Michael Kelly: Story of the recovery will be a tale of two cities

In the context of the last week's UK Budget that dictated that future growth must be led by business and exports, consistency demands that this review now focuses on how lower levels of public expenditure can be best used to create the most beneficial background for the private sector.

Cities have always been the engines of growth. In the past it was because of their location, or their proximity to resources or because they were political centres. Now, so argues Edward Glaeser of Harvard*, it is because of the concentration of people. Proximity facilitates social interaction, ease of service provision and the flow of ideas. Skills are concentrated in cities.

So the priority for Scottish public expenditure must be protecting the economies of our cities - particularly Glasgow and Edinburgh. One half of Scotland population lives in these cities or in the 12 council areas that adjoin them. More than half of Scotland's GDP is made there. Both cities have higher productivity than anywhere else in Scotland.

These are strong arguments for concentrating efforts on the Central Belt - and for its two cities to work together. For decades, representatives of both cities have talked vaguely about the need to co-operate. But the cities have appeared so different in culture, character and aspiration that this idea has never sparked the public's interest. Now Scottish Government statistics show two cities with remarkably similar industrial profiles. Their shares of employment across most industrial sectors, including manufacturing are very similar.

The exception is finance and business, where Edinburgh still holds a substantial lead.

On the face of it this similarity should make it even less likely that the cities would want to work together rather than compete for private investment. However, evidence gathered worldwide demonstrates that it takes a bigger city than any we've got in Scotland to provide critical mass and opportunity of scale. This was why the Collaboration Initiative was established by Edinburgh and Glasgow in 2003.

It has given them a more powerful voice to influence decision makers and to cut duplication of effort and resource through pooling of knowledge, joint pilot projects, policy alignment, exchange of best practice and shared intelligence while leaving both cities free to pursue their individual goals. Competition through co-operation.

However, in the present crisis we need bolder initiatives - both budgetary and administrative. The best chance of the best jobs is in the cities but the cities will prosper and grow only if they can continue to offer a growing skilled labour force to a private sector that want to locate in them.

Given the social capital invested in the rest of the Central Belt it is wrong to advocate, as Work and Pensions Secretary Iain Duncan Smith did yesterday, hastening the decline of these areas by demanding that people who can't find local employment move into the cities. Apart from the social disruption and strain on families many unemployed live in public housing more desirable than a noisy flat in the Merchant City.

Rather, all those living in the Central Belt - in Renfrewshire, Lanarkshire, Falkirk, Stirling and the Lothians - should be able to compete effectively for jobs in the cities. That means cheap commuter transport. At present, excess demand for rail is managed by high ticket prices. Slashing these would add so many more people to the effective labour supply of Edinburgh and Glasgow. Introducing late-night and early-morning service would also help the 24-hour economy. But as buses are the cheapest form of transport and the easiest to expand, road building with the savings from cancelling, say, the uneconomic Borders rail scheme should be a priority. That choice would also accept that the car, by far the most convenient form of transport and one which will never be replaced should be accommodated, not opposed, by public policy.

Of course it is the pool of skilled labour that attracts investment to cities. It's no use bussing in guys from Clydebank to Atlantic Quay who can still hammer home a rivet. Expenditure on education, training and re-training must be protected.

Glasgow and Edinburgh and the corridor in between them should be treated as two interdependent metropolitan regions, reducing the number of local authorities in the Central Belt to two based on the cities.

Planning powers need to be revised. A country as diverse as Scotland is no place for homogeneous planning laws.

The Highlands and Islands needs more protection than the land along the M8. Free it of unnecessary planning restrictions allowing a strip of retail and leisure to run its length.

More liberal planning guidelines could also give further boosts to the creation of development parks around Euro-Central.

Reducing the planning restrictions on housing would keep house prices in check.

Anyone who in the boom times looked to invest in a second home Florida would have noticed that houses in that state despite its rapidly expanding population did not appreciate the way they have done in Edinburgh.

That's because Florida's planning laws make it easy to build new houses so that demand never outstripped supply.

When the asset bubble has been held responsible for many of our current economic woes it seems a solution worth introducing here.

No-one knows how broadly the Independent Budget Review will interpret its brief.

But the depth of the economic crisis and the shock of the austerity Budget will surely prompt it to produce a fundamental rethink of whatever plans are in the Scottish Government's mind.

Its chairman, Crawford Beveridge, former chief executive of Scottish Enterprise, has certainly the international experience and the knowledge of public and private sectors to produce groundbreaking options.

*Allander Series Four Challenges for Scottish Cities. Edward L. Glaeser