Scotland finally gets its recession wake-up call

AFTER weeks of bluff courage and false optimism, disregard of warnings and 'rah-rah' good cheer messages, Scotland finally got a wake-up call last week. There is no magic shield or "Scottish difference". We are not a recession-free zone. We stand to be hit by the sharpest downturn in at least a decade.

The Scottish Chamber of Commerce's business survey for the fourth quarter of last year showed clear signs that respondents were battening down the hatches for a "negative" 2008. And SCC leader Liz Cameron bluntly warned: "The signs of slowing down in the economy and harsher trading conditions in 2008 are more evident and widespread in these latest survey results. Businesses are now reporting a negative trend in optimism across all sectors, for the first time since 2001."

The message came with a demand that Holyrood uses its powers over planning and business tax to head off a "harshening" of business conditions, after members returned their gloomiest forecast for the economy for seven years.

But what can the administration realistically do here? Are there any meaningful policy actions it can take that can help the business sector face the storms ahead? Remember that the SNP Government is committed to lifting Scotland's sustainable growth rate as its Number One priority. But if we are heading for a recession is this any more than rhetorical hot air?

The slowdown also pinions the First Minister's Council of Economic Advisers, due to hold its second meeting on February 8. It may seek to maintain a lofty distance from current events, focusing on policy horizons five to 10 years ahead. But that may be a posture difficult to maintain as the economy slows and receiverships and liquidations mount.

In truth, Scotland's economy and that of the whole of the UK, critically depends on actions taken by central banks and governments over the coming weeks.

Three developments in particular are now being looked for. First, on January 29-30 is a 50 basis points cut in US Federal Funds rate from the current level of 4.25% – already down from 5.25% when the credit crunch storm broke. There is a widespread expectation that US rates will be down to 3.5% by mid-summer and even to below 3% early next year.

Second, business is now desperately hoping that the Bank of England's Monetary Policy Committee will cut UK rates early next month from 5.5% to 5.25% – and keep cutting them through the spring and summer to 4.5%.

And third, the US Congress needs to approve a package of tax cuts proposed by the Bush administration. This ranges up to $150bn to jump-start an economy that is fast sliding into recession. However, such is the gloom on Wall Street that not even this prospect brought much relief to a market now convinced that sharp falls in business activity and profits are now unavoidable, and indeed that the credit crunch could get worse before it gets better.

There is a growing case for a tax cut package here in the UK. But we are borrowed to the hilt, already stretching the former chancellor's beloved 'golden rule', and the Treasury cupboard is bare. It would help if the Treasury could even clarify what the Capital Gains Tax regime is going to be in April. But delay and dithering by ministers could, as the head of Brewin Dolphin, leading stockbroker in the small company Aim market, warned last week, spark a sell-off in the sector in the next few weeks.

What is it that can be done in Scotland? Compared with these massive policy levers, very little, it appears. But arguably one positive change in the past week is a recognition rather than denial of the problem.

Last week I was told by a well-known Scottish manufacturer of a total drying-up of orders since the New Year. A few more weeks of this and the business is a goner. I gather this tailing off of orders is increasingly widespread. One story I was told related to a company making diagnostic equipment for the private health sector. Surely immune, I thought, from the downturn. But orders are on hold because of a feared fall in demand for private healthcare (falling Bupa subscriptions) and people deciding to go with the NHS rather than privately. Many companies are waiting for the uncertainties to clear before firming up investment decisions. But it only takes a few weeks of such delay before fear of recession turns into a fact.

There are two changes at the margin that the Scottish Government can make and which could lighten the burden on small firms in particular. One is business tax relief. The second is planning reform.

If there is one issue that unites small businesses throughout Scotland, it is business rates. On average, small businesses pay 10 times more in business rates than larger businesses in terms of profit and turnover. As a percentage of overheads, small businesses pay 13.7% in business rates, compared with 3% for large companies.

Rates relief worth £150m for small firms was pledged by the SNP. But there was disappointment when the administration announced it would be spread over three years to 2010-11. However, the speed and severity of the economic slowdown – and intense lobbying by the SCC and the Federation of Small Businesses – may compel the Government to bring forward this timetable.

This proposal is being pushed by the Conservatives and was recommended by the Scottish Parliament's Finance Committee last week. The hope is that extra funds will be available in March through "Barnett consequentials".

The current relief plan will, from April 1, progressively reduce the rates burden for businesses with properties whose combined rateable value is £15,000 or less. By 2010-11, it will remove the rates burden altogether for businesses with rateable values of £8,000 or less, cut rates by half for businesses with rateable values of £8,001 to £10,000, and by a quarter for businesses with rateable values of £10,001 to £15,000. This will cut the rates bills on around 150,000 businesses.

An accelerated relief plan could see the relief scheduled for year three telescoped into year two. But small businesses would welcome more help now when conditions are toughening by the week.

As for planning, it is, says the SCC, "one area where the Scottish Government can act in order to reduce the burden. They should introduce a nine-month time limit on planning applications and create an independent body to rule on applications of national importance."

Many would agree. But it is going to take a sea-change in the Scottish Parliament for it to happen. Perhaps a rising tide of receiverships might help to concentrate minds.