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Why we now face a double danger- The Scotsman

Bill Jamieson, The Scotsman, 20 March 2009

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WE ARE approaching a fork in the road: a profound moment of truth. Are we striding boldly to the sunny uplands of economic recovery? Or are we being led blindly towards the crushing embrace of the IMF?
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\r\nPublic concern over the deepening recession and what policy response should be is growing. Scotland is now facing the greatest test since devolution, not just of its self-confidence, but its very viability.
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\r\nTwo meetings this week provided telling measures of the increasingly apprehensive mood. The first was on Tuesday evening when more than 200 gathered to hear the First Minister, Alex Salmond, address the first annual dinner of Reform Scotland. This is the think-tank that Ben Thomson has skilfully built up over the past year and which has knitted together an impressively broad coalition of pro-fiscal-autonomy conservatives, business people and SNP gradualists. It has every prospect of becoming a powerful force in Scottish political life.
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\r\nThe second was a public debate on Scotland plc: Where Next? sponsored by solicitors Morton Fraser held at The Scotsman. Both were dominated by the economy – barely surprising in a week that brought horrific unemployment figures and a warning from the IMF that the UK was set for a recession longer and deeper than already feared.
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\r\nJohn Swinney, the finance secretary, and co-panellists Ben Thomson, businessman Mike Cantlay and Russel Griggs of CBI Scotland bravely sought to offer positive thoughts, stressing the resilient performance of sectors such as defence, renewables, niche manufacturing and tourism. But the overriding theme was money – or the sharp drying up of it. Mr Salmond\’s prescription was bold, if familiar: pending a major transfer of control through constitutional separation, he called for Scotland to have borrowing powers and for a further massive fiscal stimulus, equivalent in GDP terms to that of the Obama administration.
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\r\nFar from prudence being \’good\’, it\’s prudence that\’s killing us, apparently.
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\r\nMr Swinney expanded on a similar theme: that Scotland could only flourish by being independent and that cutting public spending, such as the proposed GBP 1 billion of efficiency savings, was quite the wrong thing to do.
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\r\nBut the audiences at both events shared a concern about the relentless growth of government while businesses and companies were having to enforce deep cuts in order to survive. They desperately need help – not the threat of big tax rises ahead.
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\r\nTo a question from Amanda Harvie about the growing share of public spending in GDP, the First Minister offered a dismissively glib response. And at the Morton Fraser debate, Deirdre Kinloch Anderson rolled a late, but suitably fizzing grenade to Mr Swinney on the spiralling cost of public-sector pensions. The counter, of course, is that the public sector is shielding Scotland from the worst of the storm. Unemployment here is not rising at the pace experienced across the UK because the public sector accounts for almost 23 per cent of the workforce and, indeed, public-sector jobs rose 1,200 over the year.
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\r\nI am not sure either audience was assured that a big public sector and yet more public spending is as obvious a "solution" as Scottish ministers believe. There is an apprehension that it will crowd out recovery and that the debt burden becomes so crushing that rapid inflation will be seen as the next "cure".
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\r\nMore immediately, the ferocity of the rise in unemployment for the UK overall poses serious doubts as to how long Scotland can remain immune. Claimant-count unemployment last month showed the biggest rise since monthly data began in 1971. Indeed, it was worse than any month in the UK\’s three big post-war recessions.
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\r\nSecond, the public finances are collapsing fast, putting a huge question mark over the sustainability of those "real terms" increases in public spending on which politicians have come to rely. The fiscal deficit last month alone surged by GBP 9 billion.
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\r\nThis takes the deficit so far this year to GBP 75.2 billion and puts us on course for a deficit of GBP 90 billion for 2008-9. This is far above the forecast of GBP 43 billion made by the government at the start of the fiscal year and well above the updated forecast only last November of GBP 77.6 billion.
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\r\nThus, even without another big fiscal stimulus of the type the First Minister is urging for the Budget next month, we are wallowing in red ink. The budget deficit for 2009-10 is on course to hit GBP 150-GBP 160 billion, or between 10.7-11.5 per cent of GDP. Among G7 countries since 1980, only Italy, according to IMF data, has recorded a deficit (until this year) above 10 per cent of GDP.
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\r\nDebt, more debt, debt on top of debt, yet more debt: is this really the way to sustainable growth? The danger with all of this is that we have lost sight of the fact that there is such a thing as too much debt.
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\r\nIt is seen as clever to scoff at such fears and cite more Keynesianism as the solution. But the problem is that we are not starting from the position of balanced budget. Indeed, Britain was well down the Keynesian route before this ferocious recession got under way.
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\r\nThe danger for Scotland now is twofold. The first is that in fending off efficiency savings we are piling up another IOU and rendering Scotland ever more dependent on a Westminster dispensary that is itself rapidly running out of cash. This is not the road to independence – but to even greater dependence on a union from which the SNP wants to break free.
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\r\nThe second is that, in refusing to recognise that efficiency savings are the least of it and we need to tackle the billowing government wage and pension bill – we are being blindly led to a denouement altogether unpleasant: a hair-shirt regime of spending cuts imposed by the IMF as a desperate means to restore market confidence in sterling and government paper. This is the moment of truth to which I fear we are now rapidly heading.
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