George Kerevan: The puzzle is less jobs, yet less unemployment

The Scottish Government claims that lower unemployment numbers are proof its budget strategy – shifting revenue spending to capital investment to boost construction – is working. The opposition parties point to falling overall employment to argue just the opposite. They say that John Swinney, the SNP Finance Secretary, is using his 2013-2014 budget to concentrate spending on the NHS rather than the economy.

As proof, Labour and the Conservatives cite an independent report for the Holyrood Finance Committee by economist David Bell. In it, Professor Bell coyly suggests that committee members might wish to “consider” (as in query) Swinney’s claim “that this is really a growth budget, when the main beneficiary appears to be resource spending on health”.

Now of course the SNP is protecting spending on the NHS as a priority. The SNP 2011 manifesto says: “We will protect the NHS budget, allowing us to deliver faster and better treatment.” But Labour and the Tories made exactly the same promise in their Holyrood manifestos, as did David Cameron at the 2010 General Election. If protecting the NHS is not a given, why is the opposition mentioning it? Besides, just think how the opposition parties would howl if Swinney stood up and said he was cutting NHS funding to build roads.

But ring-fencing the Scottish NHS budget creates a problem. Holyrood’s budget comes mostly from the Treasury in London and, as we know, Chancellor Osborne believes in austerity. Massive cuts to the Treasury grant for Scotland mean it will be 2027-28 before public spending returns to its 2009-10 level in real terms (unless a Yes vote next year changes things).

These cuts are the explanation for the fall in overall Scottish employment numbers. Basically, Scottish public spending is being hammered by the Tory-Lib Dem Coalition, which is eliminating public sector jobs. For instance, from the start of 2008 till the middle of last year, nearly 25,000 jobs have disappeared from Scottish local government. Fortunately, the SNP Government has set its face against compulsory redundancies. So most jobs disappearing in the public sector result from people retiring or moving to the private sector and not being replaced. Hence there is no corresponding rise in unemployment.

However, this trick only works if you can provide roughly the same level of public services with fewer workers. So far, Swinney has achieved such efficiency savings using artful fiscal footwork; eg merging police forces and rationalising college provision. This has allowed him to protect the NHS yet maintain universal benefits such as free prescriptions and free university tuition, all in a period of extreme austerity. In any context, Swinney’s  is an amazing political performance. The question is: how long can he go on dancing? You can only make savings once.

Meanwhile, Swinney has sought to boost private sector growth and employment by switching revenue spending to capital investment. Here the results are positive, yet more modest. The main problem is that the biggest cuts imposed on Holyrood by the London Treasury (starting with Alistair Darling when he was Chancellor) are to capital investment. This is because it is easier to cut road building than desk jobs.

Between 2010-11 and 2013-14, Holyrood’s capital spending is slated to fall from £3.3bn to £2.4bn per annum. That’s a loss of around £900m each year. This means reduced investment in the supply side of the Scottish economy and a reduction in productive capacity. The less productive we are, the less Scottish firms can sell, and so there are fewer jobs long term. Capital spending, on the other hand, not only boosts efficiency throughout the economy, it also creates construction jobs.

Swinney’s budget strategy has been to put back in circa £200m per annum in capital spending, which he has found through efficiency savings. Unfortunately, that is still modest compared with the capital cuts imposed from Westminster. Yet the Westminster cuts would have been over a fifth bigger but for Swinney’s fiscal intervention.

Is Swinney’s strategy creating enough private sector jobs to compensate for the erosion of public sector employment? On the basis of the figures released on Wednesday, covering September to November 2012, probably not. The number of people actually in jobs seemingly dropped by 24,000 - yet rose by 90,000 in the UK as a whole. Even if we take the whole 12 months to November, total employment rose only by 1,000 in Scotland compared with 552,000 for the UK. This is odd because there is no reason why Scotland should under-perform so drastically.

But there’s another explanation. These quarterly job figures – the so-called Labour Market Statistics count - are notoriously unreliable. This is because they are calculated by polling sample households and student  halls of residence, asking folk if they are in work.

As the ONS says itself: “Quarter on quarter changes at regional level are particularly subject to sampling variability.”

An alternative way of doing the sums is to ask employers how many workers they have. This gives a very different picture. If you look at the so-called Workforce Jobs survey, Scots employers say they created 52,000 net extra jobs in the year to September – including 5,000 new construction jobs, thanks partly to Mr Swinney’s capital spending.

One explanation of the difference between the two ways of calculating employment creation is that people have more than one job. But surely the fact that employers say they are creating jobs at a net rate of 4,300 per month is proof the Scottish economy is responding. This also tallies with the positive rate at which new companies are being formed in Scotland – far more than could be accounted for by a lowly 1,000 increase in Scottish jobs.

Meanwhile, today sees publication of the latest UK GDP figures. Any sign of triple-dip recession will bring renewed pressure on George Osborne to abandon austerity. And not before time.