Scotland's money: are we spending it properly?

He’s a man facing an almost impossible array of demands. Some of the brightest minds, and biggest voices, are calling for him to pull to the left, pull to the right, protect the poor, and boost business – all at the same time. Mackay – self-contained, confident and smartly dressed – may see himself as a steady pair of hands, but he’d need the skill of a juggler to make everyone happy.

At its heart, the Budget is redistributive – taking from the rich to provide services for the poor by widening the gap between how much higher earners pay in income tax in Scotland compared with the rest of the UK. Mackay has frozen the higher rate threshold at £43,430 in Scotland, while it will go up to £50,000 in the rest of the UK. However, everyone earning under £27,000 – 55% of taxpayers – will end up paying less income tax than in the rest of the UK.

The spending plans also provide extra money for education (£180 million to close the attainment gap), health (£730m), and infrastructure (£5 billion), and give new powers to councils to introduce a workplace car parking tax and a tourist tax. Local authorities get an extra £90m and can also increase council tax by up to 4.79% rather than 3%.

But what do the people who spend their lives studying the Scottish economy make of the Budget? Does the way Scotland spends its money work? Where could money be spent better? And what ideas might change the game when it comes to Scotland and out public services?

Some of the leading lights in Scottish public life give their views.

PROFESSOR RONALD MACDONALD

ECONOMIST WITH THE ADAM SMITH BUSINESS SCHOOL AT GLASGOW UNIVERSITY

Ronnie MacDonald is happy to pay more tax, but he isn’t so happy with the Scottish Government’s approach to balancing the books. “The focus seems to be too much on spending – there isn’t so much emphasis on growing the economy,” he says.

About half the revenue raised comes from taxes, he says, and our “economy is very skewed towards oil” – a commodity in price decline. “It’s a dangerous strategy for the long-term sustainability of public spending,” MacDonald says.

With limited borrowing powers, the Government has a choice between "growing the economy or spending less". The Government is following a Nordic-style model of public spending, he says.

However, “these Nordic countries grew their economies before making spending changes, we seem to be doing it the other way around”.

“I think we’ll ultimately have to cut spending,” he adds. “You either prioritise and have a leaner mix now, or you’re forced to do it in the future – you could face much worse cuts in the future.”

Higher taxes in Scotland “may well put off” foreign firms thinking of investing in Scotland, he says. “If I’m a US-based company thinking of Scotland or the north of England, I’m going to go where the tax regime is more favourable to my employees. All in all it’s quite a dangerous game they’re playing.”

Macdonald suggests a “realignment” from spending “towards lowering business rates” to encourage growth.

A more diverse economy would grow more quickly, says MacDonald, and provide the money needed for the “public provision” the SNP wants to offer. Manufacturing around life sciences and new technology is one way forward.

MacDonald suggests Scotland should follow the path of Australia – currently blazing a trail with the solar production of renewable hydrogen as a green energy source. Renewable hydrogen, says MacDonald, can be stored and shipped in liquid form. Given Scotland’s wind and waves, we’d be in a perfect position to exploit the new technology in the era of climate change.

“It could be revolutionary,” MacDonald says. “It could be as important as the discovery of oil ... it could lead to the reindustrialisation of Scotland.”

If the Government used public money to invest in the new technology “it could create a sovereign wealth fund” as the Norwegians did to use oil to pay for services.

DAVE MOXHAM

STUC DEPUTY GENERAL SECRETARY

“The Budget is incredibly timid,” says Moxham. “With the current ambition of a little bit more tax on middle- to higher-income earners, it’s quite impossible to fund the public services we need without the recognition that people on median and above incomes are going to have to pay more in taxation.

"We can’t pretend there’s any mechanism for funding public services which doesn’t have that sort of ambition.

“It’s not enough to constantly use a Conservative Government as a comparator and say we’re being slightly more progressive. Any party which aspires to say Scotland would be different under independence needs to be showing more now about what their commitment is to social justice.”

The STUC, says Moxham, would be “comfortable” with everyone above median income – about £26,500 – paying an extra penny in tax. “That’s small change. It’s hardly bank-breaking,” he adds.

Spending needs to get smarter and more local too, Moxham says. Councils and council staff need more say in spending – as they understand the problems. “There’s too much centralisation and not enough devolution to local authorities,” he adds.

He cites hospitals improving heart failure response times because “the porters helped design the system of getting someone from the front steps to the operating theatre”.

“We’ve had lots of reorganisation of the delivery of public services but these have tended to be executive-led,” he says. What’s needed is getting the people who deliver the services – carers, nurses, teachers – to help design services. “The person who best knows how to organise a home care service is probably the home carer on the ground.”

The big idea that the STUC is investigating is a “universal basic infrastructure” – where everyone has the guaranteed right to decent transport, housing, clinics and schools. Public spending priorities would be re-engineered around making sure every citizen had the basic infrastructure for a decent life.

Small business bonus schemes are in the STUC’s sights. “We need a completely new approach to business tax giveaways,” says Moxham. Investing in specific high-street regeneration schemes “is a far better way to rebuild our local high streets than the current approach where someone may need the boost, but others are using it to fund a second car”.

TRACY BLACK

DIRECTOR OF CBI SCOTLAND

IF the Government stimulates the white heat of technology it can fill its coffers with tax pounds and use the money to spend on the public services it wants – that’s essentially Black’s view.

A no-deal Brexit could cost Scotland £14bn a year by 2035, she says, and our demographics are going against us with a rapidly ageing population, so we need to start spending as smartly as we can. AI and automation could reduce costs. The elderly don’t have to travel to hospital when their blood pressure could be checked by remote monitoring. Investment in smart-ticketing and autonomous vehicles could help the high street.

Glasgow may be a 5G hub, but connectivity needs improved across the country, as does infrastructure, Black says, so “we get goods and people moving around more effectively”.

One big idea that Black is promoting is using national data to change how we spend public money. Data on the economy and population could be used by business “to come up with really creative solutions around transport and health”.

The Scottish Government has done well so far supporting science and technology in business. Black says our pharma manufacturing sector is one of the most advanced in the world – it’s now the second-biggest spender on research and development, exports £462m in products, and has seen jobs rise by 1.6%. The Medicines Manufacturing Innovation Centre in Renfrewshire was l funded by the Government and industry.

It’s this close working relationship between Government and industry that Black wants more of – but she feels there are “mixed messages” when it comes to income tax, parking levies and the tourist tax. “None of these on their own are particularly crippling, but you put the whole package together and what sort of signal does that put out to inward investors?”

PROFESSOR GRAEME ROY

DIRECTOR OF THE FRASER OF ALLANDER INSTITUTE

"THE debate around public spending collapses down into short-term political sound bites rather than more intelligent conversations," says Roy. "We see that every week at First Minister’s Questions and in every manifesto that every party produces."

Parties obsess on issues like "1,000 more nurses or 1,000 extra police officers" when they should be looking at outcomes – like extending life expectancy or making streets safer. It may be that spending more money on housing rather than nurses will improve life expectancy. Preventative measures – that improve health or cut crime – will save money in the long run.

"Simple metrics don’t do anything for the long-term delivery of better value for public services," Roy says. "There’s a fixation on targets and numbers when the evidence is that you should be bolder."

He adds: "If we’re thinking about long-term sustainability of public services what we need to do is reduce demand, not just keep increasing supply."

Such a quantum shift in how we look at public spending would require political courage. Politicians are locked in short election cycles, while long-term preventative policies might take decades to show fruit, Roy says. Closing a hospital because it makes more sense to spend the money on nutrition for the young could lose a government an election, even though 30 years from now it might have improved health.

"Some of the delivery of public services is simply not going to be sustainable in the long run," Roy says. "We’ve played with numbers where we think that on current projections NHS spending will within the next two or three years be pretty much 50% of the Scottish Budget. This will mean every other area in the public sector has to be squeezed – that’s the sort of thing which I think will start to force more radical thoughts on how we deliver public services."

JOHN DICKIE

DIRECTOR, CHILD POVERTY ACTION GROUP

Dickie is clear that Scotland’s public spending does not match the ambition of the Government when it comes to tackling child poverty. Targets have been set that less than 10% of children should be living in poverty by 2030.

With currently one in four Scots children in poverty – that’s about 230,000 – to reach that target, says Dickie, "we need a substantial rethink of how we raise revenue and allocate resources to make sure those families on the lowest incomes can give children a decent start in life". Estimates show that one in three children could be in poverty within a few years.

Dickie wants an "income supplement" to lift family finances to levels above the poverty line. The government is committed to introducing an income supplement by 2022 – however, it hasn’t said how that will be delivered or how much it will be.

The supplement needs brought in now, Dickie says. "Families can’t wait until 2022." He applauds policies like best start grants for families, and improvements in school clothing grants but says "none of this is on the scale to have the kind of substantive long-term impact to really change the trajectory of child poverty".

Dickie would also like to see the Scottish Government act to top up child benefit by around £5, following cuts by the UK Government.

Not tackling child poverty is a drain on the economy – with children more likely to get involved in crime, have poor health, and fewer job prospects. "The government needs to act with urgency," Dickie says. It needs to "recognise the value of the next generation" and invest.

DEREK MITCHELL

CHIEF EXECUTIVE, CITIZENS ADVICE SCOTLAND

WHEN there are families going to foodbanks and receiving "cold bags" of shopping because their gas and electricity has been cut off – when 50% of people in "food poverty" are working – then for Mitchell "that doesn’t paint a picture of a society where everything is wonderful and great".

"The simple matter is," he says, "that things are very difficult for lots of people and that doesn’t show any sign of abating."

Public resources need to go to those most in need, Mitchell says. "Poor people don’t have a voice. We’ve a debate at a political level. We talk about interest rates and mortgage rates, we don’t talk about household debt."

Put simply: we’re looking at things through the wrong end of the telescope. Get tougher with payday loan companies, force employers to pay decent wages, increase the funeral expense allowance, prioritise affordable rent – these are the levers of Government Mitchell wants to see pulled.

DEREK MACKAY

SCOTTISH FINANCE SECRETARY

MACKAY’S childhood shaped his politics. This is a man who didn’t grow up easy – raised in a council house, he even spent time in a homeless unit after a family break-up. He puts his life lessons into his policies – beliefs like “the importance of community, kindness, treating others as you would be treated yourself”.

“I’m very aware of chaotic lifestyles, lack of opportunities, intergenerational poverty,” he says. Mackay says he struck it lucky by entering politics and getting elected. It changed the direction of his life.

He’s got a slick command of his portfolio and can rattle off statistics at a dizzying rate – but his Budget is assailed from all sides: it’s either a hit on the middle classes; or it isn’t doing enough for the poor.

Criticism doesn’t faze Mackay though – only once does he falter, and even then momentarily, when asked why the SNP needed the Greens to push them in a more progressive direction over policies like the parking levy.

In his eyes, the Budget is about stability in the face of “calamity at Westminster”; sustainability of public services, and stimulus for the economy.

Mackay says preventative measures are built in when it comes to public health and early years – and the economy of the future is being looked after in terms of innovation on data and infrastructure. Direct investment in Scotland is second only to London, and research and development is at record levels. He makes much of new figures showing unemployment is at an all-time low.

However, there’s only so much the Government can do given the limited range of powers granted to a devolved administration, he says. “We can grow the economy as an independent country if we have control of levers like immigration policy, and over a wider basket of taxation powers.”

Mackay described his current Budget as “fair and progressive” in that it takes “a bit more from the highest earning section of society”. In the next financial year, he says, “99% of taxpayers will pay less tax, not more, on their current incomes, and it’s only those on or above £124,000 who will pay more”.

It’s a “balanced and moderate” approach, he thinks. “We’re building a social security system with a different philosophy around dignity and respect,” he said, while claiming the UK Government was in a “race to the bottom on tax”.

While Mackay attempts to create a more progressive Budget, he insists he’s also trying to remain pro-business as he believes “the best social policy is employment”. He dismissed claims of “class war” in his Budget.

“If we don’t invest in society and have the necessary safeguards for all then everyone pays for societal failure – business and taxpayers pay for this with prisons and unemployment,” he says, adding that he believes his Budget presents a “pretty good deal”.

Reformation of council tax is likely to dominate the political discussion soon with plans for cross-party talks to find an alternative. “If we can find the consensus that could adequately and safety replace it then we’ll support that,” Mackay says. Legislation could be prepared in this Parliament for implementation in the next.

Come the end of this Parliament, the country will also be heading towards the time for a review of the “fiscal framework” set out by the Smith Commission and Scotland Act, which will mean the Government can ask for more powers from Westminster.

Mackay admits such an ask won’t be easy as “Westminster concedes nothing without challenge and pressure”.