Alex Salmond’s plea for Alistair Darling to accelerate capital spending from 2011-12 into 2010-11 in tomorrow’s pre-budget report and to provide extra funds in order to complete a new Forth road bridge by 2016 represents Keynesianism at its very worst.
Scotland’s unemployment rate stood at 7.2% between July and September of this year and a staggering 32% (claimant count measure) of those had been unemployed for more than the critical length of 6 months. The worst areas were North Ayrshire, Glasgow City and West Dunbartonshire. The reason for this is simple: these areas were based around industries which have now been rendered uncompetitive by the access firms in developing and newly industrialised countries have to cheap labour and raw materials. Furthermore, it is unrealistic to expect these areas to improve in the future as the national minimum wage and lack of skilled labour deters potential investors.
The classic policy to deal with long-term structural unemployment is to increase spending in education and thus develop a more skilled and flexible labour force that allows entrepreneurs to capitalise on areas of potential comparative advantage within the economy, but the Scottish Government’s attempts to follow this path are undermined by the proposal of accelerated spending now and subsequent fiscal cuts over the next 20 years. Salmond and Swinney plan to spend the extra money on building affordable housing to help the long-term unemployed, but this reduces labour market flexibility by providing a disincentive to relocate and, given that Britain’s strengths are in financial services and that potential investors in this field are not interested in areas of economic depravation, compromises any educational schemes designed to increase the occupational mobility of Scotland’s workforce.
This is also the worst possible time for any Government to be embarking on a major spending plan, as the possibility of misallocating resources is so great. The absence of private sector demand means that the Government will be choosing the areas for investment, and not consumers and producers. The wrong choice, as shown above, leads to public debt without the increase in productive potential necessary to justify it, and the consequences of increased public debt are currently much more severe than usual. Britain is in grave danger of losing its triple AAA debt rating, and if that happens then interest rates will have to rise in order to attract the funds from abroad necessary to service our monumental current account deficit. Higher interest rates will deter private investment within the economy and thus lead to economic stagnation. The Scottish Government’s fiscal response would be handcuffed by the deal made over the Forth road bridge ensuring a reduced budget for 20 years.
The solution to the nightmare outlined above is to allow a private firm to construct a bridge and then let them charge a toll and keep the profits. If no firm deems this to be profitable then the project should not go ahead and the Government should continue to dry out the cables on the old bridge and thus prolong its life. The Scottish Government should also cut back its spending on affordable housing and instead promote more flexibility in the labour force which would encourage investment, reduce unemployment and lead to a long term increase in residential construction stimulated not by the Government, but rather by demand for houses.
