Saturday 31 May 2014

Would independence really help those living in poverty?

Like many Scots I was struck by the SNP poster depicting a little girl with scuffed shoes, dirty legs and a tattered skirt. The slogan ran “Let’s become independent, before 100,000 more children are living in poverty”.

The first thing that struck me was that no political party in Britain wants children to live in poverty, but that we have different ideas of how to make people in Britain better off. Some people think that raising taxes and public spending is the answer, while others think that focusing on policies that will lead to economic growth will benefit everyone. Most people nowadays, whether they are more or less left of centre or right of centre, accept that the key to prosperity and ending poverty is economic growth. There are differing viewpoints on how large the state share of GDP should be, but it’s a matter of degree. Some people on the right think it should ideally be around 30%, but accept that getting it down to the low 40s is more realistic, while some people on the left think it should be rather higher. But the amount you can vary this figure either up or down is limited without the risk of doing damage to the economy and anyway it can only happen slowly.  Once you get much above 50% it begins to seriously affect the economy’s capacity for growth. This in essence is the problem that M. Hollande faces together with the recessionary effect of being in a fixed exchange regime when France needs gradual currency devaluation. What this all means is that most politics is a lot of sound and fury about not very much.  There is a balance between economic growth and public spending. Lowering the state share of GDP will help growth, but potentially damage things we want governments to spend money on. For this reason, all political parties are really only debating about a couple of percentage points of state spending of GDP, somewhere in the low to mid-40s.

But the SNP claim that life would be different in an independent Scotland and that we could have a Scandinavian style economy which would eradicate poverty. Well let’s imagine that an independent Scotland raised public spending to the mid-50s % of GDP like Denmark or Finland? I strongly suspect this would damage economic growth in Scotland, but accept that we may suddenly turn into Finns and Danes who for some reason seem happy to work hard and not take advantage of their incredibly generous welfare state. If you think likewise, by all means vote for independence. But be aware you could equally end up like France. But anyway let’s imagine an independent Scotland following more or less Scandinavian socialist economic policies, while the UK follows free market capitalism. How would it be possible to maintain a currency union between such divergent economies? What would happen to the UK single market of goods and services on which 70% of Scotland’s trade depends? In reality if you want to maintain anything like the present economic relation between Scotland and the other parts of the UK it would be necessary to follow a broadly similar economic policy. So the scope for change in an independent Scotland is limited at best. Again we’re talking about those one or two percentage points of GDP.

What is poverty and how do you attempt to help people not to live in poverty? Well firstly it’s important to realise that in the UK poverty is defined as 60% of average income. Well average earnings in the UK are £26,500 so anyone earning less than £15,900 is living in poverty. Well there are a number of ways in which it would be possible to add 100,000 poor people to Scotland. One way would be if we had economic growth such that average earnings went up to £30,000 a year while the rate of increase for the poorer people was somewhat lower. Thus if I was earning £17,000 pounds a year I would now be poorer than if I had been earning £16,000 pounds earlier, for the poverty line would now be £18,000.

In Poland average earnings are rather less than Scotland. Many people earn only around £6000 pounds a year. What this means is that someone earning £12,000 pounds a year in Poland who moved to Scotland in order to earn £15,000 would be moving from wealth to poverty. Why would so many people want to do that? It’s fairly obvious that are making calculations about poverty in a different way.

We all know that there are people who live in real need in Scotland. But it is important to put this into perspective. Even by European standards there are far fewer genuinely poor people in Scotland than there are in Eastern Europe. I’ve walked down streets in provincial Russia where old ladies sell a few bulbs of garlic, where average earnings are £200 pounds a month and where there is no unemployment benefit whatsoever.  That is what poverty looks like and Russia is wealthy compared to most of the world.  

The concept of relative poverty is not really a measure of poverty at all. It’s a measure of inequality. Thus if everyone in Scotland earned £10,000 pounds a year and there was no variation in salary whatsoever we would have eradicated poverty in Scotland. Is that how the SNP want to help poor people after independence?

What matters is not so much relative poverty as the ability of poor people to buy the things that they want and to have a standard of living that enables them to eat well and enjoy the good things in life.  The best way to achieve this goal is for governments to have policies that lead to economic growth. With economic growth everyone benefits, both the rich and the poor. It's something of a paradox, but if through cutting the state share of GDP you raise economic growth beyond what it would have been, the poor will certainly benefit, not least because as the economy grows the share of resources dedicated to alleviating poverty will increase in value. The austerity of the past few years has been unpleasant for many, but it has worked. If we had failed to take the necessary steps towards prosperity, the economy would have continued to shrink which would have made everyone including the poor, poorer. The UK economy has low inflation and a good level of growth. We are very lucky indeed compared to France, Spain, Italy and many other European countries. We also made better choices than they made. There are challenges ahead and recovery is not yet completely secure.  But when a patient is beginning to rise from the sick bed you don’t amputate one of his legs. You certainly don’t do that if you live in that leg and hope to help the poor who live there with you.