Darling: I won't order banks to save jobs

THE Chancellor, Alistair Darling, has issued a stark warning that he will not use his position as chief shareholder of Scotland's two biggest banks to force them to keep jobs north of the border or to bail out Scottish firms.

In an exclusive interview with Scotland on Sunday, Darling says that the new part-nationalised RBS and Lloyds/HBOS will "have to be run on commercial lines" free from Government influence.

The move means he will not interfere if – as is feared – the new Lloyds/HBOS orders job cuts to its huge staff in Scotland or moves its key functions elsewhere. Nor will the Chancellor order the banks to lend at better rates to thousands of small businesses who say they are being forced out of business by the rocketing price of credit.

Darling also said that the banks' survival had been due to the strength of the UK, and the events of the last few weeks had now left the case for Scottish independence "in tatters".

He said: "The banks in which we take a shareholding, RBS, HBOS and Lloyds, will be run on a commercial basis at arm's length of government… You can't have a bank that is run by a government."

On the question of whether to force banks to lend to businesses at better rates, he said: "What you can't do is stand in the shoes of the bank manager; you don't know whether or not an individual will repay a loan or whether a business case stacks up or not. Everyone is agreed that it would be disastrous to return to irresponsible lending."

The Chancellor's position was criticised last night by First Minister Alex Salmond, whose spokesman said: "Alistair Darling is not just turning his back on the need to maximise jobs and decision-making in Scotland – he is turning his back on his own constituency."

Meanwhile, a group of senior economists signed a letter branding the Government's plan to spend its way out of the looming recession a "misguided and discredited" approach that could make things worse. The 16 eminent economists argued the UK Government could not expand expenditure without "seriously misallocating resources".

A spokesman for the Federation of Small Businesses in Scotland said that they feared that, left alone, the banks could severely damage the economy. "What is happening is that the banks are being much less willing to give (businesses] access to flexible finance," the spokesman said.

However, Iain MacMillan, director of CBI Scotland, said: "Of course we would like to see more jobs kept in Scotland as a result of this merger. But I do agree with Alistair Darling. It is not for the Government to make interventions on operational matters."

Darling said recession was now "inevitable". But, speaking a day before he campaigns in Glenrothes, he added that matters would be far worse if Scotland were independent. "The argument of separation is threadbare at the best of times. It is in complete tatters now."

Economists attack Darling's rescue plan

ALISTAIR Darling's plan to spend his way out of recession was last night described as "misguided and discredited" by a group of eminent economists, who claimed his approach could make the financial situation worse.

The Chancellor said a week ago that he wanted to bring forward spending on major state-funded projects in order to kick-start recovery.

The proposal was then defended by Gordon Brown, the Prime Minister, despite a massive rise in public sector debt to record levels.

In a letter to a Sunday newspaper, 16 economists attacked the policy. The signatories, who included Trevor Williams, chief economist at Lloyds TSB Corporate Markets, and Peter Spencer, chief economist to the Ernst & Young ITEM Club, wrote: "We would like to dissent from the attempt to use a public works programme to spend the country's way out of recession."

Darling's policies, which are based on the interventionist policies developed by John Maynard Keynes in the last century, were too risky, the economists said.

"It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink 'too rapidly' in a recession.

"Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources."

They went on: "Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past.

"Occasional slowdowns are natural and necessary features of a market economy. Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones.

"It is inevitable that Government expenditure and debt naturally rise in a recession, but planned rises in Government spending are misguided and discredited as a tool of economic management.

"If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them."

One of the signatories of the economists' letter, Dr Andrew Lilico of Europe Economics, said: "Some sort of Keynesian action might not be inappropriate but this is precisely the wrong way of going about it.

"A recession is intrinsically a time of uncertainty, so the Government cannot know for certain that any of the big projects it orders will actually be necessary or useful a few years down the line; ministers do not know which parts of the economy will sink or flourish."

John Greenwood, chief economist at Invesco Perpetual, said: "Japan tried to spend its way out of recession in the 1990s and the result was nothing except huge debt. Private firms will not be able to improve their own balance sheet if the Government gets to the table first."

The letter followed Friday's announcement that the UK economy shrunk by a greater-than-expected 0.5% in the third quarter of the year. The previous quarter saw zero growth. Two successive quarters of negative growth indicate a full-blown recession.

Official figures have also showed net borrowing hitting a record 37.6bn between April and September – higher than the whole of the previous year.

The sharp increase left Darling's forecasts of 43bn of borrowing this year in tatters and led to warnings that debt could balloon to 120bn in three years.

The Prime Minister, however, insists the public finances are in good shape and the Government can afford to borrow to finance a major programme of public works.

Last week Darling singled out housing, energy and small businesses as sectors where spending could be brought forward, as well as continued spending on major defence projects, the London Crossrail project and the 2012 Olympics in the capital.

"What I want to avoid is getting ourselves in a position governments have done in the past where you face an immediate problem and cut back on the things the country will need in the future," the Chancellor said last week.

The signatories to the letter are: Dr Andrew Lilico, Europe Economics; John Greenwood, chief economist, Invesco; Richard Jeffrey, Cazenove Capital Management; Dr Ruth Lea, economic adviser, Arbuthnot Banking Group; Trevor Williams, chief economist, Lloyds TSB Corporate Markets; Dr Nigel Allington, University of Cambridge; Prof Philip Booth, Institute of Economic Affairs; Prof Tim Congdon, author, Keynes, The Keynesians And Monetarism; Prof Laurence Copeland, Cardiff Business School; Prof Kevin Dowd, University of Nottingham; Prof Kent Matthews, Cardiff Business School; Prof Alan Morrison, Said Business School; Prof Sir Alan Peacock, former chief economic adviser, Department of Trade and Industry; Dr Mark Pennington, Queen Mary College, London; Prof David B Smith, University of Derby; Prof Peter Spencer, University of York.

Tom Peterkin

Scottish Political Editor