Analysis: With a dose of optimism, the focus is on solid investment in skills and infrastructure

By DAVID BELL
Published on Thursday 9 February 2012 00:00

IN HIS Autumn Statement last November, the Chancellor committed to spending £5 billion on additional capital projects between 2011-12 and 2014-15.

This may have reflected a concern that the coalition’s austerity programme was bringing the UK economy to a juddering halt. But there was no acknowledgement that this amounted to a somewhat Keynesian deviation from “Plan A”. These additional UK spending plans generate, by the magic of the Barnett formula, what are called “consequentials”. These amount to £137 million in 2011-12, and about £450m between 2012-13 and 2014-15. They restore some of the reductions in capital spending that were included in the 2010 UK Spending Review. The cuts in capital spending that were passed on to Scotland were much more severe than those in the current budget.

The Scottish Government’s Spending Review, published last September, anticipated a reduction in capital spending in cash terms from £2.61bn to £2.32bn between 2011-12 and 2014-15. This amounts to an 11 per cent cut in cash terms, which would be magnified in real terms by any increase in the price of capital projects.

Yesterday, the finance secretary outlined how he intends to use this additional cash. An additional £97m will be spent on housing between 2011-12 and 2014-15. This will contribute to increased spending on council housing, affordable housing and shared equity schemes.

The Scottish government will be subsidising the extension of broadband connectivity with an additional £60m over the next three years. This will particularly benefit rural populations where private sector investment is not likely to be profitable and therefore unlikely to go ahead.

There will be additional spending on roads, with bypasses of Dunragit and Dalry, as well as design work for the dualling of the A9. An additional £60m of capital funding will go to the NHS and £54m to local government.

The business rate environment will match that in England with a 45p in the pound rate for most businesses and a further 0.8p for large businesses. The Scottish Government Budget still anticipates a rise in non-domestic rate income from £2.2bn in 2011-12 to £2.7bn in 2014-15, an increase of 22 per cent in cash terms. Given that the latest forecast of the Office of Budget Responsibility predicts that prices will rise by only 13 per cent over this period and that significant economic growth which would boost non-domestic rates still seems a distant prospect, this part of the Budget seems optimistic.

There will be an increase of £20m in spending on colleges, which partly offset the cuts announced last September. The Scottish Government is also still providing the education maintenance allowance, which has been discontinued south of the Border.

Some of this extra spending will partially restore budgets that were particularly hard hit when the draft budget was announced last year. In general, the package focuses on investment, both in skills and infrastructure, which certainly makes sense, both for the maintenance of demand in the short term and for expanding the productive capacity of the Scottish economy in the longer term.

• David Bell is professor of economics at Stirling University.

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