Scotland faces new slump in absence of Plan B

SCOTLAND will face a longer economic slump than that suffered in the Great Depression unless George Osborne considers a "Plan B" including a cut in VAT, one of the country's leading economists has warned.

Professor Brian Ashcroft, of Strathclyde University's Fraser of Allander Institute, accused the coalition government of talking "rubbish" by insisting that its austerity measures must be maintained to appease the markets.

In the Institute's quarterly economic report, published yesterday, it revised Scottish growth for 2011 downwards once again to just 0.8 per cent, and warned it will be late 2013 before Scotland's output gets back to its pre-crash performance in 2007.

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That estimated recovery period - lasting fully 60 months - is likely to be longer in Scotland than Britain as a whole, and would be far longer than the recovery from the two big slumps in the 1930s and 1980s.

The Fraser of Allander analysts are warning that Scotland's economy is particularly vulnerable in the face of weak demand, low bank lending, cuts to government capital investment and the slow rate of growth around the world.

"Once an allowance is made for weather effects, it still looks as if GDP (gross domestic product, or output] growth was stagnant over the last six months," the report says. "Almost three years after the start of the recession, the Scottish economy has only recovered about a quarter of output lost, while the UK economy has recovered a third of lost output."

Prof Ashcroft warned last night that the sluggishness of the economy's recovery was now a growing and immediate cause for concern, and said UK ministers needed to think again over their policy prescription.

"The point is that the recovery is weak. We are constantly having to revise our forecasts downwards," he said. "It looks like it will be 60 months - that's 2013 - before we get back to where the UK was and I think Scotland will be behind that, more like late 2013 before we get back to where we were at the peak."

He added: "The most obvious thing that needs to be done is that the coalition needs to think very carefully about removing the increase on VAT."

VAT was increased by Mr Osborne in January from 17.5 per cent to 20 per cent, bringing in an extra 13 billion to the UK Treasury, helping the Exchequer to reduce Britain's huge budget deficit. However, last week, Shadow Chancellor Ed Balls called for an emergency temporary cut in VAT, saying such a move would "jump-start" the UK, by encouraging consumers to spend.

Prof Ashcroft said that, such was the weakness of the Scottish economy, a stimulus was required. He warned that Scotland was now extremely vulnerable to any external shocks, such as a sudden dip in global demand, and could now be running so slow as to be "below stall speed".

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On the UK government warning that it could not risk slowing down deficit reduction, he said: "That is rubbish. The yield on the spreads on UK gilts have been very, very low even before they came into power.

"To say we will be in the same boat as Greece or Portugal or Ireland is nonsense. There is a real issue about losing jobs and tax revenue and thereby failing to meet the objective they are trying to do, to reduce the deficit."

SNP Finance Secretary John Swinney said Prof Ashcroft's claims reinforced the need for UK ministers to adopt a "Plan B", by boosting spending on infrastructure. SNP ministers claim that a stimulus in capital spending now would help create demand in the economy quickly, by boosting construction.Mr Swinney said: "At the Joint Ministerial Committee this month we called on the UK government to address the critical necessity for an alternative, Plan B - calling for urgent action on capital investment, improving access to finance for businesses, and enhancing consumer confidence by prioritising growth and employment security."

SNP ministers do not favour a cut in VAT. Last week, Alex Salmond said: "I don't actually agree cutting VAT is the way to go."

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