Looming new 'public sector recession' to hit Scotland

SCOTLAND'S historical bias towards public sector employment could put the country's economy at increased risk of relapsing into recession as government spending cuts take hold, economists warned yesterday.

• Long ques for work became a common site during the depression of the 1930s

In a downbeat assessment of the prospects for growth, the Fraser of Allander Institute said that even if Scotland is found to have emerged from recession in the coming months, it could sink back into negative growth later this year.

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It said the blame lay with the refusal of banks to lend to businesses as they sought to restore their balance sheets.

But the institute also said that the coming public-sector recession – yet to strike the UK – could further damage the road back to a growing economy.

In its latest quarterly economic commentary, it notes that further fiscal tightening is one of the key factors that will "increase the risk of a double-dip recession later this year, and perhaps next".

The economic commentary, produced with the accountancy firm PricewaterhouseCoopers, notes that public expenditure cuts planned by the UK government will force local councils to reduce their costs by as much as 25 per cent during the next few years.

This would have a bigger impact in Scotland, where the public sector accounts for about 22 per cent of Gross Value Added (GVA) to the economy, compared with 18 per cent throughout the rest of the UK.

Brian Ashcroft, professor of economics at the University of Strathclyde, said: "A weak recovery for the Scottish economy is in prospect, supported by a gradual improvement in the growth in exports and investment. But, given relatively flat household and corporate spending, the ending of quantitative easing this month and the likely continuing sluggishness of bank lending, the prospect of a further fiscal tightening in 2010 all increase the risk of a double-dip recession later this year and perhaps next."

The analysis comes with policy-makers still waiting to find out whether Scotland has emerged from recession. Although UK-wide figures were published last month – showing a tiny 0.1 per cent growth figure – the statistics for Scotland will not be published until April.

The report by Fraser of Allander suggests that, even if that happens, a fragile economic recovery is the best that the country can hope for.

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The group noted that recovery from major economic downturns, such as the Great Depression of the 1930s and the recession of the 1980s, had always been punctuated by a return to at least one quarterly period of shrinking economic activity.

With questions remaining about the potential strength of both consumer and corporate spending in the coming year, Prof Ashcroft said Fraser of Allander was concerned about the impact of spending cuts and the withdrawal of fiscal measures, such as the Bank of England's quantitative easing programme.

The report suggests that these moves would have been better left until later in the year, when it expects an increase in world trade to begin boosting UK economic activity.

"We are on the side of those who are very cautious about cutting public spending at the moment," Prof Ashcroft said.

Barring any massive blows from the public-sector crunch, the report predicts that Scotland's GVA will rise by 0.6 per cent in the current year, a small increase from its previous prediction of 0.1 per cent in November.

Prof Ashcroft said the slightly more bullish outlook was mainly due to expectations that net exports will increase as global trade picks up, particularly in the second half of the year.

This "central" forecast from the institute – which factors out both best-case and worst-case scenarios – predicts GVA will continue rising, up 1.6 per cent in 2011 and 2.2 per cent in 2012.

However, it said job losses would continue in the current year, with more than 32,000 becoming unemployed. That would take the overall number of jobs shed during the two years to 96,000, with the services sector accounting for 44 per cent of the total.

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Employment will pick up from next year, with more than 18,000 jobs created in 2011 and a further 44,000 in 2012.

Unemployment, which Fraser of Allander expects to peak at 8.1 per cent this year, will drop to 6.3 per cent in 2012.

It estimates that, over the course of the recession, total GVA in the Scottish economy has fallen by 6.13 per cent, compared with the smaller contraction of 5.73 per cent for the UK. Most of this was attributed to the influence of the battered financial sector, which accounts for a larger-than-average proportion of Scotland's services industry.

The challenge for the public sector is only just beginning, the report declares. The commentary, written by Paul Brewer, of PricewaterhouseCoopers, states that the 32 councils "need to reduce their costs by around 25 per cent over the next few years to help address their funding constraints".

It warns there is limited room for manoeuvre when pay, pensions and PPP obligations are taken into account. Mr Brewer adds: "This inevitably means that the solution will involve significant restructuring and potentially sharing of activities in order to minimise any reduction in the range and extent of services."

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