will rise by £501 million in real terms.
The Scottish Government’s own figures show after the previous high of 2010-11, the total budget – in cash and real terms – has gone up.
This is not party political point-scoring or an attempt to spin figures – it is simply a matter of fact, as independent figures like the Fraser of Allander Institute have pointed out.
And when I asked Nicola Sturgeon about this, her response was to selectively quote different figures – which is exactly what the FAI warned against.
And in turn, this should revolutionise our understanding of the Scottish budget, and get us back to that sense of potential the Smith Commission promised.
Derek Mackay would have you believe he has a hard task.
From the way they talk, the SNP sound like they are in the business of managing decline – of doling out a miserable, ever-decreasing pot.
This is nonsense.
And we should call it out – because it feeds into a sense of inertia.
Many will see the irony of a nationalist government apparently content to sit back and talk about what Scotland can’t do.
If we see ourselves as simply reliant on Westminster, we will never grasp the full potential of devolution.
A budget for growth
In any case, this attitude – this presumption of inaction – will no longer cut it.
Because one of the crucial features of the new fiscal landscape is how Scotland’s money is raised.
The growth of the Scottish economy is now the most important influence on public spending.
As the Fraser of Allander institute point out:
Scotland’s economic performance – or more accurately, Scotland’s relative performance – will have a greater bearing on the spending plans of Holyrood than ever before
To see what the potential benefit could be, we did some basic modelling, trying to understand what the broad impact would be if Scotland’s economy motored up a gear.
We previously found that if Scotland matched the UK proportions of higher and additional rate taxpayers, tax revenues would increase by around £600 million.
We then looked at a simple question – what if everyone in Scotland got the job they really want?
And no – I don’t mean Alex Rowley finally becoming Labour leader – I mean across the labour market.
If every person in Scotland currently on a part-time contract who wants to go full-time could do so – revenues would increase by about £337 million.
And if everyone in Scotland who is currently economically inactive and wants to find a job – but can’t – if they found work, revenues would increase by about £435 million.
That scenarios are indicative. But that’s a fresh billion pounds. It give you a sense of potential if we grew faster.
And of course – it’s not just me saying it. Alex Salmond, remember, estimated that matching UK growth would be worth £4 billion.
I wonder what Alex Salmond would make of Derek Mackay’s budget.
And I miss that old SNP.
We might have had our differences, but at least we agreed on this guiding principle of government: if you want more money for services, start with growth.
Bairns not tax bombs, you could say.
Or to put it another way: bring back Alex. Because, on this issue if nothing else, Alex was right.
How to get growth
So how do we get growth?
Our view is that the trick of government is knowing when to intervene, and when to stay out.
The fundamental work of creating jobs, of taking risks, of making investment decisions and hiring – that is not for politicians to decide.
But government can provide the framework.
Last week, Ruth Davidson spelled out a number of ideas in education, showing the crucial long-term relationship between skills and growth.
In the rest of my speech, I want to focus on tax and a competitive economy, and then on spending that supports long-term growth.
On tax, given what I’ve said so far, you might expect me to launch into a broadside and simply lambast the SNP’s tax grab.
But I will give credit where it’s due.
The SNP have actually argued for cutting Air Passenger Duty, or the Airport Departure Tax as it will be known.
Read the rationale for this, and it comes across as a breath of fresh, bracing, centre-right air in the warm, thick fug of nationalist indecision.
It will support the economy. It will improve our relative economic competitiveness. It will help our businesses.
It places us on the right side of the laffer curve – the model that suggests that there comes a point where higher taxes are self-defeating.
Unfortunately, the logic hasn’t been carried through to other taxes.
And it’s hard to avoid this deep contradiction in SNP thinking.
On income, the SNP chose not to pass on the rate rise the UK government brought in – and then compounded that with their deal with the Greens.
It might not sound like a radical move now.
But it gives Scotland the reputation for being the highest-taxed part of the UK.
And its impact will grow over time – so that within a few years, middle earners in Scotland will pay almost a thousand pounds more than in the rest of the UK.
Already, employers are talking about having to offer their staff a Scotland supplement. They are already talking about us as a relatively uncompetitive place to do business.
That is surely the very opposite of what we want business leaders to be saying.
It is the very opposite of the approach taken for APD.
Or look at business taxes. The SNP have set the poundage for the large business supplement at exactly double that in England.
In 2007-08, the poundage rate was 0.3p.
It’s now 2.6.
So large businesses are paying 8 times as much as when the SNP came into power.
Revenues, in that period, have only gone up by 6 times – again showing that hiking taxes starts hitting a self-defeating threshold.
And when I say ‘large business’, let’s remember that a large business is defined as a rateable value over £51,000 from this year – so while we aren’t talking newsagents, we are talking firms that by any other definition are anything but large.
In total, there are about 21,000 firms affected.
And that’s before we include the revaluation, which will see some business’ rates triple.
I mentioned earlier that having a few sectors of huge importance should make policy easier.
One of the silver linings in the past year should be that a weaker pound makes coming to Scotland, and exporting from Scotland, that much cheaper.
But the supplement, combined with the revaluation, wipes out that benefit – and hammers tourism and hospitality in particular. It also hits manufacturers – which has received less attention.
So this is one example where policy is actively undermining two of our essential industries.
And again, we see the completely contradictory SNP approach.
They understand that taxing flights does damage.
Why can’t they see that taxing hotels might just tip them over the edge?
And finally, three years ago, the SNP introduced the new Land and Buildings Transaction Tax.
We only need take one look at the SNP’s projections for the LBTT to see how self-defeating high taxes can be.
After one year of the tax, they revised their projected revenue from residential LBTT down.
In the 2016-17 draft budget, they expected it to raise £1.795 billion by 2020.
But in the latest budget this figure was revised down to just £962 million – over £800 million less.
In the context of a £30-billion-odd annual budget, that is a huge misjudgement.
Surveyors, housebuilders and economists all say the same thing: if you whack up transaction taxes, there will be fewer transactions.
This is the central tenet of our economic philosophy: the single most important thing that the Scottish Government can do to support growth is to keep taxes competitive.
So finally, where would we spend the money?
I won’t go into line-by-line accountancy here.
But a budget focussed on growth would have a number of priorities.
We would focus on the areas with greatest impact on long-term growth: housing, energy efficiency, roads, rail, digital infrastructure.
Housing and energy efficiency in particular have an impact on local economies.
So many big government projects are important to the long-term future of the country – but don’t always inject money into an economy as expected.
Big contractors come in from other countries, or the skills aren’t there for local people to take advantage.
Smaller projects, like insulating homes or re-fitting boilers might be a bit less eye-catching.
But by their nature, they can have a much more immediate economic impact.
And in revenue spending, I would pick out a couple of priorities.
Health, because demand is rising and reform has to be smoothed with cash – and long-term, public health is a cost to the Scottish economy.
Education, and in particular vocational education. Because the mismatch between our investment in colleges and apprenticeships and the needs of our economy is vast – and getting bigger.
And finally, science and research – because we know that long-term productivity is supported by better research, and we know that managing Brexit means topping up research grants from the EU.
To conclude, I’d like to take you back to that sense of optimism that we felt as the Smith Commission wound to an end.
Scotland now really does have one of the most powerful devolved assemblies in the world.
The choice is clear.
We can keep obsessing about what’s coming in from Westminster.
Or we can live up to the times we face.
We believe that if you want more money for schools and hospitals, you start with growth.
And that you don’t get growth by making Scotland the highest-taxed part of the UK.
And more than anything – we think that the buck stops with Bute House.
The real disappointment is that the SNP no longer seem to agree