A capital idea
How best to pump funds into a troubled economy - tax cuts or more spending?
This is not the debate the Tories want to have, which is about the dangers of either more public spending or more tax cutting being funded by a big boost in government borrowing.
This is about a spat between the SNP Government and the Labour Government, in an economic disagreement with political overtones.
Alex Salmond, the first minister, would rather like to have £1bn of extra money to spend, partly to be seen to be doing something in the face of the downturn, and perhaps because there's a lengthening list of public sector capital projects getting delayed by his problems in getting the idea of the Scottish Futures Trust up and running.
A cynic might suggest that a row with the Treasury about £1bn or so in capital spending (when he already has an outstanding claim of around £1bn) is a handy diversion from the pressure over crumbling schools in Edinburgh and the curious plans for funding the next Forth bridge.
The first minister reckons £1bn would be Scotland's share of the £12bn or so that it will cost the Treasury to forego 2.5 percentage points in its VAT takings throughout Britain.
And with some number crunching, his chief economic adviser, Andrew Goudie, has found that an injection of £1bn could deliver or secure around 10,000 jobs, mostly in construction.
By contrast, the impact of the VAT cut on the Scottish economy would amount to about 5,400 jobs saved, the largest share in manufacturing.
Consumer confidence
You can choose to add the jobs created by those people's pay packets getting recycled into the economy, with 4,900 more posts sustained through the capital spending boost or 1,800 jobs through the VAT cut.
A no-brainer then? Darling 5,400, Salmond 10,000? Well, not quite.
Dr Goudie has pointed out that his calculation assumes only half of the VAT cut will be passed on to consumers. The rest will help out company balance sheets. That's also the Treasury's assumption.
If consumers have the full cut passed on, it could result in 10,800 jobs saved.
The chief economist has also put in bold type the observation that capital spending takes time to come on stream, not least in the planning system.
By contrast, the VAT cut - for all its shortcomings - appears to be having some impact on consumer confidence already, and speed seems to be a key requirement of any fiscal stimulus at the moment.
It's worth remembering you can't just put unskilled people to work on building roads, as in the 1930s. ³ÉÈË¿ìÊÖs, roads and buildings take skilled workers, operating complex machinery.
Some have suggested a high-speed train between Scotland and London, or sub-sea interconnectors, both of which would involve much of the money being sunk in technology and equipment. Little of that comes from British companies.
Boldest lead
Mr Salmond observes, acidly, that Alistair Darling should have done his homework before deciding on his Pre-Budget Report economic stimulus package last month - a £20bn boost, more than half of it in the VAT cut.
But perhaps the Chancellor will take note if he has to come back next year with another package. The International Monetary Fund's chief was hinting at the weekend that the boost may have to be more than the UK Government has so far committed.
In the US, President-elect Obama's team is taking the boldest lead of all, with an $800bn package now being negotiated with Congress - roughly 30 times bigger than Alistair Darling's.
Closer to home, Mr Salmond's assertion that small, independent nations can weather the economic storm better than large countries is now under new scrutiny, with news that the Irish Government has had to find more than 5bn euros to shore up the capital in its three leading banks.
It is reckoned in Dublin that they have a much smarter deal than the British one for HBOS, the Royal Bank of Scotland and Lloyds TSB.
The Nationalists' opponents reckon the case for independence has been fatally damaged by the credit crunch.
Small countries need the protection of big alliances, they say. Not so, comes the pro-independence reply - look at Norway (but please don't mention Iceland).
As the model for much of the SNP's 'Celtic Lion' thinking, it is Ireland's handling of the crisis that will influence that debate most, and the jury on that verdict will remain out for quite a few rocky months to come.
Part of the story will be the problems Ireland is already seeing from its Christmas shoppers taking their euros north of the border to take advantage of the weak pound.
That vulnerability to swings against sterling, its dominant market, would also affect an independent Scotland if it were in the euro-zone.
Hullo, I'm Douglas Fraser, and I'm business and economy editor at ³ÉÈË¿ìÊÖ Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.
Comment number 1.
At 22nd Dec 2008, lvtlvt wrote:The benefit of the VAT cut is that it can be implemented swiftly, and so could generate some momentum and confidence that prevents the downturn getting even worse. Politicians might be keen on that with an election looming.
The downside is that spend spend spend by consumers is what we need to be edging away from long term. In theory, infrastructure development will boost long-term productivity in the economy, unlike borrowing money for yet more imports.
The weaker pound will already be helping to bring this about.
The skills shortage is surely a red herring- there are loads of skilled people now ready and willing to take on jobs, particularly in construction. We might even get some value for money in procurement in these hard times.
The Irish have more levers to pull than the Scots, but they also have greater problems, as their economy and tax system is so unbalanced. But at least they have experienced growth and have the EU's second most productive economy to show for their previous efforts.
Complain about this comment (Comment number 1)
Comment number 2.
At 22nd Dec 2008, Deasun1967 wrote:Douglas re-Fraser - still writing his Herald style unionist column. Plus ca change. I notice that he only mentions the possible downside in the Republic and makes little comment on details of the bank deal (which appears to have been effective - so far). It should be pointed out that it's quite normal for people to travel to the North to take advantage of cheaper food and alcohol prices there; I know I've dome it myself a few times. No mention that this is an old phenomenon or that people from the North travel to the Republic to buy petrol - for exactly the same reason.
And absolutely no mention of the fact that we have become almost 50% poorer relative to our Eurozone neighbours, thanks to the weakest of Sterling. My next trip to Dublin may be a very expensive one!
Complain about this comment (Comment number 2)
Comment number 3.
At 22nd Dec 2008, NConway wrote:Come on Douglas you now work for the ³ÉÈË¿ìÊÖ ,a little more balanced reporting or like Kirsty Wark you will be tarnished as a Unionist Labour stooge, and like the respect that she once had you too will loose it.
Complain about this comment (Comment number 3)
Comment number 4.
At 22nd Dec 2008, Globaltraveller wrote:Why should we not mention Iceland?
Iceland is a small, resourceful, enterprising country of around 320,000 hard-working, patriotic Icelanders. I'm sure there will be pain in the short term for Iceland, but with all of its attributes, and those of its people, it will emerge a better, stronger country in the long term.
The United Kingdom is a large, creaking, bankrupt, "beggar" economy, with a population of 60m most of whom are more interested in apportioning blame than working to resolve the problems it faces. Combine that with a collapsing currency, a discredited government, a capital that is jokingly referred to as "Reykjavik-on-Thames" a lacklustre, inexperienced opposition, a massive fiscal deficit, a rocketing national debt, a strcutural current account deficit that is the 2nd largest in the world and a private sector credit to GDP ratio that would knock yer socks off...and I think the "UK" will fare much, much worse than Iceland.
An independent Scotland certainly couldn't be any worse than any of that....take me there!!!
Complain about this comment (Comment number 4)
Comment number 5.
At 22nd Dec 2008, Globaltraveller wrote:Oh...and on the recapitalisation of banks.....now that the Irish are doing it - I was led to believe that small countries couldn't do this kind of thing....
Complain about this comment (Comment number 5)
Comment number 6.
At 22nd Dec 2008, dennisjunior1 wrote:Douglas.....
How best to pump funds into a troubled economy - tax cuts or more spending?
Both, make a tax cuts to people and do spending more in the society i.e. roads and education and also, health!
Complain about this comment (Comment number 6)
Comment number 7.
At 22nd Dec 2008, Wee-Scamp wrote:"Little of that (technology and equipment) comes from British companies."
No manure Sherlock! That's a classic Union dividend.
Complain about this comment (Comment number 7)
Comment number 8.
At 23rd Dec 2008, oldnat wrote:Douglas
What a confused thread you have provided - it seems to lack any internal consistency.
Alex Salmond, the first minister, would rather like to have £1bn of extra money to spend, partly to be seen to be doing something in the face of the downturn, and perhaps because there's a lengthening list of public sector capital projects getting delayed by his problems in getting the idea of the Scottish Futures Trust up and running.
"to be seen to be doing something" is a rather facile assumption that he doesn't actually want to do anything.
The "idea of the Scottish Futures Trust" is "up and running". Strange that you don't recognise that the credit crunch has made both the SFT and PFI schemes more difficult to implement.
"The Nationalists' opponents reckon the case for independence has been fatally damaged by the credit crunch.
Small countries need the protection of big alliances, they say."
An odd statement to make, since the SNP position is pro euro. Apart from the FSP, Nationalists want to embrace a wider alliance than the euro-sceptic Unionist parties do.
"That vulnerability to swings against sterling, its dominant market, would also affect an independent Scotland if it were in the euro-zone."
This must be the ultimate in stupid comments by you.
If Scotland had been independent, it would have had an oil fund like Norway (and many other oil producing nations) and been in their position. However, due to Scots having been persuaded to remain in a UK which didn't have the wit to set up its own oil fund but to waste the revenues to prop up its imperialist agendas, instead of using the income to create an infrastructure to support manufacture, that opportunity has been thrown away.
You seem to be not only an unthinking Unionist, but a UK seperatist, clininging to a redundant sterling currency.
Grow up, or move on.
Complain about this comment (Comment number 8)
Comment number 9.
At 23rd Dec 2008, OldSouth wrote:All of our economies in the West, US, UK, Europe, Canada, share one common characteristic: They resemble yachts upon which the bridge of an aircraft carrier has been mounted. Wonder why they have trouble staying afloat?
If we cut taxes, dramatically and immediately, especially upon income, interest, and capital gains, and; cut the size, reach and expenditure of government, dramatically and immediately, especially in the areas where government impedes business formation, the results will be dramatic and positive.
Instead, we have politicians who wish to heighten the bridge, and install more mid-level officers to 'manage the economy' and 'redistribute the wealth'.
When does common sense get an opportunity to weigh in?
Complain about this comment (Comment number 9)