Download letter to the Chancellor

Rt Hon Alistair Darling MP
Chancellor of the Exchequer
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
Dear
A Budget for Growth and Jobs
My purpose in writing is to provide you with the STUC’s thoughts in advance of the
Budget statement on 24 March.
The STUC continues to be extremely concerned over the impact of the recession on
Scotland’s workers and communities. We strongly caution against early cuts in public
expenditure which would surely guarantee a repeat of the mistakes of past
recessions; recessions which together with the disastrous labour market policies that
accompanied them left Scotland with a legacy of lives ruined by persistent economic
inactivity and communities decimated by the hollowing out of our industrial core.
Scotland continues to pay a very high human and economic price for these policy
errors.
The Scottish economy
As you are very well aware, the impact on the Scottish economy and labour market
of the longest and deepest recession since the 1930s has been severe:
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Output in Scotland has declined by 6.13% compared to a fall of 5.73% in the
rest of the UK;
Financial services output has declined by 18.16%;
Manufacturing output has declined by 11.28%; and,
Construction output has declined by 13.08%.
To date, the labour market has not suffered on a level consonant with the fall in
output. Nevertheless the impact on Scottish workers has been dramatic:
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Claimant count unemployment has nearly doubled since January 2008 –
rising from 74,000 rising to 145,000 in January 2010;
ILO unemployment increased by 65,000 over the year from Oct-Dec 2008 to
Oct-Dec 2009 – an increase of 46%;
Underemployment has also risen significantly; a fact often overlooked in
media analysis of the recession’s impact. Over the year to June 2009 13,000
more workers (representing a rise of 21%) were working in part-time jobs
because they are unable to find a full-time position. Over the same period
4000 more workers (representing a rise of 12%) were working in temporary
positions because they could find permanent employment.
The STUC acknowledges that the impact would undoubtedly have been very much
worse without the unprecedented monetary response and the much more modest
fiscal stimulus introduced in the PBR 2008. Together with the Government’s quick
action to stabilize the banking sector, these measures prevented the recession
turning into a depression.
However, any recovery (we will not know until next month whether Scotland has
indeed followed the UK out of recession) is likely to prolonged and very fragile.
Output and employment are unlikely to return to pre-crisis levels until at least the
middle part of this decade. It is entirely feasible that unemployment will continue to
rise through and potentially beyond the 2010/11 Budget period. The STUC notes
across the G20 nations, only the UK, South Africa and Argentina will withdraw fiscal
stimulus measures over 2010.
A number of recent studies have demonstrated that household, firm and state
deleveraging will continue to place a drag on the economy for some considerable
time. Combined with a highly uncertain global economic outlook, very low levels of
business investment, high unemployment and low internal demand, the suspension
of quantitative easing and continuing problems with the availability and cost of credit
to small firms, the challenges facing the economy remain profound.
Therefore, the STUC’s key message to you in advance of the Budget announcement
is that, with the economy in such a fragile state, now is not the time to embark on a
programme of public spending cuts.
The deficit
Since Budget 2009 was announced, economic debate has largely been framed in
the context of the UK’s growing deficit and stock of public debt. And it matters how
the debate is framed. The STUC believes that the UK’s current economic challenges
are first and foremost an unemployment crisis and a revenue crisis.
With consumer spending and business investment so very weak, these challenges
can only be addressed through Government intervention to support demand. Of
course the Government has to be mindful of the demand for, and the price it must
pay for its bonds. Yes, the Budget should set out a credible path towards fiscal
consolidation. But there are currently no signs (beyond the very early warning shots
of discredited rating agencies) that the UK Government will struggle to sell its debt.
Recent gilt auctions have been oversubscribed.
Cutting public spending in the current circumstances could push the economy over
the edge. Introducing cuts now, will curtail any nascent recovery, restrict job
opportunities and lay the grounds for huge costs in the years ahead, given the
impact of extended periods of unemployment on individuals, families and
communities. Slashing public spending may help reduce the deficit in the short-term
but it will almost certainly hamper longer-term budgetary stabilization through the
increase in social spending inevitably resulting from a cuts first agenda.
In addressing the UK’s current economic challenges – which continue to be very
substantial – the STUC notes the following:
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Advocates of immediate debt reduction have been perfectly content in the
past to jeopardize the UK’s fiscal position by their support for the incurring of
unfunded liabilities for military operations abroad and/or through tax cuts for
the rich i.e. Inheritance Tax. The STUC notes that panic only appears to set in
when deficits rise to support the economic security of ordinary working
people;
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The present and future costs associated with cutting Government spending
when unemployment is rising are rarely mentioned in the public debate over
the deficit. The figures show that business investment has been slashed over
the past 2 years; not only on capital assets but also intangible investments
such as product development and skills training. This and the impact of higher
unemployment will reduce the economy’s potential for years to come. This is
why Government spending to fill the output gap is so necessary.
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The cheerleaders for immediate deficit reduction also bemoan the impact of
higher deficits (in the shape of higher future taxation) on young people.
However, the STUC believes that anyone who is genuinely concerned about
the prospects of young people will argue for more Government spending to
create jobs. The evidence is clear – the burden of higher unemployment falls
disproportionately on young workers with entrants to the labour market in
years of higher unemployment suffering permanent career damage.
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In any case, it is far from certain that higher taxes will be required in the future
to pay for stimulus spending now. Spending more on recovery will lead to a
stronger economy – and a stronger economy means more government
revenue.
We also believe there is much the Treasury can do to maximise income by taxing
high earners and companies fairly and cracking down on evasion and avoidance. A
redesign of the taxation system, one aimed at embedding progressivity, will have
wider economic benefits. As the Nobel Prize winner Joseph Stiglitz has recently
argued, ‘well designed taxes on the financial sector might help alleviate problems
caused by excessive leverage and banks that are too big to fail. Taxes on
speculative activity might encourage banks to focus even greater attention in
providing their key societal role of providing credit’.
Rebuilding Collective Prosperity
As the STUC finalised this letter, research was published which revealed that the UK
has the lowest levels of social mobility in the OECD. This is yet another
manifestation of the failure of unregulated financial capitalism to deliver benefits to
workers across the economy. As the STUC consistently points out, the ‘financialised’
economic model which imploded so spectacularly in 2008, delivered modest GDP
and productivity growth compared to the era of managed capitalism which preceded
it. It did however deliver an exponential growth in income and wealth inequality and,
as revealed by the OECD today, it lowered social mobility.
Budget 2010 must therefore be constructed with the aim of increasing the pace of
change towards a fairer and more sustainable economic and social model. The
STUC believes that the measures we outlined in our submission to you last
November in advance of the Pre Budget Report (copy enclosed for ease of
reference) remain very relevant. These included:
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The introduce a short-time wage/training subsidy initiative to keep workers in
jobs and to upskill for the recovery;
The extend of the Future Jobs Fund to provide a place for every young person
who needs it;
An increase in out of work benefits and tax credits to help those hit hardest by
recession and to boost demand;
A reversal of the cuts in public service spending proposed in Budget 2009;
and,
Investing in a public works programme focused on house building and
investment in green jobs.
I encourage you to look positively at introducing such measures in Budget 2010 and
look forward to discussing these matters with you directly in due course. Copies of
this letter have been sent to Jim Murphy and Ann McKechin at the Scotland Office.
With very best wishes
Grahame Smith