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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: 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: 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: 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; 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. 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. 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: 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