Scotland is on the road to economic oblivion

IN THE five years since returning to Scotland after a 30-year absence, I have been struck by two features. The first - once the initial hot steam of devolution had evaporated - is how little has changed while government got bigger, and how profoundly conservative (with a small "c") Scotland has become in its outlook and behaviour. Suspicion of change and a distrust of anything that might upset the way things are done, run deep in the public sector.

The second - once the hot steam of the dot-com "revolution" had evaporated - is how small the private sector of Scotland's economy has become while the public sector has grown remorselessly. There are some stunning exceptions to this sense of economic shrinkage. But not many.

I have found these two perceptions to be shared, to a greater or lesser degree, across the political and business spectrum. And they coalesce into the two big questions that now dominate Scottish life: how can this relative shrinkage of Scotland's economy be halted and reversed? And how can change be catalysed in a culture so resistant to it?

These are the questions that form the backdrop to the publication next week of an important book on the future of Scotland and its economy. It is arguably the most important since the onset of devolution. Coming as it does in the trough of post-devolution disillusion, it could hardly be better timed.

Many of the themes in New Wealth for Old Nations* will be familiar. This excellent book brings together papers submitted by various economists invited to contribute to the Allander series of lectures over the past two years. They include Nicholas Crafts, Edward Glaeser, William Baumol and (arguably now more a Left polemicist than an economist) Paul Krugman. Some show only the most wayward knowledge of Scotland and the challenges that we face. Others are bang on the nose.

It is in the final chapter that the editors, Diane Coyle, Wendy Alexander and Brian Ashcroft, attempt to distill the insights of these papers into a growth manifesto for Scotland.

Intellectually, it is broadly in the New Labour camp, and in Scotland that can be a radical place to be. Indeed, reading it, I was reminded of two wonderful-sounding words from South Africa that so well described the sharp division of Afrikaanerdom as the apartheid era neared its end: there were the liberal and progressive Afrikaaners who sought change - called "Verligte" - and the conservative Afrikaaners, deeply fearful of any change - called "Verkrampt".

In a Scotland still largely dominated by a party that is "Verkrampt", the authors here are very much "Verligte". They are, however, not to be at all confused with neo-liberals.

So what does this chapter say? And will its prescriptions work? It has three good points. It also has three weaknesses, one of them fatal.

First, the good points. Top of these is the recognition of the imperative for change. "Pro-growth policies," it declares, "need to overcome the entrenched institutional and political barriers to change." It stresses the importance of public policies to achieve long-term economic growth, both for the greater opportunity that it brings and as the means - arguably the only means - of arresting our population decline.

Here it admits to the "chicken-and-egg" problem for policy: people and capital will be attracted to a growing economy, but growth depends on attracting skilled people and mobile capital to make that growth happen.

Second, it admits to the problem of a producer-dominated public sector. It notes that in economies such as Scotland, where the state is responsible for spending approaching 50 per cent of GDP (now 55 per cent here, I would add), "the drag-anchor of widespread public-sector inefficiencies cannot easily be dismissed. Producer dominance in the public sector not only hinders efficiency or quality gains in public services themselves but can also act as an impediment to private-sector initiative."

To address this, the authors argue that incentives and "managed" competition will prove more efficacious than target-setting (we now have, as Professor Crafts points out, 109 metrics for each of Scotland's 15 health boards and 47 targets for each school).

Third, neither in the final chapter nor in the submitted papers is there a descent into the fashionable happy-clappy psychobabble ("growth doesn't matter so long as we act confident and feel good") that has now infected large sections of the Left like a brain-devouring fungus. The latest to show symptoms of this default into mince was the Scottish Enterprise chief executive, Jack Perry, in a recent speech in Glasgow.

It seems to be an occupational hazard for anyone exposed to the Executive long enough. I was reminded of a teacher at my school who, faced with a class of pupils rioting with boredom, asked us to turn our faces skyward, close our eyes, imagine that rain was gently falling and, as we drummed our fingertips on our foreheads, to chant out loud: "Pitter patter, pitter patter ..."

This (I think), was meant to make us feel better, happier and calmer. I had forgotten all about it until a sudden urge came upon me while listening to a speech on enterprise by Jim Wallace.

NOW the fatal flaws. First is the authors' understatement of why ever greater public expenditure in Scotland has failed so signally to improve health, education and welfare outcomes. Indeed, in schools particularly, there is deeply worrying evidence of deterioration. And in health outcomes, measured by heart disease, obesity, and drug and alcohol addiction, the figures are getting worse, not better.

Second is the way in which alternative options for change have been screened out. There is, for example, no discussion of the case for sharp and sustained reductions in business taxation as a means of galvanising private-sector investment and growth.

And third, the authors leave the levers of change in the hands of a parliament dominated by the very producer interest they are seeking to curb. One of the striking features of devolution is how much the parliament has been captured by the public sector. Change is just not going to happen, or if it does, it will be at such a glacial pace that few will notice.

The book does not address the "catalyst for change" issue convincingly. That leaves two other options. Change may be catalysed by a crisis in the public finances (conceivable in the next two years, but one likely to see, at least at first, a deeply conservative defence thrown around Barnett and the favourable spending formula for Scotland, rather than any positive reform).

That leaves what I call, for want of a better term, a "bravura act" to catalyse change. The adoption of a flat tax would be one such act. Another might be the abolition of business tax.

Whatever it is, Scotland desperately needs a "bravura act" that would at once mark a determination to break with the narrative of decline, and give us a fighting chance of attracting skilled people and investment.

Here, I share this concern with the authors. The alternative is a long, slow, relentless decline into economic oblivion. And that, make no mistake, is where we are headed.

• New Wealth for Old Nations: Scotland's Economic Prospects. Edited by Diane Coyle, Wendy Alexander and Brian Ashcroft. (Princeton University Press, 29.95.)