Continued fiscal stimulus runs risk of creating a methadone economy

TWO positive points can be taken from an otherwise worrying set of unemployment numbers. First, on the International Labour Organisation (ILO) measure, unemployment has not reached the levels widely feared this time last year.

At the UK level it has reached 2.46 million (7.8 per cent; in Scotland 7.6 per cent). This is still well below the widespread predictions of three million and above last year. Second, it is also substantially below the 10 per cent level now prevailing in the United States and across the Eurozone. In the UK this is still, in labour market terms, a recession contained within the private sector, and well below the projections that initial comparisons with the 1930s suggested.

Why is this? First, there has been a notable increase in part-time working, now at 7.6 million, the highest since records began in 1992. Many in the private sector have agreed to shorter hours and a pay cut rather than being put out of work. In addition, many have chosen to leave the workforce or go into higher education. And meanwhile, the public sector work force has continued to rise – up by 23,000 in the three months to end September to just over six million.

This public sector employment cushion – also reflected in a 3.7 per cent rate of increase in average earnings compared with a zero increase in the private sector – is now set to be removed as a post-election government grapples with a colossal budget deficit and public debt. We can no longer afford – if we ever could – a "two nations" economy in which the private sector is crushed and the public sector continues a relentless expansion.

In its report today Audit Scotland is only stating the obvious when it says councils must act urgently to find more savings such as the provision of joint services. There are obvious savings to be made without inviting the politicised charge of "tearing into front-line services". Public sector pensions should be speedily switched from a defined benefit to a defined contribution basis. A line should be drawn for now under net new recruitment. Reducing the number of sick days taken in the public sector to the private sector average would save 3 per cent of the UK wage bill, or 6 billion a year. Paying equivalent wages to public sector employees to private sector ones could save as much as 20 billion.

But retrenchment will also require reform. Here in Scotland we need to question more than we do whether we really require 32 local authorities each providing similar services.

Faced with figures for Scotland showing a 10,000 rise in unemployment, the SNP administration argues loudly against the withdrawal of fiscal stimulus. While a case may be made in the short term for keeping emergency measures in place, the danger is that we become permanently dependent on them and avoid public sector reform. Rather than promoting pro-growth fiscal measures, this could lump us with a toxic economic model: a methadone economy permanently addicted to artificial stimulus and higher tax to fund the activities of government. Such a fix offers no solution to the debt-strapped crisis we face.