In THE October 2010 Spending Review, the UK government announced cuts in Scottish public sector capital spending from £3.4 billion in 2010-11 to £2.3bn in 2014-15 – a reduction of 32 per cent.
The coalition government, like Labour before it, took the politically expedient route of cutting capital spending more than current spending. Now the worm has turned.
Prompted by the business community, particularly the hard-pressed construction sector, and an abysmal growth performance, the Chancellor has decided to shift the balance back towards capital spending.
So Scotland will receive an additional £160 million to spend on capital in 2013-14 and £229m in 2014-15.
With the Scottish Government already transferring some cash from current to capital spending, this will provide a boost to infrastructure investment in Scotland.
Nevertheless, even with these adjustments, public sector capital spending will remain below its 2010-11 level for the foreseeable future.
Part of the Chancellor’s plan for increased capital spending in England is for investment in schools. Over the next two years, he will spend £1.2bn on the fabric and construction of English schools.
Immigration and a higher birth rate have led to increased demand for school places in England.
This pressure is set to continue. Between 2010 and 2030, the number of children aged from five to 16 in England is likely to grow by 17.9 per cent, compared with just 7.4 per cent in Scotland.
Scotland will receive the Barnett consequentials of the increased investment in English schools, but does not face the same pressures of pupil numbers, giving it some freedom to increase capital spending on other priorities.
John Swinney has had a list of “shovel-ready” projects for some time. The UK government’s conversion to “shovel readiness” is much less convincing.
Nevertheless, the effect of this extra capital spend on economic growth will be more nuanced than many politicians suggest.
Capital spending increases the productive capacity and growth of the economy, but only when the assets that it has funded are in use.
There may be an increase in economic activity in the construction phase, but if there is an offsetting reduction in public spending somewhere else in the economy, the net effect on growth is unclear.
So, in the short run, what is the net effect on economic growth of reduced welfare benefits offset by increased spending on Scotland’s roads? Reductions in welfare mean lower demand from a group that tend to spend all of their income locally.
This will have a negative effect on local services, which will depress employment.
Increased spending on roads might lead to a short-run increase in construction activity, but this may not have beneficial effects for the rest of the Scottish economy to the extent that equipment and workers are brought in from outside Scotland.
The modest increases in capital spending included in the Autumn Statement will provide some long-run benefits to the Scottish economy.
But it would be unwise to assume that this reallocation of spending will result in a substantial boost to employment in the short-term, particularly when other parts of public spending continue to experience significant cutbacks.
• Professor David Bell, is based at the Stirling Management School, University of Stirling.