John Swinney: It’s not that we’re waiting for austerity to come – it’s here and it’s reactivated

There was little fanfare on the third anniversary of the UK leaving the European Union, no waving of flags, few politicians talking about taking back control. Instead, a report from the International Monetary Fund (IMF) predicted the UK economy will shrink in 2023 and perform worse than other advanced economies. Those other advanced economies include Russia, an international pariah that is subject to a host of economic sanctions.

The IMF’s report didn’t explicitly reference Brexit, and economists are divided over the impact that leaving the EU has had on the British economy. But while the IMF’s predictions are just that, the UK economy appears to be an outlier amid the continuing impact of high energy prices, rising mortgage costs, and increased taxes.

And its high earners in Scotland who are among the biggest payers of tax in the UK. During his Budget statement in December, John Swinney announced plans that will see everyone earning over £43,662 pay more tax from April. The higher rate of tax will increase from 41p to 42p in the pound, while the top rate will go from 46p to 47p. Delivering his statement in parliament, Swinney said he was doing so in the “most turbulent economic and financial context most people can remember”. 

In truth, the raising of income tax is one of the few economic levers Swinney has at his disposal to find money for public services. The Institute for Fiscal Studies (IFS), a think tank, has warned that increasing health spending to meet rising costs and demand and boosting spending to meet net zero commitments could lead to cuts of around 13 per cent to other public services between 2023 and 2027. 

Last year, Audit Scotland said the Scottish Government was at risk of overspending its budget for the first time in the devolution era, something Swinney confirmed to MSPs earlier this month when he said he was “wrestling” with an overspend of around £100m. While the Scottish Government might like to walk a different ideological path from its UK counterpart, there may be very little wriggle room for it to do so.

“If we take the outlook over the next four years, the first two years on the public finances and available public expenditure are not as grim as the latter two years,” Swinney says.

“On public expenditure, we have a two-year period in which we can, to some extent, adapt to a much tighter climate that is likely to follow.”

But he’s realistic that across the whole four-year period, the situation is going to be “very challenging” for individual households as inflation continues to bite. 

“A climate of high inflation and an erosion of the public finances is difficult circumstances. It’s that combination of difficult economic circumstances, constraining public finances, and the much higher cost of finance. These are a difficult confluence of circumstances.”

I ask about whether he’s worried about the UK Government defaulting back into austerity mode similar to that adopted by then Chancellor George Osborne following the 2008 financial crash.
“That’s what the next four years look like,” Swinney says.

“We should be seeing a significant uplift in the public finances to deal with the erosion of inflation. That real-terms pressure within the public finances is with us now and it will be with us for the foreseeable future. As we get into year three of the four-year spending settlement, that becomes ever tighter. It’s not that we’re waiting for austerity to come – it’s here and it’s reactivated.”

Already overseeing a sizeable list of portfolio areas as deputy first minister and Covid recovery secretary, Swinney was parachuted into his old finance brief when Kate Forbes left to go on maternity leave last year. He previously held the position between 2007 and 2016, a period that included not only the financial crash, but the independence referendum and the run up to the vote on leaving the EU.

He contends that many of the challenges now being faced by public services, namely the problems in the NHS, are the direct result of spending decisions taken by the UK Government during that initial period of austerity.

“One of the observations I made in my Budget statement was that the current outlook on the financial profile for public expenditure comes on top of a platform that is weaker because of that period of austerity. There has been an erosion of the capacity of public services because of austerity.”

When Swinney’s opposite number at Westminster, Chancellor Jeremy Hunt, gave his autumn statement in November, he painted a bleak picture of what lies in store for the UK economy, warning of a “tough road ahead”.

But while there were clear similarities with the austerity budgets of the early 2010s, Hunt also raised benefits by 10.1 per cent in line with inflation and lowered the 45 per cent income tax threshold from £150,000 to £125,140. Scheduled public spending will be maintained until 2025, the year by which the next general election must be held.

Hunt’s statement was widely seen as an attempt to steady the ship following his predecessor Kwasi Kwarteng’s headlong dash for growth under then Prime Minister Liz Truss which threw the markets into a panic and forced the Bank of England to step in to prevent pension funds from collapsing.

Swinney says the Scottish Government intends to take measures to ameliorate the worst effects of austerity, but he’s clearly constrained by the funding he receives from the UK Government through the block grant. 

“We can try to do that and that’s an approach we took in the aftermath of the financial crash in 2008/9. Obviously, we have a slightly broader range of powers [now] that enable us to act in that respect. The decisions I took on tax and that Kate [Forbes] has taken in previous years are designed to ameliorate some of those difficulties, but there are limits to how far you can go. You have to be mindful of the impact of tax on individuals; you’ve got to be mindful of behavioural changes that can arise out of that.”

While the UK Government has since changed tack, there was concern last year over a growing divergence in tax policy between Scotland and England after Kwarteng announced a decision – quickly reversed – to cut taxes for the highest earners. Nadhim Zahawi, who was recently sacked as Tory party chairman for failing to disclose an HMRC investigation into his taxes, was among those warning that Scotland faced a potential “flight of talent” as higher earners left for England. 

“I don’t really think people are making decisions about where they live based on the tax position alone,” Swinney says. He points to differences between Scotland and England such as free university tuition, free personal care, or prescription charges. “I think people take a much more rounded view of how that all fits together.”

Swinney is withering in his assessment of the UK Government’s fiscal direction, now reversed, under Truss and Kwarteng. Asked how future historians might look back on the period, he answers: “Agog.” But he is similarly dismissive of Sunak’s five pledges, which include halving inflation, growing the economy, and reducing the national debt.

“I think he will probably be successful on reducing inflation – I think that’s pretty high likelihood. I don’t think he’ll be successful on growth because of the nonsensical position they’ve got on trade with Europe and on migration. If you look at any economic theory and analysis, population growth is a critical component towards growth in the economy. 

“About the only thing that happened in the Liz Truss experience, if I can call it that, which was mildly encouraging was the relentless focus on growth. I thought maybe they had read a book or two about how you drive growth and population growth might be embraced, so we might get a relaxation of the migration constraints. But none of that happened.”

Swinney says the stance on migration is “disastrously damaging” for the Scottish economy. Yet figures published late last year by the Office for National Statistics (ONS) show that more than 500,000 people are estimated to have moved to the UK in the 12 months to June 2022 – the highest net migration figure since the Second World War. The numbers were bolstered by those fleeing the war in Ukraine.

“I think the [economic] growth ambitions are significantly eroded,” Swinney says. “And if they can’t get growth up, then the only way to get the debt down is to cut spending and that would be really difficult. The outlook is difficult enough – further erosion of public expenditure because they can’t get debt under control is even worse.”