With promises to keep, the shifting of spending and cutting was inevitable

THE Scottish Government’s latest Budget was an exercise in living up to its earlier commitments. Hence, on higher education and on preventative spending, substantial extra funding was allocated.

In order to do so, savings had to be found in other areas, so while higher education funding is maintained, further education funding drops considerably.

More funds are being put into capital expenditure from various sources than was the case this time last year, although capital investment still declines dramatically as a whole.

It has been argued by the Scottish Government that this emphasis on softening the cut to the capital budget has resulted in an improved economic performance compared with that of the UK as a whole.

This view is largely based on Scotland’s relatively good employment performance over the six months. However, there are a number of problems with this line of argument.

First, the timing is out between the capital acceleration and the employment rise.

Second, employment performance is still poorer with respect to two years ago in comparison with the UK.

Third, workforce figures suggest that it is health jobs that have been rising most, which seems odd.

Finally, Scottish output has not improved in line with employment, suggesting that any such employment gain has worsened labour productivity, which could ultimately prove problematic. Further, over the most recent employment period it is Northern Ireland that has been performing best within the UK.

In fact there are doubtless a host of variables that are affecting economic and employment performance, including industry mix and underlying productivity.

While shifting money from resource to capital budgets has the potential to lift the productive capacity of the economy (assuming capital spend is in the right areas), for the policy to have any meaningful impact in the short run, the capital projects need to be ready to go now and the funding switch must not lead to job losses elsewhere.

Since we do not know where the switch has occurred, this short-term value is difficult to prove.

None of the above means that increasing the total budget through higher capital investment would be unwise. But that is a different point.

At present there are political arguments coming from either direction on whether more cuts should be made to ensure meeting borrowing and debt targets or whether a fiscal loosening should occur and the targets delayed slightly.

The repeated downgrading of UK growth forecasts suggests this decision may need to be faced up to sooner rather than later, particularly as global uncertainties keep confidence in check.

The UK government may have to jump one way or the other over the coming year, which in turn means that this week’s allocations may not be the last word in this affair.

l Professor John McLaren is an economist at the CPPR