The reckoning: How the global meltdown will affect Scotland

Published on Saturday 11 October 2008 20:18

• 38,000 Scots to lose jobs in economic crisis • 5 years of tax pain ahead to pay for bailout • Millions of workers see pensions slashed • 75% of houses failing to reach fixed price

AFTER the chaos, the true cost is beginning to emerge. The painful price that thousands of Scottish families will have to pay following the wildfire which tore through the world's markets last week was becoming clearer last night.

One leading economist is predicting that unemployment north of the border will rocket by 34% over the next year, a loss of 38,000 jobs.

The housing market is already deep in the doldrums with 20% discounts commonplace and three-quarters of homes for sale in the south-east of Scotland failing even to reach their fixed price.

Fears are growing for millions of British workers approaching pension age who have seen their retirement funds eroded as a result of disastrous collapses in the value of leading shares, prompting fears of a rise in poverty among the elderly. And Britain's leading fiscal experts warned last night that the country would be paying for last week's bailout in higher taxes until at least 2013.

The dire outlook came as fresh warnings were sounded about whether the unprecedented global effort by governments to restore confidence in capitalism would be heeded when markets return tomorrow. G7 finance ministers agreed a deal in Washington on Friday, but failed to halt speculation about further bank nationalisations and even another panic interest rate cut as early as this week.

Last night, Dominique Strauss-Kahn, the head of the International Monetary Fund, warned that the world financial system was teetering on the "brink of systemic meltdown". The crisis, he said, was being fanned by fears over debt-ridden banks, but added that rich nations had so far failed to restore confidence.

Strauss-Kahn was speaking after talks with US President George Bush, G7 finance ministers and the World Bank.

Speaking on the White House lawn yesterday, Bush admitted that "anxiety can feed anxiety". He added: "That can make it hard to see all that's being done to solve the problem."

The confusion prompted an emergency meeting of EU leaders later today, when Gordon Brown will travel to Paris to meet leaders from the eurozone nations.

The meeting has been called by French president Nicolas Sarkozy despite the fact that EU leaders were due to gather in Brussels on Wednesday, suggesting that leaders want to agree on a joint plan similar to Britain's before markets open tomorrow.

But with or without fresh reassurances, the damage to the real economy appears to have already been done.

The Centre for Economics and Business Research said last night that unemployment would rise to 6% in Scotland over the next year, with white collar workers in financial, business and retail sectors most at risk.

Its economist, Charles Davis, predicted unemployment in Scotland will rise from 112,000 to 150,000 by the end of next year, warning the country's heavy reliance on banking and finance made it particularly vulnerable.

"If the HBOS and Lloyds deal goes through, I would think there would be job cuts following from that. RBS obviously has a big presence in Scotland, and it made a loss in the first part of this year. The Government has ensured that banks in the UK will not be allowed to collapse, but they are going to have to think about cost cutting."

He added: "The current financial crisis is going to have a serious impact on the economy. At the moment it is not exactly clear to the ordinary man on the street, but this mayhem in the City is going to mean a slowdown across the world in terms of jobs."

Professor David Bell of Stirling University broadly agreed with Davis's prediction of 38,000 lost jobs, and said: "I wouldn't be surprised if retail suffers a lot."

He added: "We can no longer rely on the financial sector as a major engine for growth or jobs. The Government or the enterprise agency has got to be quick on their feet to rethink their strategy."

For people about to retire, there were warnings last night that their retirement pots may have shrunk

massively over the past week. Some five million workers are paying into defined contribution schemes, and if they opted for the default fund, all their investments could be in shares. Malcolm

McLean of the Pensions Advisory Service said: "My concern is people think the default fund has been recommended to them and that it's appropriate for them personally, which it may not be, because it may be 100% invested in shares. But they may actually be taking more risk than they know about."

A recent report – published before last week's turmoil – showed retirement savings have lost more than 10% of their value in the last month as credit-crunch-stricken investors attempt to offload their shares.

Meanwhile, the Institute of Fiscal Studies, the most respected analyst of Government coffers, said that taxpayers would be paying for last week's bail-out for at least another five years.

Robert Chote, IFS director, said that ministers were likely to boost spending and restrict tax increases in the next year to see off a full-scale depression, before enforcing a massive squeeze between 2010 and 2013.

Meanwhile, in the property market, Scotland on Sunday has established that housebuilders are now offering 20% discounts, with new flats in Edinburgh being offered for 35,000 below the asking price.

In one exclusive housing development in East Lothian, a show home offered for 1.3m is now being offered for 200,000 less. Sellers of new flats are now offering rent-before-you-buy deals, while buyers are being told they only need pay 75% of the asking price up front in a desperate bid to find buyers.

David Marshall, of the Edinburgh Solicitors Property Centre, said: "Even in the existing property market we are seeing discounting of various forms."

However, the crash looks set to benefit first-time buyers, priced out of the market during the boom, who are now being offered bargains by desperate estate agents.