#SP16: Twelve questions we should all be asking about Scotland’s economy


Ahead of the Scottish elections next month, Monojit Chatterji, Economics professor at the University of Dundee, writes for Common Weal Policy looking at the big questions we need to be asking about Scotland’s economy, and offers ideas for what could be done about it

THIS is an exciting time for us, the people of Scotland. The independence referendum released an outpouring of energy and passion which we had not seen before. Soon we vote on another referendum and in our own Parliamentary elections in the aftermath of another austerity budget announced by the Chancellor of the Exchequer. All of these events could be major pointers to the Scotland of tomorrow. It might fairly be said that we stand at a crossroads. Perhaps now is the time for us to reflect on what kind of Scotland we want for ourselves and our children. What should our priorities as a nation be? I write mainly from an economics perspective, and I hope that all people of goodwill who care about our nation and its people will engage with this discussion.

1. Are we maximising our economic potential as a nation?

We are a rich country by any standards. Our GDP currently stands at PS142 billion or PS26400 per person – approximately the 30th richest country in the world. What this is equivalent to saying is that if we took the entire output produced within our borders, sold it at current market prices and then divided the proceeds equally amongst every individual in Scotland, then each of us would receive PS 26400 per year. A family of four would then have a claim to just over PS 100,000 a year! This is of course fantasy economics for a number of reasons.

The GDP is not the best single measure of our national income, never mind our welfare as a society. Nonetheless it does allow us to profile a major question. “Is it acceptable that some people in a society as rich as Scotland still must rely on foodbanks whilst others remain homeless? And if the answer is ‘no’- as surely it must be, then how do we end this blight?” Data on the numbers suffering is hard to come by. One estimate by the BBC estimated that 10500 people visited foodbanks in Dec 2015.

Food banks and homelessness apart, another element of unacceptable poverty is joblessness. If the data on foodbank use and homelessness are not easy to come by, the data on the labour market most certainly is. The most recent data (Dec 2015) show that in Scotland 162,000 are jobless and 701,000 (aged between 16 and 64) are “inactive” in the sense that they are not looking for work. Added together this equals 863,000 people who are not working and thus not contributing to the GDP. There are 2,636,000 people actually working. Hence of all those aged 16-64 nearly a quarter do not work. If the non workers were working at the same average productivity level as those employed our GDP would be nearly one third higher! In other words our potential if we had full employment would be a GDP per capita of PS 34848 (which would make us richer than the United States). This is NOT an argument which suggests that everybody not in work should be forced into work. Many who do not work cannot work for reasons of health or disability or because they have significant responsibilities as a carer for an unwell relative. But it simply shows the potential that does exist and reinforces the argument that we are a fundamentally wealthy society.

2. How have we allowed in-work poverty to become acceptable?

Until the last ten years the link between joblessness and poverty was quite strong. Those in poverty were often those without work. But in recent times a new and disturbing phenomenon called “in work poverty” has reared its ugly head. When one remembers the prevalence of zero hours contracts, in work does not mean full time. In fact the definition of employment used in the official data is that anyone who works one hour per week counts as being “in work”. No surprise then that several who are in work (but on few hours) may well count as also “in poverty”. In work poverty is now an established reality.

The official measurement of poverty is quite complex from a statistical point of view. In effect absolute poverty is defined by counting all individuals who live in households where the household disposable income (including all benefits less tax less housing costs) falls below some absolute threshold. This threshold is currently 0.6 times the disposable income of the median household in 2010-11 fixed in real terms . In 2013-14, this threshold stood at PS12,600 per two member household (which gets adjusted for larger households). 1,030,000 (20%) Scots fell below this minimum standard and thus were officially in absolute poverty. Relative poverty measures use the same idea but the threshold moves with time to reflect 60% of the current median household income as opposed to the median in 2011. By this measure in 2013-14 18% of Scots were in relative poverty.

So there we have it -the unacceptable face of modern private property dominated capitalism where 20% of the population in the 30th richest country in the world live below the poverty line. To progressives such gross poverty in the midst of so much plenty is unacceptable and indeed offensive. In any national debate on priorities, correcting this must surely be at the top of the agenda. The task is not easy. Many of those in poverty may well have long term health or disability issues- all the more reason why they should be cared for by a properly designed social apparatus. Even with the current system of benefits for the disabled, they carry a bigger share of poverty. At present individuals living in a household where one person has a disability suffer relative poverty rates of 23% – compared to the national average of 18%. We are too rich a society to simply accept this status quo – and our political rulers need to know this.

3. Do we need a social mechanism to tackle income inequality?

Closely linked but separate from the poverty issue is the issue of inequality. Even if we manage to lift everybody above the poverty line, the issue of the differences in income and wealth between those just above the poverty line and those at the top remains.

In Britain, income inequality fell after World War 2 largely as a result of progressive taxation with those on higher incomes paying a higher proportion of their income in tax. But this trend of falling inequality has been completely reversed since the 2008 recession. Indeed if we sought to return to 1970 inequality levels using only the tax system it would involve such swinging rises in income tax as to make the whole project unfeasible. If we care about income inequality, additional routes will have to be found.

One idea worthy of public discussion is to consider the possibility that salaries are set by a social mechanism rather than the market. The notion that somehow the market properly rewards merit and therefore high salaries are deserved cannot be easily defended. Public sector salaries are already set by a social mechanism – often embedded in Pay Review Bodies. Why not generalise that idea to incorporate the private sector too? Surely as a just society we should take a position on the ratio between the lowest and the highest salary in the land. Should we further use such mechanisms within each employing organisation? Why not? Is it reasonable to say that the maximum salary differential within the same institution or organisation should be fixed by public debate? I have no particular number in mind but 25 to 1 suggests that the highest paid earner in any organisation should receive PS180per hour as the mimimum wage is PS 7.20 an hour. On a 40 hour week this amounts to approximately PS 375,000 per annum!

Within Scotland as a whole, whose job is the hardest? My vote goes to the First Minister who currently earns PS 144,687 per annum. Is there any justification for someone in Scotland to earn more than the First Minister? If we apply my ratio test, and assuming she works the same 40 hour week as the lowest paid office worker in Holyrood, a rough estimate of the Holyrood maximum to minimum pay ratio would be 10 to 1. If that’s good enough for Holyrood and doesn’t incline the first Minister to leave or to slack, then why does the private sector need such spuriously large incentives? Can the absurd incomes of Chief executives of companies, Vice Chancellors of Universities and others in such exalted positions really be justified by incentives? And the argument that gross inequality in pay is required to motivate high flyers – even if true – has to be set against the demotivation of those at the bottom end of the pay scale when they observe what the bosses are paid relative to their own lowly salaries. An agreed social contract on pay is long overdue. Lets have that debate now!

4. Should we be considering a wealth tax?

Inequality of wealth is at least as important as inequality of income. Wealth consists of assets like land and property, shares in companies, bank accounts , etc which are all sources of income. In Britain wealth is not currently taxed only the gain in wealth is taxed (capital gains tax) at the time the asset is disposed. And even capital gains tax has now been lowered in the most recent budget. Measurement of capital for the purpose of levying tax is not easy. Some houses and land do not come to market regularly so their value is hard to determine. Stock prices fluctuate a lot and that also makes for difficulty in levying taxes. Nonetheless, annual taxes levied on wealth do have supporters amongst distinguished economists- notably Tony Atkinson in his latest book on inequality. The pros and cons of wealth tax is a conversation which we the body public must engage in.

5. Can we continue to rely on the market to solve the productivity problem?

Whilst poverty and inequality reduction must be at the heart of any future Scotland, we also need to be mindful of the need to maintain and even increase our productive capacity as a nation. This raises a deep and fundamental question – what is the best institutional arrangement for raising productivity? Should we simply leave the matter to the market and rely on creating market driven incentives or do we need to be more imaginative?

Productivity increases occur when both the worker and the machine(s) she works with improve. Essentially this requires investment in physical and human capital (education) preferably in a coordinated way. The conditions under which the market can achieve this coordinated increase in different kinds of investment are rather unlikely. There are many reasons to suspect that under market rules, there will be an investment “hold up”. Businesses will need to be sure of high future demand and low borrowing costs. Workers will need to be sure that the skills they invest in today will still be important in the future. And both sides will need to know that the extra output generated jointly by their respective investment efforts will be shared in an equitable way. This is a big ask for the market. A social long term contract is the way forward. Since 2008, the cost of borrowing in the UK has been at an all-time low; and despite that investment in new technology has been sluggish. And consequently productivity has fallen well below its trend in 2008. Clearly exclusive reliance on the market has not worked. Negotiation mechanisms to bring workers and business around a table will be needed. How we create such mechanisms is a big challenge but it’s a question which absolutely must be asked and become part of our public discourse.

6. Do we have the data we need to understand what’s really going on in Scotland’s labour market?

Most of us derive our livelihoods from work. Hence the performance of the labour market is crucial to public welfare. A superficial look suggests that we are doing rather well. Scotland’s unemployment rate is lower than the UK average. Likewise the employment rate in Scotland is higher than the UK average. But what does this tell us about the nature of work that most Scots do? As I have already said earlier being in employment does not at all mean that one necessarily has a good job. One might think of a “good job” as being secure, with a proper contract, perhaps with trade union support. These arewhat we might think of as prime jobs, usually full time. In the last quarter, the number of people in full time jobs in Scotland rose by 12000. For women, the number entering full time work rose by 24000 whilst for men the number actually declined by 12000. Comparing with the start of the recession in 2008, employees in full time employment has not moved much at all. So where has the reported rise in employment come from? The rise in employment across the UK has been dominated by the rise in part time work and in self-employment. If individuals choose to work part time or prefer self-employment to being a job holder, then this phenomenon of increase in part time and self-employed work is not particularly worrying. However, it is legitimate to question how common that is. Or is it the case that those who lost full time jobs in the recession have given up trying to find prime jobs and have been forced to accept part time work or try their hand at self- employment? We simply do not have the data to separate these competing explanations. Without a richer data base we are floundering. One of our top priorities has got to be to create a socially meaningful data base about work.

7. Are we prepared for the energy challenges of the future?

No modern society can thrive without sources of power. The recent closure of Scotland’s last coal fired power station in Fife has brought this issue to the forefront. What kind of power industry do we want? The production of renewable energy in Scotland is an issue that has come to the fore in technical, economic, and political terms during the opening years of the 21st century. Scotland’s natural resource base for renewable energy is extraordinary by European, and even global standards, with the most important potential sources being wind, wave, and tide. Although much progress has been made, (nearly 50% per cent of Scotland’s electricity came from renewables in 2014) much more remains to be done. Once again a full and comprehensive investigation of what the hold ups to progress are and how to overcome them must become part of our national conversation. Can we rely solely on wind, wave and tide power or must we supplement with other more conventional sources even in the long term? And if the latter, how do we ensure the greening of the production process? Can the market mechanism be relied on to gradually increase the share of renewable energy? What more needs to be done to make us major exporters of green energy?

8. Do we have a plan to address the problem of Scotland’s under-utilised land?

The other resource in which Scotland is very blessed is land. Driving through Scotland one cannot help but notice vast areas of under-utilised land. This under-utilised land mirrors the under-utilised labour that unemployment represents. What potential is there for these two components to be brought together in a socially productive way? There are major difficulties to be overcome. Much of the rural land is privately owned. How are the owners to be persuaded to join in a social enterprise with a workforce coming from the cities? Equally, how are city dwellers – whether unemployed or on low pay- to be persuaded to forsake bright city lights for a rural existence? Clearly the market mechanism will not achieve this. Is the cooperative a good model for such ventures? What goods might rural cooperative ventures produce? Food perhaps, or maybe green energy? Once again, we seem to be without a co-ordinating mechanism to bring potential partners together.

9. Do we need a national bank to encourage saving?

One of the biggest issues facing virtually all countries in the West is how to deal with income provision for older people who have retired from work. For most of us in Scotland there is almost no market incentive to save for the future because the interest rate offered by banks is less than the inflation rate. One idea worth discussing is the creation of a national bank which offers small savers a rate of interest higher than the rate of inflation. How would this bank get the funds? It should consider investing in private companies, property etc. By spreading investment over several different projects the National Bank would diversify risk in a way that an individual cannot. The profits such a bank generates can be further utilised in social investment projects.

10. What plan do we have to address extortionate house prices?

Perhaps the most pernicious aspect of market driven prices is house prices. An average house in Edinburgh today costs PS 238000 according to Rightmove. Balance that against a per capita GDP of PS 26,400 – which can be taken as a rough measure of average income. The house price to income ratio is thus 9 to 1! Banks will typically lend about 3 times salary, so how does anyone young on an average salary get a house in Edinburgh? This problem is not unique to Scotland- it’s pretty much a UK wide problem. Forty years ago when I bought my first house in the UK, this house price to income ratio for me was a manageable 3:1. Clearly a solution to this escalating ratio has to be found. A solution on the supply of housing is needed. For local councils or the government to do this, initial seed finance will be necessary. Thereafter there are many options to consider ranging from the traditional council owned property with tenants to some form of shared ownership between tenants and the council. Ultimately what we want is a scheme whereby both the tenants and the council have incentives to maintain the property well and that the council receives enough money from the arrangement to fund the next round of social housing construction. For example, under joint ownership the council will get a share of the capital gain when the property is sold; this capital gain gets ploughed back into the social housing construction fund which finances more new build social housing. There is no doubt scope for other more complicated schemes.

11. How, in economic terms, do we manage the constitutional transition to fiscal autonomy?

As a nation, we are already on the road to fiscal autonomy albeit in steps. Full independence would of course secure full fiscal autonomy immediately. Fiscal autonomy represents a massive opportunity for Scotland. I take it that this would mean the eventual end of block funding (Barnett) from Westminster enabling us in Scotland to have our own tax and welfare regime. There are some questions which arise from this prospect.

How large is our tax base? Will we have the right to levy income tax on all those resident in Scotland (regardless of where their income is earned)? Or will we have the right to levy income tax on all those whose labour activity is in Scotland – what we might call Scottish workers (regardless of where they live). How large is the gap between these two tax bases? The National Income accounts suggest a large difference. The same distinction between Scottish residents and Scottish workers applies to capital gains tax and inheritance tax too.

With corporation tax is the basis to be where the “factory gate” is located or is it to be whether the relevant corporation has its registered address in Scotland or not? This again would make a difference. What proportion of Scottish GDP is generated by Scottish based companies?

In this context, I imagine VAT would be levied on all activity taking place in Scotland. But what about excise taxes, duties etc.? Would we get a share of these UK wide taxes? In the same vein, would we face a bill for those services provided by Westminster, e.g. defence, security etc?

Finally, how are budget deficits to be handled? If the Scottish government needs to issue bonds to finance deficits, who will underwrite them? The UK Treasury? The Bank of England?

12. How do we create an economy where the market works for the common good?

Much of the discussion above has centred around the creation of new institutions – a pay council, a national investment bank, a social data base, a social housing construction fund, a green energy council etc. The objective is not to replace the market but to manage it. A market can only operate in a particular context. At present that context in Scotland is one dominated by massive inequality of income, wealth and power. But whilst the market reinforces the inequality it does not by itself create it. Private property and inheritance are seen as sacrosanct in our society. The slightest talk of raising tax is greeted by horror in the press. If we could find a way of recognising the importance of shared social ownership sitting alongside private ownership, and of reducing inequality in access to resources, then the market would be a useful tool in the reconstruction of a new progressive Scotland. It is a big challenge and it necessarily involves us the people having a louder voice. Should we not ask for that voice now?

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