Scotland plc falters amid yawning split in economy

David Bell, the professor of economics at Stirling University, calculates that the private sector in Scotland has grown by just 12.8 per cent since 1998, but the public sector has increased by 19.3 per cent.

Professor Bell has taken the figure for gross value added, GVA, published by the Scottish Executive and broken it down into its private and public components.

Outlining a growing gap between the growth in the public and private sectors, Prof Bell says: "It is clear that the private sector has spent most of this period in the slow lane."

The figures, published for the first time in The Scotsman today, show that the average private-sector growth was 1.7 per cent between 1998 and 2004 but the public sector grew at around 2.4 per cent.

Since 2002, output in health, education and public administration - the main public-sector activities in Scotland - grew at 2.7 per cent, while the rest of the economy increased by 1.1 per cent.

Prof Bell says: "Without the additional boost from the public sector, Scottish growth in the past three years would have been lamentable."

Last night, opposition parties and business leaders said the figures called into question the claim by Jack McConnell, the First Minister, that Scotland's economic ills would be cured by growing the private sector, not cutting the public sector.

Prof Bell's figures also compare Scotland with the UK as a whole, and paint a "depressing" picture. The public sector GVA has grown by 20.7 per cent in the UK and 19.3 per cent in Scotland. But the private sector has risen by 20.1 per cent in the UK, against just 12.8 per cent in Scotland.

Prof Bell says: "The gap between rates of growth in the UK and in Scotland is almost entirely explained by the gap in performance of the private sector."

And he warns that, with a slowdown in money coming to Scotland from the Treasury, "future growth will be dependent on increasing the economic health of Scotland's private sector".

An Executive spokesman said: "We firmly believe that an efficient and effective public sector can be a driver for economic growth in Scotland - not a drag.

"There is no doubt, however, that our ability to provide world-class public services is linked to our ability to compete in a rapidly changing world."

He added: "The public sector in Scotland is less than a quarter of the whole economy, but ministers have said the balance can be improved.

"The reform of public services has been a key priority since devolution and we will step up the pace of change with an Executive-led debate which aims to consider radical solutions for public services in Scotland."

Murdo Fraser, the Scottish Tories' deputy leader, said: "Prof Bell's startling figures are confirmation of what many of us have believed for some time, namely, that Scottish economic growth rates have been inflated by the over-reliance of the economy on the public sector.

"It is fine to want to grow the private sector, as the First Minister says, but these figures show it is declining relative to the public sector."

He added that the Scottish public sector should be reduced by actions like cutting civil servants, and the privatisation of Scottish Water.

Iain McMillan, the CBI director in Scotland, said: "The public sector relative to the private sector in Scotland is too large. The public sector by and large does not create wealth, it consumes wealth.

"We need education, health and social services, but if the public sector is too big relative to the private sector, the economy becomes out of kilter in terms of wealth creation in relation to wealth consumption."

Jim Mather, the Scottish National Party's enterprise spokesman, questioned the value of using GVA as a measure of a "branch economy" with large companies taking profits out of Scotland.

However, he added: "In spite of our caveats about the relevance of GDP, it is the only macro-economic measure we have, and yet it proves that Scotland is growing slower than the rest of the UK."

Stephen Boyd, an assistant secretary at the Scottish Trades Union Congress, said: "I would be more concerned if private-sector growth and jobs were not continuing to rise. Both are."

We must help private sector fuel future growth

THE private sector is the engine behind all the major world economies. It provides most of the goods we consume and most of the work for the population.

The Scottish economy is no different. Most of the economy is dominated by the private sector. Fishing and farming, energy, manufacturing, banking, tourism, retailing and distribution are all crucial; all are private- sector activities.

Economic growth is ultimately driven by increasing the volume and value of private- sector business. The partnership agreement between Labour and the Liberal Democrats commits the Scottish Executive to economic growth. Growing the economy is the Executive's "top priority". Its view is economic growth is "a necessary condition for Scotland's future prosperity, for building first-class public services and for social justice". If growth is the primary policy objective, then the private sector of the Scottish economy should be in robust health.

But the growth record is problematic. Since the introduction of devolution, overall economic growth in Scotland has averaged 1.9 per cent. In the UK as a whole, it was 2.7 per cent. Almost all OECD countries grew faster than Scotland, with the exceptions of Japan and Germany, whose economies have both been in the doldrums for the past decade but now show signs of recovery.

If growth has been slow over the whole economy, the private sector cannot have fared too well. The Executive does not directly measure how fast private-sector output is growing. It does publish quarterly estimates of Gross Value Added in the industries that make up the economy. These figures are the best short-term measure of output and growth in Scotland.

One of the "industries" is health, education and public administration, whose activities are almost wholly in the public sector. These activities now account for 22 per cent of the entire economic output of Scotland. From other data, we know the public sector accounts for about 23 per cent of Scottish employment. This confirms the close match between the public sector as a whole and the "industries" of health, education and public administration. Their combined output is now greater than the total output of mining, energy production and manufacturing. Scotland's industrial base is a pale shadow of its former self.

Using Executive data, it is a straightforward calculation to leave out health, education and public administration and then evaluate how the rest of the economy has been performing. This gives a good estimate of the health of the private sector.

It is clear the private sector has spent most of the period between 1998 and 2005 in the slow lane. The average growth rate was 1.7 per cent between 1998 and 2004. The public sector grew at about 2.4 per cent. The difference in performance since 2002 has been even more dramatic. In the three years up to the third quarter of 2005, output in health, education and public administration grew at 2.7 per cent, while the rest of the economy could manage only 1.1 per cent. Without the additional boost from the public sector, Scottish growth in the last three years would have been lamentable.

Declining output across a range of production industries has been offset by reasonable growth in services. While there have been some success stories, the overall picture is one of comparative weakness.

How does the private sector in Scotland compare with the UK as a whole? The second figure compares output excluding health, education and public administration in Scotland and the UK. Again, the comparison is depressing. Between 1998 and 2004, output in the UK grew by 2.4 per cent, compared with Scotland's 1.7 per cent. Since 2002, the UK private sector has maintained 2.4 per cent growth, while Scotland has slowed to less than half this rate.

Meanwhile, output in health, education and public administration in the UK as a whole has been growing at almost exactly the same rate as in Scotland. So, the gap between rates of growth in the UK and in Scotland is almost entirely explained by the gap in performance of the private sector.

It is no surprise growth rates of public-sector activities are much the same across the UK. The amount they grow is constrained by the amount government is willing to spend. The Barnett formula ensures any increase in spending in Westminster is broadly matched by a rise in the Executive's budget. Recent spending increases by Westminster and Holyrood have focused particularly on health and education, increasing the convergence between measures of output of these activities.

With the private sector, it is possible to measure output by looking at the value of sales of a product that is sold on some market. With the public sector, such markets often do not exist - because consumers do not pay for the services they receive. As a result, measuring output in the public sector is extremely difficult. In many areas of government, the difficulty is such that output is simply equated to input. In Scotland, output of the public sector is equated to public sector employment. This means changes in the productivity of public-sector workers have no effect on Scottish GDP.

The recommendations in last year's review by Sir Tony Atkinson on how to measure government output will finally make possible productivity comparisons between Scotland and other parts of the UK in areas such as health and education, and hopefully turn the public debate more towards issues of public-sector efficiency.

However measured, public-sector output in Scotland is constrained by the Executive's ability to fund it. There has been a boom in public-sector spending in the past three years due to the strength of the private sector in the UK as a whole and the resultant boom in tax revenues. Now UK growth has slowed, there is no chance of a further three years of public-sector largesse. Future growth will be dependent on increasing the economic health of the private sector. This is a lesson the Executive must take to heart if it is to achieve its objective of making economic growth its "top priority".

David Bell is professor of economics at Stirling University.