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George Osborne reshuffles £5 billion to boost economy

Chancellor George Osbourne. Picture: Getty

Chancellor George Osbourne. Picture: Getty

  • by EDDIE BARNES
 

SCOTTISH ministers are set to receive a multi-million-pound cash sum from the UK government to spend on so-called “shovel-ready” capital projects.

Chancellor George Osborne will confirm in his Autumn Statement on Wednesday afternoon that £5 billion will be shaved from Whitehall’s budgets, including the Scottish Government, over the coming two years and the money diverted into building and infrastructure projects.

The announcement comes as Mr Osborne faces growing pressure to demonstrate that he has a clear plan for growth.

In the Autumn Statement he is expected to concede that he has missed a target on cutting back Britain’s debts. The admission is likely to force the Office of Budget Responsibility to downgrade its own forecast for Britain’s recovery.

The plan to boost spending on capital projects comes after intense pressure from opposition parties and the devolved administrations in Scotland, Wales and Northern Ireland that have complained bitterly about cuts to funds available to spend on infrastructure.

A sudden uplift to the Scottish Government’s capital budget could see a host of projects being signed off by

finance secretary John Swinney. He has already published a list of 33 shovel-ready projects across Scotland, many which have already received planning consent.

These include a £119 million masterplan for the Port of Leith, a £60m plan for a new economic development office in the Clyde Gateway, a £34m trunk road maintenance programme, and £40m worth of economic development projects led by Scottish Enterprise.

On Tuesday night, sources said the Scottish Government’s own budget would be among those hit to pay for an increase in capital projects, but said that the extra cash for infrastructure would outweigh any loss, leaving Holyrood ministers better off overall.

A proportional share of Mr Osborne’s UK-wide £5bn capital pot would present First Minister Alex Salmond with just shy of £500m extra to spend on roads, public buildings and refurbishments.

However, that figure falls short of the £800m extra that SNP ministers have said is necessary to help boost flagging demand in the country.

Mr Salmond insisted the decision to boost capital spending by cutting departmental budgets would “not achieve the increase in demand” that was required.

“This investment must be additional”, he said.

However, the Treasury announcement means that Whitehall and officials in Edinburgh must tighten their belts still further over the coming two years, to impose further cuts on top of those already ordered.

Across the UK government, an extra cut of 1 per cent in 2013-14 and 2 per cent in 2014-15 was laid out by Mr Osborne at a Cabinet meeting on Tuesday, savings which together are expected to produce £3.5bn for infrastructure projects,

Treasury officials say they have found a further £2bn in departmental underspends which, rather than being used to pay down the deficit, will also be diverted to infrastructure.

The savings have been identified after a mid-term spending review carried out by Chief Secretary to the Treasury Danny Alexander.

Sources said that the Scottish Government’s budget cut would be less than the UK average, at 0.2 per cent next year and 0.4 per cent the year after.

The lower-than-average cut is due to the fact that big English departments such as health and education, whose funding influences the Scottish grant, are being exempted from the cuts.

Britain’s aid budget, HM Revenue and Customs and nuclear decommissioning will also be protected from the new squeeze.

Scottish ministers may also opt to exempt health and education from further cuts in their next spending review, triggering deeper cuts for others, such as justice, transport or local

government.

Details of exactly how much extra Scottish ministers will receive from Mr Osborne’s switch to infrastructure spending will be revealed on Wednesday.

For England, Mr Osborne will direct £1bn of the £5bn to a new round of spending on school buildings.

However, Scottish ministers are not obliged to follow suit and may opt to spend their own share elsewhere, given different demographic pressures in Scotland.

Mr Osborne’s opponents said that the decision to pump up the capital-spending programme was a clear admission he had cut too far in the first place. Some economists have claimed that infrastructure projects are the quickest way of stimulating the economy, by giving a quick boost to the

construction sector.

Mr Salmond said: “Increasing capital investment by simply cutting departmental budgets will not achieve the increase in demand in the economy that is so urgently needed – this investment must be additional.”

That, he said, should come from taking on more debt.

“Unlocking additional funds for investment in public sector capital projects through the use of the UK government’s borrowing powers would provide an immediate and targeted stimulus across the three devolved nations,” he added.

TUC general secretary Brendan Barber said: “The government’s £5bn U-turn on infrastructure spending, though welcome, is still nowhere near enough to undo the damage caused by the £22bn of infrastructure cuts over the last two years.”

However, other figures said Mr Osborne could not risk increasing Britain’s debt.

Andrew Sentance, senior economic adviser to PWC, said: “We have got a lot of credibility in the financial markets because we have stuck to our plans and countries which have not stuck to their plans, particularly in southern Europe, appear to pay a pretty high penalty in terms of their borrowing costs.

“We don’t know where that dividing line is but I don’t think we should be taking any risks.”

Mr Osborne is expected to use his statement to MPs to paint a stark picture of the uphill challenge facing the UK economy, and laying out further cutbacks he deems necessary to reduce the deficit.

Pension relief for high earners has been tipped as one possible victim. The Chancellor may also opt to increase stamp duty on the sales of costly homes. More controversial would be moves to freeze the rise in welfare payments for working-age families.

 

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