You are here >

STUC Budget 2008 Submission

STUC February 2008

Summary of Recommendations

In recent years, the STUC’s annual Budget Submission has recommended action in a wide range of areas: the environment, productivity, science and innovation, women and work, welfare reform, manufacturing, pensions, public services and regulation. In its 2008 submission, the STUC has deliberately confined its detailed comments to two key issues: taxation and public sector pay.

Key recommendations include:

1 Budget 2008 should aim to establish a fair fiscal framework which:

Is truly progressive, ensuring that all income taxes have progressive rates and that indirect taxes operate with exemptions to assist the poor;
Ensures that the capital gains tax regime does not offer significant tax incentives when compared to income taxes;
Includes fair and proportionate inheritance taxes;
Removes allowances only available to the wealthy.

2 Inheritance Tax - Budget 2008 should clearly set out why Inheritance Tax is a key component of a fair taxation system. The priority for reform should be closing the loopholes used by the super-wealthy rather than increasing thresholds at the bottom end. The rates should also be made much more progressive.

3 Capital Gains Tax - A key problem in the current fiscal framework is the different top rates charged for capital gains and income. As long as this remains the case, tax avoidance will increase as accountants seek to tax income as capital. The Chancellor should ignore employer lobbying and instead tweak the original PBR proposals in order to increase incentives for long-term asset holding rather than speculation and encourage genuine venture capital and business start ups.

4 The STUC believes that a National Commission on the Distribution of Wealth and Income is required to consider the type of fiscal framework necessary to fund the requirements of a mature western democracy in the 21st century.

5 Public Sector Pay - The Government’s public sector pay policy is unfair, is based on questionable assumptions, and must be revised urgently. Budget 08 provides an opportunity for a fresh start. Whatever has happened up until now, the STUC calls on the Chancellor to use this Budget for a new approach to public sector pay. Central to this approach must be full respect by the Government for the integrity of independent pay review bodies.

INTRODUCTION

The STUC represents some six hundred and thirty thousand workers across Scotland, the members of our affiliated trade unions.

We speak for trade members and their families in and out of work, in the community and in the workplace. Our affiliated trade unions have interests in all sectors of the economy.

The following submission sets out our current assessment of the Scottish economy, our comments on aspects of the Pre Budget Report (PBR) and some of our key priorities for the 2008 Budget and for Government action generally.

The STUC continues to believe that Scotland is well placed to meet the challenges of the global economy. In many ways, Scotland has coped remarkably well with massive industrial restructuring over the past three decades. However, current evidence is that we are making insufficient progress towards the creation of an economic and social framework that is wholly fit for purpose. If Scotland’s success in the global economy is to be assured, it is vital that substantial progress is made in achieving the twin aims of raising productivity and reducing inequality.

The risks to growth in Scotland and beyond in 2008 are widely identified and do not require to be rehearsed again here. Current statistical evidence is mixed. On balance and contrary to conventional wisdom it does not tend towards a recession in 2008. However, it is clear that the Anglo-Saxon model so heavily reliant on deregulated financial services, the accumulation of consumer debt and soaraway house prices will at the very least struggle to maintain the growth rates of the past decade.

This will undoubtedly exacerbate the economic insecurity of ordinary workers; a core and apparently intractable feature of the global economy. House price inflation, high interest rates and rising energy costs all continue to have a real impact on incomes at a time when job security particularly in manufacturing and financial services is weakening.

The STUC hopes that the Government has observed a particular irony of the recent economic turbulence: that the plight of such pillars of international finance as Citigroup, Merrill lynch, UBS and Barclays is attributable to the system – unregulated market capitalism - they espouse and have vigorously defended. It is doubly ironic that these organisations now find themselves being bailed out by sovereign wealth funds such as the Government of Singapore Investment Corporation, China Investment Corporation, Abu Dhabi Investment Authority and the Kuwait Investment Authority. These are Government bodies doing exactly what global finance has always lectured governments not to do. Perhaps it is time that Governments adopted a less obsequious posture when listening to the views of the global financial elite.

One key issue that global finance has lectured nation states on is the need to reduce corporate taxation. Their success may have contributed to profitability in services reaching a forty year high but it has also ensured that Government fails to gather a fair slice of the cake.

THE SCOTTISH ECONOMY

The STUC does not underestimate the long-term challenges facing the Scottish economy or the current factors, such as the ongoing decline in manufacturing and the apparently intractable problem of pockets of high economic inactivity, that restrict our economic performance. This submission seeks to be realistic about Scotland’s current performance which, in terms of jobs and growth, is generally positive: - GDP rose by 2.3 per cent annually and increased by 0.9 per cent over the second quarter of 2007 (seasonally adjusted). This compares to UK figures which show that GDP rose by 3.1 per cent over the year to the end of 2007 Q2 and by 0.8 per cent over the quarter. However, recent reports do reflect growing uncertainty:

Royal Bank of Scotland’s Purchasing Managers’ Index for January 2008 “signaled a slight improvement in the rate of growth of private sector output at the end of the year, but still the second weakest expansion for almost three years. New business growth remained moderate and the volume of outstanding business continued to decline, indicative of spare capacity. The latest anecdotal evidence suggested that subdued growth reflected the continuation of tough trading conditions as 2007 drew to a close”.
Bank of Scotland Monthly Labour Market Survey, December 2007, reported that ‘Scotland’s labour market continued to cool last month, hitting its lowest level of activity for almost three years. The report's labour market barometer slipped from 58.9 in October to 56.4 in November – its lowest level for 34 months. It was the fifth successive monthly decline, although a figure above 50 still denotes expansion. November's index was marginally below the equivalent measure for the wider UK economy for the second consecutive month.

The Scottish Labour Market

Overall, the Scottish labour market continues to perform well with employment at historically high levels and Scotland has, to date, avoided the small upward trend in unemployment which has affected England over the last couple of years. The latest labour market statistics reveal that the trend in the employment rate may be starting to level off and the rate in the latest period is not significantly different to a year ago. The trend in the unemployment rate may be levelling off after decreasing and the rate in the latest period is not significantly different from a year ago.

The data for the three months to December 2006 records the employment rate as 76.4% up 1.1 percentage points on a year ago. The seasonally adjusted unemployment rate was 4.9%, down 0.3% on the same period a year earlier.

Whilst employment levels are high, some regions, such as Dundee City, East and North Ayrshire, Glasgow City, West Dunbartonshire and Inverclyde, experienced levels of unemployment of over 3% for claimant count unemployment as a percentage of the working age population. This compares to 2.6% for Scotland and 2.5% for the UK as a whole.

Although the statistics for economic inactivity for Scotland compare favourably with the UK as a whole, this masks the ongoing problem of areas, particularly though not exclusively, west central Scotland, where inactivity remains persistently high. The number of 16-19 year olds not in employment, education or training (NEET) was approximately 32,000 in 2006 which equates to 12.4% of the 16-19 year old population. The proportion NEET in Scotland has not significantly changed in any year since 1996 with the proportion fluctuating between 12% and 15%. Other groups in society continue to be under-represented in the labour market:

Disabled people – the employment rate is 47.4%, dropping to an average of 27.1% in the most deprived areas (bottom 15%);
Minority Ethnic people – an employment rate of only 60.9% compared to 76.2% for white residents;
Lone Parents – employment rate of 56.5% dropping to an average of 38.9% in the most deprived areas;
People aged over 50 – employment rate of 70.1% but dropping to just 47.2% in the most deprived areas.

The historically high levels of employment are to be welcomed but Scotland, in the face of demographic change, the under representation of the above groups in the labour market must be addressed. The recent influx of migrant workers cannot be relied on to sustain the Scottish economy indefinitely.

Earnings

In 2006 the median gross annual full-time income in Scotland was £22,603, up from £21,312 in 2005. However, earnings differ considerably by type of occupation. Managers and senior officials and Professional Occupations have the highest median income FT income earnings at £32,935 and £32,040 respectively. The occupation group with the lowest median FT earnings is the Sales and Customer Services Occupations group at just £13,391. All occupation groups saw an increase in earnings between 2005 and 2006, however, it should be noted that this does not take account of cost of living increases.

In 2006 Scotland was ranked 4th out of the GB regions in terms of median FT earnings. The highest earnings were in London at £30, 587 and the lowest in the North East at £20,774.

The positive headline figures obscure less welcome news: there is a large regional variation – from £491.90 in West Dunbartonshire to £362.40 in Moray – and progress on the Gender Pay Gap is painfully slow. The latest figures are particularly worrying: the gender pay gap for mean full-time hourly pay in Scotland rose from 14% to 15.9% over the year to December 2007. For mean part-time females compared with mean full-time males the gap remained at 35%.

STUC Priorities

Taxation

Taxation is currently as prominent a political issue as it has been for a couple of decades. This is hardly surprising: there has been a deliberate attempt by many in politics and the media to distort the issues and underlying evidence. This is particularly true on the two issues on which coverage of the PBR focused: the proposed changes to Inheritance Tax and the simplification of the Capital Gains Tax regime.

The STUC believes that the PBR was, once again, a missed opportunity to address the complexity and manifest unfairness in the UK taxation framework. A fair and progressive tax system must be a key element of any viable attempt to address the massive inequality that persists in Britain. The failure to collect a fair tax contribution from super-wealthy individuals and corporations is unsustainable if sufficient investment in public services is to be maintained.

The success of corporations and the super rich in convincing Governments around the world that increasing the concentration of wealth in their hands benefits all of us is extraordinary. The durability of the trickle down philosophy is attributable to a radical but cleverly managed partnership between sections of the political and media classes particularly in the US and UK. It is certainly not attributable to a sound evidential base – academic economists have thoroughly debunked the case for continuing tax cuts for the wealthy as an economic stimulus.

At a time when the income of ordinary people is being squeezed in every direction, it is right to seriously examine just what has gone wrong with taxation policy in the UK. Wages have barely kept pace with the rate of inflation. The pre-tax annual median income of full-time UK workers is around £23,674 and some 25% of full-time employees earn less than £17,000 a year. Millions of workers are not even paid the minimum wage that they are entitled to. Buying a house is a virtual impossibility for many if not most workers. The poorest fifth of UK households pay 36.4% of their income in taxes: 9.5% in direct taxes and 26.9% in indirect taxes. The top fifth pay 35.5% of their income in taxes: 24.7% in direct taxes and 10.8% in indirect taxes.

It is disappointing if not, sadly, too surprising that despite the super-rich continuing to accumulate wealth on a gargantuan scale, mainstream political efforts to curb this massive upwards redistribution are conspicuous by their absence.

The competitiveness agenda is wheeled out time and time again to explain why corporations and wealthy individuals cannot be taxed fairly. This reflects a worrying fracture in the relationship between state and markets. In the past, it was widely accepted that a balance could be struck between the demands of economic growth and of social protection because the nation state was in a powerful position to impose effective regulation. But globalisation is generally believed to have shattered that balance. The consequence is that the benefits of growth increasingly accrue to corporations whilst responsibility for funding vital public services increasingly falls on the ordinary worker.

Fairness and Business Taxation

It is frustrating that in the early years of the 21st century, the case for fair taxation of business still has to be made. The global drive to reduce corporate taxation has the most powerful of supporters but is not widely perceived to be a threat to the sustainability of mature western democracies. As the economist Paul Krugman has written of the Bush administration,

“If you take the administration’s tax proposals as a group, they effectively achieve a long-standing goal of the radical right: an end to all taxes on income from capital, moving us to a system in which only wages are taxed – a system, if you like, in which income is taxed but unearned income is not”.

Those who campaign for reductions in business taxation are guilty of the displaying hypocrisy and inconsistency. The PBR’s plans for simplification of CGT met with unfounded and often quite hysterical objections. Exaggeration and distortion of the nature and scale of business taxation is endemic and the positive case for business taxation is hardly ever promoted in the public realm.

As Richard Murphy, Director of Tax Research LLC, succinctly puts it:

"Tax is not a cost to a company. It is a distribution out of profits. That puts tax in the same category as a dividend - it is a return to the stakeholders in the enterprise….This reflects the fact that companies do not make profit merely by using investors’ capital. They also use the societies in which they operate, whether that is the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their property rights. Tax is the return due on this investment by society from which companies benefit."

It used to be generally understood that corporations earn their “social license to operate” insofar as they contribute to the general good of the societies in which they exist. This now appears to be a quaint and unrealistic ambition.

Tax avoidance is a major and growing problem in the UK. Those who deliberately avoid paying fair taxation are guilty of ignoring basic standards of fairness. Corporations are able to generate profits because they have access to our markets, and make use of our workforce, legal system and transport system. Basic fairness therefore dictates that corporations have responsibilities to society, and the very minimum of meeting those responsibilities should be meeting the full tax contribution.

And the success of UK Businesses in avoiding taxes altogether is extraordinary:

National Audit Office found that one third of the UK’s top 700 companies paid no corporation tax in the last financial year.
Del Monte, Chiquita and Dole sold over £400 million worth of bananas in Britain last year. Yet these three corporations between them paid only £128,000 tax in the UK.
Saga/AA – on the announcement of their merger in July 2007 it was found that the Private Equity owned businesses Saga and the AA, incurred no liability for corporation tax in the previous year. Indeed, in the 2 ½ years of ownership by private equity they paid almost zero corporation tax. In the same period, the private equity owners of these businesses – Permira, CVC and Charterhouse – generated profits of £2.5bn.

What is really required here is a culture change where firms accept they responsibilities to nation states in which they operate and in which they make profits.

The Budget can assist by making the case for a fair fiscal framework which:

Is truly progressive, ensuring that all income taxes have progressive rates and that indirect taxes operate with exemptions to assist the poor;
Ensures that the capital gains tax regime does not offer significant tax incentives when compared to income taxes;
Includes fair and proportionate inheritance taxes;
Removes allowances only available to the wealthy.

Inheritance Tax

The issue of Inheritance Tax (IHT) has become something of a cause célèbre for the right-wing press. The STUC has been dismayed that no mainstream political party and very few individual politicians have sought to highlight the positive case for retention of a fair rate of IHT by explaining its key role in a progressive taxation framework. It is a myth that IHT now affects ordinary working families and the impact on the middle classes is also grossly exaggerated.

Will Hutton recently wrote:

“Every civilisation has wrestled with what to do about inherited property. The human impulse to pass on what you own to your heirs is one of the most primeval and elemental of all. But allowing too few families to concentrate property ownership and thus deny the prospect to others is pernicious. It creates an unfair aristocracy of the propertied that ultimately undermines the legitimacy of the very idea of property”.

The momentum in favour of ‘reforming’ (a euphemism for ‘reducing’) is not underpinned by any analysis linking light IHT with innovation, entrepreneurship or quality business start-ups. Of course, the opposite is true. Easy access to unearned wealth destroys the incentive to work and to experiment – one of the reasons the wiser among the super-wealthys are generally careful to limit the money they leave their children. The 120 billionaires campaigning against the elimination of inheritance tax in the US take the same view.

The STUC believes that decisions must be taken on the basis of the evidence not the shrill campaigning of the right-wing press. Of the value of all inherited property in Britain, only around 6% is paid in tax. This is less than in most other countries and much less than was paid even 25 years ago. Whilst this does suggest that the IHT regime should be revisited it does not necessarily imply that the imperative should be an increase in thresholds.

Although the percentage contribution has fallen the yield has increased due to house price inflation and it is a concern that 70% of the take is paid by people inheriting estates of half a million pounds or less. This suggests that the priority for Government should be closing the loopholes used by the super-wealthy rather than increasing thresholds at the bottom end. The rates should also be made much more progressive.

The STUC believes that IHT helps to:

Promote social mobility;
Create opportunity;
Limit entrenched advantage; and,
Redistribute wealth in a fair and effective fashion.

This should be reflected in the Budget report.

Capital gains

The STUC was disappointed by the Chancellor’s recent decision to amend the proposals contained in the PBR to reform Capital Gains Tax. The campaign waged by the employer representative organisations was entirely out of step with the strength of the proposals.

A key problem in the current fiscal framework is the different top rates charged for capital gains and income. As long as this remains the case, tax avoidance will increase as accountants seek to tax income as capital. The changes proposed in the PBR were important for three main reasons:

They radically simplify a complicated tax regime – we are consistently told that the business community seeks simplification;
They acknowledge that under the current regime some individuals are paying very small levels of tax on very considerable gains; and
They represent an important response to public concern over the very low tax paid by private equity partners on their carried interest returns.

However, the STUC believes these proposals could have been improved to increase incentives for long-term asset holding rather than speculation and encourage genuine venture capital and business start ups. Tweaking the proposals would also limit opportunities for tax avoidance which arise where there are differentials between capital gains and income tax top rates.

To achieve this the STUC proposes:

All gains on disposal of business assets should be charged at 18% as proposed in the PBR but with a 1% reduction in this charge for every year the asset has been held until a charge of 10% is reached.
Shares held under SAYE and other share incentive schemes open to all employees of a company should be considered business assets for CGT purposes, so preserving a valuable benefit for these incentives.
All gains on the disposal of non-business assets should be charged at 18% as proposed in the PBR but with the refinement that any part of the gain that would have caused the taxpayer to pay income tax at above the basic rate if the gain had been liable to income tax, will instead be charged at 40% subject to a 2% reduction on the 40% rate for each year that an asset is held until a rate of 18% is charged on the gain in its entirety.
The arrangement with the British Venture Capital Association, under which returns to the carried interests of private equity partners are treated as capital gains for tax purposes should continue, but only in respect of those funds that restrict their total investment in any one company to £5 million or below. This will ensure that this beneficial tax arrangement only applies to genuine venture and start-up capital investments where the risk involved justifies this treatment. Carried interest on larger investments should be treated as income for tax purposes.
To prevent abuse of these measures, we suggest that any scheme which is designed to convert income into a capital gain purely for the purpose of avoiding tax would be declared null and void.

We believe these measures will prove progressive, will encourage enterprise and longer term investment and will ensure that Britain still has one of the most competitive CGT regimes in the world. The regime also remains considerably simpler than the current CGT rules.

In addition, although our refinements propose a relief for length of asset holding, we believe this will be offset by the higher 40% rate for non-business assets and the anti-avoidance measure and will, therefore, ensure that your proposals remain revenue positive for public funds.

Public sector pay

The Government’s public sector pay policy is unfair, is based on questionable assumptions, and must be revised urgently.

PBR 07 describes recent inflation, and its causes, in some detail:

“Over the recent past, inflation has been boosted by temporary, unforeseen shocks: increases in energy prices, driven by developments in the oil market and, in particular, a tight wholesale gas market during late 2005 and early 2006. On top of this, food price inflation was pushed higher by the effects of the unusually hot UK summer in 2006 and, more recently, global supply and demand pressures.

“Seasonal food and energy price inflation rates tend to be more volatile than headline inflation. Stripping out these short-term influences, underlying ‘core’ inflation (excluding energy and seasonal food) has remained low and generally under 2 per cent.”

It is notable that nowhere in this description of recent inflation is there any mention of pay, and certainly not public sector pay.

In its inflation report for November 2007, the Bank of England says:

“CPI inflation reached 1.8 per cent in September, 1.3 percentage points below its March peak. Much of that fall was accounted for by lower domestic energy price inflation, though movements in food and household goods prices also played a part. CPI inflation is likely to pick up again over the next year, mainly reflecting increases in energy prices”.

Once again, mention of public sector pay, in relation to inflation, is notable by its absence.

Yet, in Budget 07, the Treasury said:

“Over the 2007 CSR period controlling pay spending will be essential in delivering value for money from public spending and keeping inflationary pressures in check. The Government has made clear that pay settlements must be consistent with the achievement of the CPI inflation target of 2 per cent and demonstrated this commitment by announcing on 1 March 2007 that the overall headline awards for Pay Review Body groups in 2007-08 are to be less than the two per cent inflation target, averaging 1.9 per cent, the lowest level of awards in over 10 years.”

Budget 07 argues that the Government’s public sector pay policy is “essential” to keeping inflationary pressures in check, whilst PBR 07 makes no link with public sector pay when explaining higher inflation in 2007. Yet in an interview with The Observer on Sunday 6 January, the Prime Minister was even more expansive on his belief in a link between inflation, interest rates and public sector pay:

“And why am I saying that Britain is better placed because I believe we have an economic resilience that we perhaps did not have ten, fifteen or twenty years ago. And why is that the case? It’s because we’ve got inflation low. Now these were very difficult decisions we made at the beginning of the last year on public sector pay and they were not popular decisions because they were long-term decisions about the stability of the economy. And so to stage the public pay awards sent a signal and it’s unfortunate because I would like to have given the police more, nurses more. I’d like to have given the prison officers, and the teachers and others more.

“But our decision to stage the public sector pay award means that inflation fell in Britain and we managed to bring interest rates [down] in the last, the last few weeks.”

Gordon Brown’s belief in a link between public sector pay and inflation is flatly contradicted by a number of respected economists in an article in the Financial Times on 10 January 2008. Among them, Stephen Nickell, head of Nuffield College, Oxford, and a specialist in labour economics, says: “They [public sector pay rises] have nothing to do with inflation.” Martin Weale, Director of the National Institute of Economic and Social Research, argues that, because nurses and teachers do not sell their services in the high street, a rise in wages does not lead to higher unit prices. George Buckley, UK economist at Deutsche Bank, notes that private sector employment dwarfs that of the public sector, so it is difficult to make the case for a spillover effect.

It is important to make four further points about the Government’s public sector pay policy. First, the staging of the 1.9 per cent increase over two years, referred to in the Prime Minister’s comments quoted above, made workers even worse off. Second, the Government’s public sector pay target is based on its CPI inflation target of two per cent, even though CPI does not include significant outgoings such as housing costs and council tax. RPI, running at 4.1 per cent in January 2008, is a better guide to the costs faced by most working people. Third, the pay policy is based on the Government’s inflation target, not its record of achieving that target. For much of 2007, CPI was above two per cent. The CBI expects it to rise above two per cent again in 2008, as does the Governor of the Bank of England. If that happens, and public sector workers have their pay increase based on the CPI target, they are, once again, suffering a real terms pay cut.

The fourth point is this: in our view, limiting public sector pay has less to do with controlling inflation and more to do with meeting the Government’s fiscal rules. For this reason, we need an open debate about the best ways to meet those rules. Policy instruments might include, for example, changes to tax arrangements. Such an approach would be preferable to cutting public sector pay behind the smokescreen of rising inflation. Public sector workers should enjoy rises of no less than the retail price index, in order that the real costs that they face are fully reflected in they pay and they suffer no loss of living standards.

The Government’s public sector pay policy provides much pain but no gain. It causes real financial hardship to public sector workers, such as teachers and nurses. It damages morale in the public services, which can ultimately lead to workers leaving their professions altogether. And it loses political goodwill for the government from workers, many of whom are instinctively supportive of a Labour Government.

Budget 08 provides an opportunity for a fresh start. Whatever has happened up until now, the STUC calls on the Chancellor to use this Budget for a new approach to public sector pay. Central to this approach must be full respect by the Government for the integrity of independent pay review bodies.

Conclusion

The STUC believes that a National Commission on the Distribution of Wealth and Income is required to consider the type of fiscal framework necessary to fund the requirements of a mature western democracy in the 21st century.

The STUC is committed to a Scotland where the proceeds of economic growth are broadly shared with those who create that growth each day of their working lives. A successful economy is underpinned by a strong, cohesive society. To achieve this society, it is first necessary to reconnect a growing, innovative economy to the living standards of all.

The STUC also believes that a crucial first step is to establish a fiscal framework that is truly fit for purpose. The system is currently failing workers, particularly the low paid, and the complex and opaque business tax regime provides too many opportunities for evasion and avoidance.

The anticipated economic downturn also calls for a boost in the income of those at the bottom of the pyramid. This has beneficial effects for the whole community. Ordinary people spend their money on everyday items and this has a greater multiplier effect on the entire economy. Yet the Government’s solution is to force ordinary public service workers to accept a wage increase of just 2%; a real cut in their spending power. Such policies are likely to hasten a recession, exacerbate income inequalities, increase social tensions and also make it impossible to meet government targets for reducing child poverty.

Copyright

STUC February 2008