‘Twenty years of austerity’ for Scots public spending

SCOTLAND’S battered economy will remain flat throughout the first half of this year and public finances face an austerity chill of almost two decades before spending returns to its pre-recession high, the country’s chief economist has warned.

The crisis engulfing the eurozone and continuing global uncertainty means the world economy is not expected to start growing again until 2013, according to Dr Gary Gillespie.

In a further blow, he predicted the jobless crisis would not ease in the year ahead.

However, he said there was “no risk” of a double-dip recession in Scotland, despite the UK economy shrinking by 0.2 per cent at the end of last year.

Dr Gillespie’s State of the Economy report prompted finance secretary John Swinney to demand action from Chancellor George Osborne to get the domestic economy moving.

As uncertainty reigns over the future of the eurozone, the report warned this would be a “key determinant” in Scotland’s economic fate.

But asked about the prospect of a double-dip recession north of the Border, Dr Gillespie said: “I don’t see that as a risk at all.”

His report said: “Scottish growth is forecast to remain subdued at least until halfway through 2012, with a pick-up in growth expected thereafter.”

The study predicted spending cuts would last longer and have a far deeper impact than first envisaged. Some £51 billion will be lost from the Scottish budget – a third higher than the £39bn forecast last autumn. The cumulative loss would build up year on year and mean an 18-year austerity chill in spending. Holyrood’s budget would start to rise again in 2017-18, but it would be 2027-28 before it got back to its pre-recession high of 2009-10.

And it could get worse. The report said: “Should the Chancellor decide that further cuts are necessary to achieve his fiscal mandate, then the scale of the impact will be greater.”

Mr Swinney met fellow UK finance ministers yesterday and said later that Mr Osborne had to act in this month’s Budget to stimulate the economy.

“This latest analysis makes an overwhelming case for an injection of extra capital spending right now to support recovery – and for Scotland to have the powers of independence so that we can deliver an alternative economic strategy,” he said.

“The real impact on UK growth rates comes from the failure of the UK government to invest in recovery, to get banks lending to small business and to build consumer confidence with support for household budgets.”

But Conservative Scotland Office minister David Mundell hit back at Mr Swinney’s criticism, insisting the UK government had provided an extra £380 million for capital projects in Scotland recently to boost growth.

“It is for the Scottish Government to decide how to spend this money,” he said. “We have repeatedly supported the Scottish Government with capital projects, by providing an additional £50m for the Caledonian Sleeper Service and access to £100m of pre-payments to bring forward work on the new Forth road crossing.”

The performance of key sectors of the Scottish economy, including transport, storage and communication, construction, and the government and other sectors, remains below pre-recession levels.

The business, services and finance sector, which accounts for about a fifth of Scotland’s economy, is down by more than 5 per cent, according to the report.

The escalation of the sovereign debt crisis in the eurozone, with Greece needing a second €130bn (£108bn) bail-out last month, means “years of adjustment and economic hardship” lie ahead, the reports said.

The European Union is the destination for 45 per cent of international Scottish exports and the report warned: “Subdued growth will undoubtedly have an impact over the medium term.”

The world economy is also expected to flatline throughout the year ahead.

Dr Gillespie said: “That uncertainty … leads me to think that it will be 2013 before we can be confident of a sustained global recovery.”

Scotland’s small and medium-sized businesses (SMEs) have been “particularly affected” by the fall in lending over the past year, despite government efforts to improve this. Just 4.8 per cent of total UK lending reached those Scottish firms, despite them accounting for 6.4 per cent of all SMEs in the UK. “Access to finance for SMEs clearly remains a constraint on growth and the rebalancing of the Scottish economy,” the report said.

Unemployment also showed little sign of picking up, with the rate in Scotland having more than doubled from about 4 per cent before the recession struck to almost 9 per cent.

About 40,000 jobs in the public sector have gone since the recession and levels continue to plummet.