AFTER a week of self- congratulatory back slapping over ten years of devolution, is there anyone who has a clue how our economy is going to get out of the rut and move on up from here?
I ask, because I could not discern, in the "jolly jape" BBC documentaries on devolution last week – munching Tunnock cakes in Stirling, kilt wearing in the Royal Mile and, most bizarrely of all, Morris dancing in Essex – whether anyone had seriously
asked if Scotland was better off financially or economically as a result of devolution, still less held a microphone to anyone prepared to offer an answer.
After a decade in which public expenditure in Scotland has doubled, it would be surprising indeed if the public did not express a desire for more of the same. But higher public spending is not, and should never be, the sole measure of a nation's economic health or yardstick of benefit.
The facts are that over this devolution decade, Scotland's economy has continued to lag that of the UK. Our business formation rate remains abysmally low. Our business investment rate is among the lowest in the OECD. The stock of our 'big board' public companies has atrophied.
Private sector employment has shrunk as a proportion of the total. Public sector jobs (not including the semi-nationalised banks) now total 527,300, some 23 per cent of the workforce, a rise of 52,300 since 1999. We have more people than ever in government, and more people than ever not in education, employment or training. Overall, we have grown more, not less, dependent on high and rising public spending.
Now add to this the global financial crisis and its impact on what was until mid 2007 the fastest growing sector of Scotland's economy and we face some very serious questions indeed about our economy and our future.
If there is any doubt on this, the big business stories of the past week – the 500 net job cutbacks by Diageo, the first quarter 6.5 per cent year-on-year fall in Scottish manufacturing exports, the questions on the future of the Clyde yards and the losses of a further 350 Scottish jobs at Lloyds Banking Group – should leave us in no doubt that we have serious thinking to do.
Not all of these dismal developments are recession related. But their coincidence, and at this time, adds to a sense of vulnerability about our economy and wellbeing. Seven years ago, when Motorola shut down its Central Belt operations with the loss of thousands of jobs, the blow was readily absorbed by an expanding finance and business services sector.
But today, with our banks shattered and the financial sector contracting, there is no area of growth to readily absorb the loss of other jobs.
Last week was also a wake-up call for those who thought that the first signs of a slackening pace of economic contraction meant that the recession was over and that the newsflow would turn consistently positive. Even if you are neutral as to what alphabet shape the recovery will take, this was a reminder that the fall-out from recession lasts far longer than the passing of its worst point, and that unemployment in particular is a 'lag' indicator, with net job losses likely to continue well into next year. The same is also true of business failures.
Here it is worth revisiting the recent forecasts in the independent and respected Fraser of Allander Quarterly Commentary. Its central scenario is that Scotland's economy will underperform the rest of the UK next year and will suffer renewed slowdown in 2011 before going on to register an anaemic recovery. It predicts job losses this year and next amounting to nearly 137,000. Net jobs growth only returns in 2011, strengthening in 2012. But it expects the recovery to be slow and protracted. The institute's central forecast is for a rise in the ILO measure of unemployment to a peak of 212,600 in 2010 or 6.2 per cent of the workforce and then a gradual fall.
Most worrying of all for Holyrood is that the juice of ever rising public spending is about to run dry. The Scottish Government now faces the need for reductions in its spending commitments. This will be the first real adversity that a devolved Scotland will have faced. And until tested in adversity there is little conclusion to be drawn as to whether devolution has been a "success" or not.
As for what will drive Scotland's economy forward out of this rut, you will hear from the depths of the silos of the Scottish Government, the parliament, the think tanks and the policy wonks nothing but an endless, echoing incantation on the miracle of skills training and continuous loop prayers for inward investment: yet greater dependence on economic forces outwith Scotland on which to rest our prospects for survival.
Devolution should not of course be measured in terms of economic outcomes alone. Nor was its primary intention an uplift in Scotland's economy. Its concerns have been broadly social and its legislation increasingly dominated by the politics of lifestyle change. But the broader state of Scotland and that bigger question - 'Are we better off?' – surely now warrants a wider examination than our fondness for Tunnock cakes and the obsessive focus on the doings of MSPs, the majority of them drawn from the public sector, local government and trade unions.
Indeed, the devolution process, and its central preoccupation with public sector spending and expansion, may have weakened the ability of the economy to adapt and recover from a recession as marked as this. This is the charge implicit in the conclusions of the Fraser of Allander Commentary. Scotland, it warned, "may have difficulty in adjusting to a situation post recession of higher household savings, lower domestic consumption growth, and severe cutbacks in public spending and/or higher taxation. This will require the economy to become more export and private sector orientated over the medium to long term. The required switch towards exports puts a premium on the competitiveness of manufacturing."
What other ways out should be considered? I would expect next year to see far greater policy attention on how to encourage business start-up, investment and spin-outs from universities as a means of raising our growth rate. At present public resource commitment to this area is small and investor appetite for venture capital and private equity chastened after the value collapses and failures over the past year. It is also, because of this high failure rate, a most difficult area for politicians to dabble in. But something quite drastic by way of tax change had to be done to kindle enterprise and turn on new funding taps.
Without such a radical step change our prospects in Scotland look grim. We run the risk of being condemned to a politics of retrenchment and decline as the public spending axe begins to fall. This would not be a "new future" of devolution at all, but a return to "same old", and a steepening gradient of decline.
