Analysis: The myths aren’t myths, they lie at heart of legitimate policy concern

WRONG, wrong, wrong, wrong. Oh, and wrong again. It’s not the slashed forecasts for this year and next that will occasion disappointment in the latest Fraser of Allander commentary.

Nor the warning that we are teetering on the brink of recession and that the risks to the latest forecasts are to the downside.

Tagged on to the end of the analysis is a section setting out five what it calls “persistent macro-economic policy myths” that are “seriously limiting appropriate policy responses to the aftermath of the Great Recession and the eurozone crisis”. Oh, really? They are not myths at all. They lie at the heart of legitimate policy concern world-wide about the recession and its aftermath.

Hide Ad
Hide Ad

More in a moment. The bigger and more immediate points in this analysis is that our economy is flat-lining, and there is little evidence that the administration’s much vaunted “Plan MacB” has led to any enhanced performance vis-a-vis the UK – though it may, of course, have prevented Scotland from lagging further.

Our services sector, accounting for some 73 per cent of total value added, has markedly lagged the recovery in the UK. And within this, the weakest area has been the financial and business services sectors. The FoA’s concern is of permanently lost output – financial products and services that will just not return.

The analysis also challenges the Scottish Government’s view that the labour market here continues to be robust both absolutely and relative to the UK. But, Ashcroft points out, total UK unemployment is currently about 1.5 per cent below its pre-recession peak while total Scottish unemployment is more than 3 per cent below. And the subsequent strong growth in jobs masks the fact that Scotland endured a larger shake-out. This catch-up has now come to an end – due to severe lack of demand – four years after the start of recession.

As for those “myths”, the first, it claims, is the belief that reducing government budget deficits and debt levels will enhance growth. However, there is nothing mythical about net debt heading towards £1.3 trillion and annual debt servicing costs already barrelling towards £60 billion. These are dead weights on the underlying economy and the notion that more deficit spending can be incurred with impunity is specious.

Another “myth” is inflation fears from quantitative easing – as if the lower pound and higher prices for imported raw materials played no part in the surge of inflation to 5 per cent. If printing money has no inflationary consequence, why don’t we all do it?

Finally, it dismisses as myths fiscal and structural reforms in the eurozone periphery and that austerity is necessary to secure business and financial market confidence. Would the UK now have ten-year bond yields as low as 2.3 per cent if there was no commitment to a deficit reduction plan? Given the febrile conditions of markets, it would be a brave government that took the risk of piling on yet more borrowing and an even greater debt burden for the future. There is room for argument on all these points, but to dismiss concerns over deficit spending and QE as “myths” does this Keynesian last redoubt no intellectual favours.

Perhaps the section on “myths” might have been better wrapped and packaged separately, with appropriate warnings and a pair of complimentary oven gloves supplied by PwC: “open with extreme caution”.