Analysis: Will it work?

The coalition government is seeking to remove the UK's structural budget deficit and stabilise its debt position by the end of the present parliament in 2015.

To achieve this, the government announced in its June Budget a fiscal tightening of 113 billion - around 16 per cent of government spending and 75 per cent of current borrowing.

Last week's Comprehensive Spending Review outlined 81bn of proposed spending cuts, with the remainder to be financed by higher taxes, such as the increase in VAT next January. UK spending departments are to experience an average real cut of just over 11 per cent and welfare spending is to fall by 18bn.

In Scotland, the real cut in the assigned budget is estimated to be 10.6 per cent, or 11.3 per cent, depending on whether you choose, respectively, the UK government's or Scottish Government's baseline.

So will it work? The honest answer to this question is that nobody knows. There are many uncertainties along the way.

The key factor is the growth of the economy. If the UK and Scottish economies improve their pace of recovery from recession so that growth is more than sufficient to offset the estimated 4 per cent fall in GDP caused by the fiscal consolidation, then a future recession will be avoided. But growth will have to be considerably faster if unemployment is to stabilise and then fall. Faster growth is also required to ensure that tax revenues rise, transfer payments fall and the government's finances improve as the coalition hopes.

There are favourable precedents. In the UK in 1991, at the end of that recession, public sector employment stood at just over 6 million. In the next four years 650,000 jobs were lost and 850,000 by 1997. The UK managed this adjustment with an overall rise in employment as the economy grew by 3.1 per cent per annum.

Will history be repeated? On present UK government plans some 490,000 public sector jobs are to go. However, the problem is that the recent recession was so much more severe than in the early 1990s. The Office for Budget Responsibility is forecasting growth of 2.6 per cent per annum and many private forecasters consider that projection to be too optimistic.

For example, the National Institute of Economic and Social Research forecast last week that the UK economy will be much weaker than the OBR predicts. NIESR predicts that a recession will be avoided but the public finances will improve much more slowly than the OBR and the UK government expects.

With so much spare capacity after the recession, and a weaker Scottish recovery, there appears little hope that the fiscal cutbacks will "crowd in" much private sector growth here in Scotland. Worse, the fiscal cutbacks may damage business and consumer confidence, so weakening private sector growth at a time when the world recovery from recession is faltering. Added to this, Scotland's record of weak entrepreneurship, a low business birth rate, inadequate research and development and low innovation makes one cautious that we can secure the growth in investment and exports that is required.

As the public sector shrinks, can the Scottish private sector step up to the plate?

• Professor Brian Ashcroft is policy director of the Fraser of Allander Institute for Research on the Scottish Economy, University of Strathclyde