In one of its bleakest assessments of Scotland’s immediate economic prospects, the influential Fraser of Allander Institute (FoA) yesterday halved its growth forecasts for Scotland from earlier this summer, saying the country was “bumping along the bottom” following the “Great Recession” of 2009.
The wealth of the country could once again start to shrink within months, the report added, especially if the eurozone crisis deepens.
Scotland’s predicted rate of growth for this year – 0.4 per cent – is less than half the 1 per cent expected in the UK, the institute believes.
The report came as Mr Osb-orne yesterday warned eurozone ministers they needed to show they would “stand behind” their currency, as turmoil in Greece and Italy continued to spread panic over the continent’s debt mountain.
But, in a blunt critique of the UK government’s economic policies, the institute used its Economic Report to slam Westminster’s austerity programme, saying neither Mr Osborne nor Prime Minister David Cameron could blame the eurozone for the country’s woes when their own policies were responsible for taking money out the economy.
It described as “myths” claims by coalition ministers that cutting Britain’s debt burden will boost growth and restore confidence in the UK economy. Any benefit from such policies will be “more than outweighed by the loss of output and jobs caused by the cut back in government spending”.
The unusually trenchant criticism of the government comes just a week after the respected National Institute for Economic and Social Research (NIESR) also warned there was a 70 per cent chance of the UK economy tipping back into recession.
It too said that Mr Osborne’s cutbacks were “too tight”, and urged him to announce targeted tax cuts – such as a reduction in income tax – in his Autumn Statement on 29 November.
The Fraser of Allander report said it backed the NIESR paper, saying there was room for more “fiscal easing” without damaging Britain’s credibility.
UK ministers insist their clarity on reducing the deficit is providing the “firm foundations for a sustainable recovery” and a rebalancing of the UK economy away from debt-fuelled spending.
Last night, the CBI urged Mr Osborne to stick to his targets, even as it too cut its own forecasts on growth for the coming year.
In a section on the euro-crisis, the FoA report backs calls for the European Central Bank to take on the role of lender of last resort, printing euros to buy up the sovereign debts of Italy and Greece. But admitting this is “unlikely to happen”, it says that the eurozone “will continue until eventual break-up”.
However, in a lengthy attack on the UK government’s prevailing proposals on the economy, the institute says that Mr Osborne and Mr Cameron cannot pass the buck on to the crisis in Europe.
It says: “There is a sense from some of the comments of UK government ministers to recent UK growth figures that the crisis in the eurozone is being blamed for the current weakness of UK growth … the explanation for weaker UK growth largely rests at home.”
It blames households reining in spending, low expectations by firms that are not investing because of the economy, poor exports and the impact of the UK government’s fiscal consolidation.
Brian Ashcroft, Professor of Economics at the University of Strathclyde, and author of the report, said last night: “Sadly, the weakening in the global economy that we feared in June has come to pass, leading us to half our forecast for Scottish GDP growth this year. Our central forecast is for growth to continue, just. But the avoidance of recession as the crisis in the eurozone deteriorates is becoming less and less likely.”
The Scottish Government last night used the report to reiterate calls for a so-called “Plan MacB” to stimulate growth. First Minister Alex Salmond has said he wants UK ministers to push more money into capital spending to give a short-term kick to the economy. He has also supported the idea of a targeted VAT cut on home improvements.
Prof Ashcroft has previously supported a short-term cut in VAT in the hope of boosting consumer spending.
His report yesterday reveals that there has been hardly any recovery in Scotland’s key services sector, which relies heavily on household spending for growth.
This poor performance, which is worse than the UK as a whole, may be due to the fact that incomes in Scotland have risen far more slowly here than in the rest of Britain since 2008, the report suggests. It has also been hit, the report adds, by the credit card “hangover” which many families are still paying off from the boom years.
Scotland has also been disproportionally hit by the recession in the financial sector. While it has recovered a little over the past two years, the report shows that it is still 11 per cent below its peak when the financial crisis struck.
Lindsay Gardiner, head of assurance services at PwC in Scotland, warned last night that the condition of the financial and banking sector in Scotland was “concerning”.
The Scotland Office said: “The economic forecast shows that Scotland is not immune from the problems of the global economy and the eurozone in particular.
“This is why the biggest single boost to the Scottish and British economy this autumn would be a lasting resolution to the eurozone crisis.”