Bill Jamieson: Small window of opportunity

Published on Sunday 4 December 2011 00:00

THIS week the Scottish Government unveils its Infrastructure Investment Plan. I commend it to readers’ attention for two reasons. First, it marks the onset of a sea-change in priorities in public spending and the aims and purposes of government. And second, it is likely to prove about the only item of good news we can expect.

Journalists are now often accused of constant negative reporting on the economy. But for months it has been difficult to report with any conviction otherwise. Last week marked the worst that I can recall in 38 years as a financial journalist. First was the OECD forecast that the UK economy was likely to enter recession. Then on Tuesday came the Autumn Statement with the worst projections on economic growth and our national debt and deficit ever presented to parliament outside of war-time.

And on Thursday came a statement from the Governor of the Bank of England using words without precedent from a UK central bank chief. We are in, he declared, “an exceptionally threatening environment” and that our financial system faced an “extraordinary serious” situation. Our banks face a “systemic crisis”.

The defence of journalists faced with such announcements remains as it has always been: we don’t invent it, we only report it. And lest we are still charged with over-egging the gloom, here is a quote from an end-of-week assessment by one of the most experienced investment bank economists. I cite this, not because it is extraordinary, but because it is so typical of much of the commentary circulating in the financial sector. It comes from Michael Saunders, UK economist at Citigroup.

“We expect the UK’s cumulative growth over 2008-16 will be similar to, or worse than, Japan’s lost decade and the UK’s worst recession/recovery cycle of the last 100 years (excluding effects of World War 1 and 2). And it may be even worse than we expect. There is no accepted definition of depression: but this may qualify”.

It is against this appalling background that reports of business investment and expansion are of course all the more welcome. But we should be under no illusion about the extent and degree to which our economic and business environment has changed. This is no ordinary cyclical recession but the onset of a new era. It will transform not only our own financial prospects but a political culture accustomed for decades to raising expectations and then meeting them by resort to ever more debt and borrowing. Political priorities must now change profoundly – from the focus on current consumption spending to capital investment to create and sustain employment.

This is the context of this week’s statement from the Scottish Government on its capital investment intentions. It will set out a pipeline of more than 50 major projects and 30 programmes across Scotland. These have been identified as “the key capital investments that will deliver growth, support jobs and keep our economy moving.” It comes against a backdrop of previous cuts at the UK level to capital spending programmes – a policy effectively reversed in the Autumn Statement last week and one open to the charge of “too little too late”.

The plan, to be announced by Alex Neil, Cabinet Secretary for Infrastructure and Capital Investment, sets out a programme of investments beyond the spending review to 2030. In 2015 the administration hopes to complete the new South Glasgow Hospital and in 2016 the Forth replacement crossing. All told, the administration expects to spend between £3 billion and £4bn each year on capital investment, or between £45bn and £60bn over the next 15 years.

All this surge of infrastructure will require the most innovative – not to say desperate – scrambles to secure funding, through revenue financing and innovative approaches. We will see funding leveraged in from elsewhere to complement Scottish government funding.

The programme comes, of course, with a charged political message: for this to be effected, Scotland must be given extra borrowing powers. It has become a familiar refrain from the SNP. With more borrowing, it argues, “we could do more and do it more quickly”.

Few doubt that this is true. But here we run into one of the major problems that lie behind the Eurozone crisis – the extent to which there can be a devolution of tax and borrowing powers within a single currency area. This is the conflict that is now threatening to tear the Eurozone apart. And it is one that needs to be addressed. So long as Scotland remains within a single currency area – be it the euro or sterling – borrowing, and terms and conditions attaching thereto need to be imposed and policed by a central agency. Without this, as Europe has discovered to its cost, the entire single currency area can be plunged into crisis.

Under the current terms of the Scotland Bill, the Holyrood administration is being offered a borrowing limit of £260 million a year, up to a £2.2bn limit. The SNP administration has proposed to the Treasury a borrowing level of £560m a year, up to a £5.6bn limit.

Any extra borrowing, of course, has to be agreed within an overall UK limit. Currently, that limit is under colossal pressure. Any further increase in borrowing, over and above the eye-watering totals announced last week by the Office for Budget Responsibility would not only add even further to an annual debt interest bill set to hit £66bn or twice the entire annual Scottish budget, but would also risk triggering a bond market panic.

“More borrowing” thus involves more than making desirable projects possible. Other issues to be sorted include the criteria for borrowing, the strength of the guarantees surrounding interest payment and capital return, and, not least, the policing of the extra debt: how will it be spent and how to ensure that it is spent on the projects for which the funds have been advanced.

The SNP will insist it plans to invest within “a sustainable financial framework” and not overly constrain choices in future years. To this end it is proposing a five per cent cap on future revenue commitments related to capex projects as a proportion of its expected future annual budget. Whether this is enough given the bleak outlook ahead is debatable.

All of this also suggests a further step-up in the work of the Scottish Futures Trust. But arguably the greatest significance of all will be in the change it portends in the nature and purpose of government in Scotland: a new era, difficult, daunting and desperately demanding of new priorities to cope with an economy locked in depression. When in a hole like this, get digging.

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Danielrober2

Sunday, December 4, 2011 at 09:08 PM

# 5 e2toe4.................. It is interesting that you emphasis spending rather than building. Surely Keynesian model is about creating built wealth and usable goods, rather than spending money.

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e2toe4

Sunday, December 4, 2011 at 07:13 PM

The 'infrastructure projects' need to be carefully considered to avoid the example of the near farcical state to which the Aircraft carrier project has descended. Ships that won't sail, or won't have any decent aircraft for 10 years or so.........at a soaring price that as well as mis-allocating capital is misallocating it from borrowed funds creating current account revenue issues.------------------------------------------------ and don't even mention the Capital's 'Tram project', as poor an example of 'infrastructure spending' as there must ever have been.......

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sprog

Sunday, December 4, 2011 at 01:13 PM

With full fiscal autonomy there would be nothing to stop the scittish government from creating a local Scottish currency. We don't need to wait for independence.

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Danielrober2

Sunday, December 4, 2011 at 12:38 PM

I for one will take the announcements very seriously. However I will also take announcements with a pinch of salt. Too many promises have increased budgets and national turnover, but without a real increase in noticeable wealth. Capital projects with no jobs, or very few jobs, is not the Keynesian model. Roughly between 1950 – 1970, national wealth in Scotland went down in terms of world of world growth – yet living standards went up. Over the last 20 years economic growth increased and yet living standards went down. As governments have nationalised either directly or indirectly so many aspects of the economy, they must start to take responsibility for failures as well as credit for success. ............................ Politicians in the UK and Scotland have tended to have it easy compared to other EU countries. Maybe we are to blame for this for been more interested in gossip than governance. Whatever, the SNP, Coalition and others must get used to tougher demands from the public to deliver what they not only promise but what they commit taxpayers money, directly and indirectly to be spent upon. .................................. Critical journalism is vital for our economy, as billions are promised here it means they are lost there, Journalists are one of the few means the general public has to find out about what is going on behind increasing closed doors, un-recorded government meetings and decisions protected by confidentiality agreements for a selected few. Good criticism and questioning makes government better, not worse.

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SlyFifer

Sunday, December 4, 2011 at 08:47 AM

Well Bill, good you see that the Scots politicians have a plan to invest. Couple of points you as a dyed in the wool Unionist might ponder. 1. The Referendum should result in Scotland becoming independent around the maturity of some of these projects. Such spending after independence may well be totally different to that planned now. 2. The world might well experience further turmoil when Israel bombs Iranian nuclear weapons manufacture. The world oil price will spike and Scotland, paying 855 tax on it's fuel might shut up shop - temporarily. Just in time, when the price per barrel hovers at around $250 a barrel there will be massive oil finds for the UK around the Falklands giving them an excuse to go warmongering again in the South Atlantic and for an independent Scotland, further massive finds of oil west of Shetland. Game changer !.

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Beachdair

Sunday, December 4, 2011 at 03:13 AM

Excellent analysis by Bill Jamieson, as usual. Bill points out all the pitfalls of this course of action, but recognises that it is the best course. When Scotland becomes independent, it should definitely stay in the sterling area until it can transition to its own currency. Sterling is the the only viable option, and switching to the euro would involve joining the EU. .................................................... The UK’s membership of the EU has been the greatest disaster to befall Scotland since the 1707 Treaty of Union. The EU Common Fisheries Policy (CFP) alone is costing Scotland considerably more than £1,500 million in lost wealth creation every year. The EU has destroyed tens of thousands of jobs through the CFP. .............The gross incompetence of the EU fisheries management of the CFP continues to this day............................................................Scotland’s share of the UK’s annual EU “dues” was £845 million in 2010, up from £532 million in earlier years because of Scotland’s proportion of the IMF and direct aid to the Eurozone. £845 million is more than £162 for every man, woman and bairn in Scotland. As an EFTAEEA member Scotland would be liable for a contribution of about £200 million to the EEA solidarity fund for weaker EEA member states. It is NOT a contribution to the general EU funds. The EFTAEEA contribution is less than a quarter of the EU amount. ..................... How many Scottish jobs could be created with the difference?.......Independent Scotland should have nothing to do with the EU, but should conduct its business as a member of the European Free Trade Association (EFTA) of the European Economic Area (EEA) as Norway and Switzerland have done.

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