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How Scotland can get ahead- The Sunday Times

Ian Fraser, Sunday Times, 26 April 2009

Economists and business lobby groups have traditionally had a love-hate relationship with Scotland’s bloated public sector. Most of the time, and especially during economic upswings, they see it as an unproductive dead weight on the economy — largely because they believe the job security and perks offered to public servants sucks talent out of the private sector and undermines entrepreneurship.

However, the size of Scotland’s officialdom comes into its own during downturns, and particularly in recessions. By their very nature, public sector jobs are less susceptible to the vicissitudes of the market than those in the private sector, and their high number serves to buoy up the wider Scottish economy. People with secure jobs and index-linked pensions are more likely to continue spending when others lose their nerve.

Yet it is likely to be different this time. In his Budget Alistair Darling, the chancellor, failed to make the severe cuts in public spending that many economists believe are required. They think whoever succeeds him will have to be much more realistic about what the nation can afford.

Under the Barnett formula, which is used to distribute public money proportionately to the regions of the UK, this will inevitably mean current and future Scottish governments will have to make do with more meagre resources. Even the relatively minor cuts and efficiency savings Darling did announce came as a severe blow.

Salmond’s cabinet had been hoping to pursue a neo-Keynesian response to the recession, which was confirmed by GDP figures out last week. This has become well-nigh impossible.

The disappointment on the SNP benches at Holyrood was palpable, and it prompted an unseemly row with Westminister. John Swinney, the finance minister, accused Darling of snatching £500m from Scottish budget after next April. “This budget is deeply damaging for Scotland,” he said. “The chancellor said that you cannot cut your way out of recession and that taking money out of the economy at this critical time would damage key public services. Yet that is precisely what he is imposing on Scotland.”

Swinney argued the cuts will necessitate 9,000 job losses across the public sector.

The claims were disputed by Andy Kerr, the Labour finance spokesman at Holyrood, and Jim Murphy, the Scottish secretary. Both said there will in fact be £700m increase in the Scottish budget from next year.

Some voices suggest forcing the Scottish public sector to cut its cloth in line with today’s straightened circumstances might be no bad thing. In January, the Centre for Economic and Business Research gave a warning that Scotland was set to be the third most state-dependent nation in the world after Iraq and Cuba, adding the burgeoning public sector had become “unsustainable”.

“I appreciate it will be difficult, but it will at least provide the public sector with the incentive to become more efficient,” said Gabriel Talmain, professor of economics at the University of Glasgow.

Geoff Mawdsley, of the think-tank Reform Scotland, said: “We’ve gone through a period of rapid growth in the block grant — this [change]gives the Scottish government more of an incentive to focus on value for the money.”

He said ways of achieving that include encouraging decentralisation within Scotland and giving private sector providers greater leeway to compete within state-funded services such as the NHS.

So where do economists believe Scotland’s future economic growth is going to come from? Given the implosion of the banking sector, where are we going to find a the engine to drive Scotland’s future growth? The questions are pertinent given Scotland was last week confirmed to be in recession.

The country’s mid-term prospects have, of course, been severely weakened by the collapse of RBS and HBOS. The baleful influence of these two damaged franchises is going to make itself felt on the economy for many months to come; thousands of jobs losses are said to be in the pipeline.

However, Jack Perry, the chief executive of Scottish Enterprise, said it is too early to write the obituary of financial services in Scotland. He believed there may be points of light, saying: “It is important to recognise that our financial services industry is more than the banks. We do have significant insurance business, pensions, asset management and asset servicing.”

Perry, who recently returned from a visit to China, said there are real opportunities for Scottish-based asset managers to sell their services into similar markets with ageing populations and high savings ratios.

He said that, despite the banking crisis, financial services remain one of six priority areas in which Scotland is deemed capable of long-term success. The others are creative industries (including digital media), energy, life sciences, tourism and food and drink.

Of these, Talmain was most optimistic about tourism, which he described as a sector with immediate potential to fill the void left by the banks, and possibly by jobs losses in the public sector.

He suggested Scotland could do more to capitalise on the weakness of sterling, on the Year of Homecoming campaign to boost the tourist trade and on its natural, historic and contemporary attractions — and cultural attractions such as the Kelvingrove Museum and Art Gallery in Glasgow.

Last week the Visit Scotland Expo in Glasgow was attended by 800 travel industry buyers from around the world and about 250 exhibitors. Visit Scotland also recently launched a Perfect Day campaign to highlight Scotland’s potential for leisure and activity holidays, offering a challenge to the popular north of England market.

Philip Riddle, the chief executive of Visit Scotland, conceded the business travel market has taken a knock, but he was bullish about the prospects of attracting individuals. “We have tremendous competitiveness due to the exchange rate — it’s never been better value to be in Scotland than it is just now,” he said.

Talmain is more sceptical about at least two of the other sectors on which the Scottish government and Scottish Enterprise are pinning their hopes.He said life sciences remains a risky sector where long-term rewards can be elusive.“It’s a bit like drilling for oil,” he said.“You are likely to fail many more times than you succeed.”

He also criticised the Scottish government’s optimism about renewable energy, saying it “has a long way to go before it is commercially viable”.

Talmain believes sectors which do offer scope for job creation are higher and further education, call centres and the offshoring of business services.

Avoiding a “brain drain” is critical, he cautioned. “If talent can be retained then Scotland is going to be all right.”