Jobless total to rise as Scotland falls behind

A BLEAK forecast for Scotland's economy warns of "a slow recovery in 2010, with only modest growth likely" and says unemployment may continue to rise.

The assessment, from the Scottish Government's chief economic adviser Dr Andrew Goudie, suggests growth in Scotland is likely to lag behind the 1 to 1.5 per cent figure for the whole of the UK given by Chancellor Alistair Darling in this week's Pre-Budget Report (PBR).

Scotland's economy has been in recession for five successive quarters and is reckoned to have shrunk by almost 6 per cent since the financial crisis struck.

The Goudie report says the decline in Scottish output "continues to be broad-based, with all major sectors of the economy experiencing a further contraction in output".

His presentation was immediately seized upon by finance secretary John Swinney to condemn this week's PBR. The latest assessment, he said, "demonstrates the UK government was wrong to withdraw its stimulus package and ignore cross-party pleas for accelerated expenditure".

The detailed assessment suggests that, while the latest business surveys say growth may have returned to parts of the Scottish economy in the third quarter, recovery is likely to be held back by problems of access to loan finance for small firms, sharp falls in government spending after a decade of increases and a near 22 per cent plunge in business investment across the UK – one of the sharpest falls on record.

Dr Goudie also suggests Scotland's economy may have to be "rebalanced", away from services towards export– oriented industries selling more goods and services to East Asian economies.

But there is little sign yet of a manufacturing export pick-up, with an 8.5 per cent decline in the year to the second quarter.

While no details were given this week of the UK government's spending plans after 2010, Dr Goudie's report suggests departmental spending in Scotland is likely to decline by about 3 per cent a year in each of the three years from 2011-12 to 2013-14.

Mr Swinney said: "The near universal commitment to continuing stimulus … demonstrates the Chancellor did exactly the wrong thing and jeopardised economic recovery by ignoring Scottish Government calls for further accelerated capital spending in his Pre-Budget Report.

"Over the last two years, Scotland – just like countries across the world – has brought forward substantial sums of capital investment to keep our economy moving. In places like the USA, Canada, Germany and Japan, investment will continue to flow next year. In Scotland, it will be stopped at source."

A big constraint on Mr Darling is that borrowing from future years' budgets would put spending for those years in jeopardy, while inciting claims from the UK's nations and regions for similar acceleration, making a mockery of future budget planning.

He would prefer to see the Scottish Government adjust its budget for capital projects. But the draft budget for 2010 reveals that the sector dealing with enterprise and sustainable growth is set to take the biggest spending reduction hit.

Last week, the Scottish Parliament's economy committee condemned the draft budget on this point as being "unfit for purpose" in helping to secure recovery.

While the latest assessment acknowledges that recession is beginning to ease in Scotland and that a fragile recovery may be getting under way, it is notably cautious about the speed of recovery next year.

And senior sources close to the Scottish Government have expressed scepticism over official Treasury forecasts of economic growth rebounding to 3.5 per cent in 2011.

In that year, the contribution of government spending to growth is forecast to be minus 1 per cent. This would suggest that the private sector would need to grow by 4.5 per cent.

Given the severe downturn in business investment, rising unemployment and constraints on bank lending as more bad debts are written off, such a recovery rate in the private sector looks highly unlikely.

As for access to bank finance, the official report notes that the overall level of demand for finance by Scottish firms has risen since 2007, but the supply of finance has declined over the same period. An update of this Scottish Government survey is currently under way and results are due early in the new year.