George Kerevan: Blame Brown for slower recovery north of Border

Published on Thursday 25 June 2009 00:13

The Treasury lops off a lump sum from the Scottish grant and tells Holyrood to make cuts … sorry, savings

THE current state of the Scottish economy feels a bit like a rollercoaster ride rushing up the incline. It is thrilling to be going up but there is an inevitable fall coming.

This is the picture revealed in the latest forecast from the Fraser of Allander economic think-tank. It predicts the Scottish economy will perform better than the UK as a whole in 2009. But it warns "the Scottish recovery will be slower than that of the UK".

The natural resilience of the Scottish economy means we have been slower to enter the recession than England, but for a variety of reasons we are going to be much slower to get out.

How can that be? Surely the existence of a devolved administration – which helped create the resilience in the local economy in the first place – should also give us an enhanced capacity to deal with economic crisis?

A recession is like an airliner suffering a catastrophic loss of air pressure at altitude. When bank lending collapses (as it did last year) and firms stop investing, the air rushes out of the economy. The economic equivalent of the oxygen masks dropping is for the government to pump in more spending in order to give the real economy time to recover. That is precisely what is not happening in Scotland.

The Fraser of Allander report warns: "Government spending … will begin to decline in real terms in 2010-11." Because Holyrood is dependent on the Treasury for its pocket money, any sudden contraction in the block grant impacts directly on the economy. Cutting public spending in the middle of a recession is the worst possible economic policy. But that is what the Treasury is about to do to Scotland.

This is confirmed in a note to the Fraser of Allander report by Professor Brian Ashcroft, the husband of the former Labour leader in Scotland, Wendy Alexander. He warns: "The Scottish economy may therefore experience difficulties in adjusting to a situation of … severe cutbacks in public spending."

How can Fraser of Allander suggest that Scotland is facing severe public spending cuts when Gordon Brown is claiming that Labour wants to "grow" the UK economy out of recession? Could it be that Mr Brown speaks with a forked tongue?

Holyrood is funded by a block grant from the Treasury, awarded in three-year tranches. At the start of the current three-year spending round, which lasts till 2010-11, the Scottish Government was allocated a modest real spending increase, though this was the lowest for years. But this paper settlement takes no account of so-called efficiency savings decreed by the Treasury.

I'm in favour of making public spending efficient but the way the Treasury does it is to lop off a lump sum from the Scottish grant and tell Holyrood to make cuts … sorry, savings. Holyrood has endeavoured to improve productivity, but it does not have the same scope to replace people with computers as do the giant Whitehall bureaucracies. (And it must be noted that the IT disasters in English government agencies may have lost more money than they saved.)

In his Budget in April this year, Alistair Darling actually increased this "efficiency" claw-back for 2010-11. As a result, there will be about 500 million less in the kitty for the Scottish Government to spend, despite bits and pieces of extra spending offered by the Chancellor.

This will not stop Jim Murphy, the Scottish Secretary, claiming that the Labour government is spending more in Scotland. He will justify this by lumping in cash spent by central government on rising social security payments caused by the recession. But it is the Treasury cut in the Holyrood grant that is deepening and prolonging the recession in Scotland. The increase in social security payments is a sad consequence of that stupidity.

The next Treasury spending round, which runs from 2011 to 2014, is where the really savage spending cuts kick in. The Chancellor is being coy about how he will cut departmental revenue spending. But respected independent analysts such as the Institute for Fiscal Studies think he will have to cut budgets by 7 per cent annually, to find cash to pay the interest on Britain's ballooning public debts. That means another 7 per cent off the Scottish block grant.

The Scottish economy is more dependent on public spending and public jobs than many other parts of the UK economy. We can argue about the pros and cons of that another time. But if the Treasury slashes Scottish public spending in a downturn it will have a disproportionate impact. That is why it will take so long to crawl out of the recession.

What is Fraser of Allander's solution? With domestic consumption and public spending constrained, the Institute suggests a switch to exporting. But it warns: "A key question here is whether Scottish manufacturing in particular has the size, diversity and capability to take advantage of a recovery."

The report is right to put a stress on the need to export more. However, that is easier said than done, especially as a lot of other countries will be adopting the same strategy. Boosting manufacturing requires capital investment. Fraser of Allander thinks this will have to come from inward investment.

But that's an unlikely source when the UK is headed for a period of rising taxes and a devolved Scottish Government has few fiscal incentives at its disposal (something the Calman Commission funked). I have advocated the creation of a regional investment bank on German lines, by putting the nationalised RBS, or part of it, under the control of the Scottish Parliament. Somehow, I think that won't happen.

In a rather under-reported initiative, the SNP Government is creating a Scottish Investment Bank (SIB) by merging a clutch of existing business support schemes run by itself and Scottish Enterprise. In legal terms, SIB is not yet a bank but more of a "super" public sector funding agency, with only 150 million to dole out. What is needed is for the SIB, or its equivalent, to tap global investment funds on a much larger scale in order to channel new development cash into Scottish manufacturing.