Why Plan B may yet be needed

The Herald Business - - Straighttalking - IAN MCCON­NELL

WE’RE just days into the New Year and, af­ter months of grim an­tic­i­pat i on, t he UK’s mas­sive f i s cal c o n s o l i d a t i o n pro­gramme has be­gun in earnest.

It will prob­a­bly be well into 2011 be­fore it be­comes clearer just what the Con­ser­va­tiveLib­eral Demo­crat Coali­tion Gov­ern­ment’s pack­age of tax hikes and spend­ing cuts will mean for the econ­omy north of the Bor­der.

What is with­out doubt is that, af­ter months of de­bate over the im­pact and warn­ings about the speed and depth of the cuts and about the Coali­tion’s hike in value-added tax, the ma­chine has now been set in mo­tion.

On Jan­uary 4 the VAT rate was hiked from 17.5% to 20% – a move aimed at rais­ing £13.5bn per an­num by 2014/15.

This £13.5bn-a-year which the Trea­sury hopes will flow into its cof­fers will be com­ing out of the pock­ets of con­sumers in Scot­land and else­where in the UK. It is way too early to gauge the pre­cise ef­fect but we un­der­es­ti­mate the im­pact of this move, which is equiv­a­lent to roughly three pence on to the ba­sic rate of in­come tax at cur­rent es­ti­mates, at our peril.

And 2011 will al­most cer­tainly be the year that the swinge­ing pub­lic sec­tor spend­ing cuts re­ally be­gin to bite.

It may be that the big moves in Scot­land do not start emerg­ing un­til af­ter the Holyrood elec­tion i n May. How­ever, what has been made plain is that hun­dreds of thou­sands of pub­lic sec­tor jobs will go in com­ing years through­out the UK.

The de­bate con­tin­ues to rage over whether this will cause fur­ther job losses in the pri­vate sec­tor or whether firms will ride to the res­cue and re­cruit those laid off by the state. It is, un­for­tu­nately, still eas­ier at this point in time to imag­ine the first sce­nario than the sec­ond.

It was there­fore heart­en­ing to hear ru­mours re­cently that an eco­nomic “Plan B” was be­ing drawn up by civil ser­vants, in case the re­cov­ery can­not with­stand the huge fis­cal tight­en­ing which will be im­ple­mented as the Coali­tion aims for £113bn per an­num of pub­lic spend­ing cuts and tax hikes by 2014/15.

This chat­ter ap­peared to in­di­cate an aware­ness that the fis­cal plan (which is aimed at cut­ting na­tional debt but may not achieve this if it snuffs out re­cov­ery) may have to be changed around as its ef­fects be­come clearer.

The Gov­ern­ment at West­min­ster ap­peared at pains when this talk sur­faced in De­cem­ber to deny any need for a Plan B. How­ever, it will hope­fully keep a very close eye on the un­em­ploy­ment num­bers as it im­ple­ments its fis­cal pro­gramme and adapt it as ap­pro­pri­ate, in the same way as a busi­ness would al­ter its plans with chang­ing cir­cum­stances.

The fact that un­em­ploy­ment did not rise nearly as far as had been feared dur­ing the re­cent re­ces­sion was a cru­cial fac­tor in the econ­omy be­ing able to haul it­self back to growth.

Events in the labour mar­ket as the fis­cal con­sol­i­da­tion un­folds are likely to be crit­i­cal to the out­look for the econ­omy north of the Bor­der and in the UK as a whole.

And peo­ple must not make the mis­take of com­par­ing this eco­nomic re­cov­ery with that of the early 1990s. Af­ter all, we are emerg­ing from a re­ces­sion caused by a fi­nan­cial cri­sis and the signs re­main that the UKbank­ing sec­tor is still un­will­ing or un­able to lend nor­mally. Fi­nance is vi­tal to firms eyeing new mar­kets or prod­uct launches, con­sid­er­ing re­cruit­ment, or plan­ning in­vest­ment for growth, and there re­mains far too much anec­do­tal ev­i­dence that such fund­ing is still not freely avail­able

Mean­while, many firms de­pen­dent on the pub­lic sec­tor for work will be keep­ing an anx­ious eye on de­vel­op­ments. Some of the busi­ness lob­by­ing groups may have un­der-es­ti­mated the im­pact of the pub­lic sec­tor spend­ing cuts on their own mem­bers.

How­ever, at least there have been signs of strength in the econ­omy with the man­u­fac­tur­ing sec­tor ap­pear­ing to be do­ing well. Within this, Scot­tish En­gi­neer­ing has re­ported that its mem­bers have been per­form­ing strongly. Man­u­fac­tured ex­ports will be cru­cial to Scot­land’s fu­ture, as will in­ward in­vest­ment.

And many Scot­tish firms are bat­tle­hard­ened af­ter the deep re­ces­sion. This should stand them in good stead as they face the next huge chal­lenge for the econ­omy – fis­cal tight­en­ing.

Mean­while, we will all have to keep our fin­gers crossed that the Scot­tish and wider UK econ­omy can end this year with re­cov­ery in­tact.

It is still too early to as­cer­tain the ef­fect of the Con­ser­va­tiveLib­eral Coali­tion Gov­ern­ment’s pack­age of tax hikes and cuts

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