Let's build our way out of recession

A HISTORIC change to allow Scotland to borrow and build its way out of recession is urgently needed, a heavyweight group of economists and businessmen has reported.

In a radical vision to get Scotland out of the downturn and build it up as an economic powerhouse, the Council of Economic Advisers (CEA), chaired by Sir George Mathewson, a former Royal Bank of Scotland chief executive, said that Holyrood needs to be given borrowing powers.

The CEA, featuring some of the world's leading economists, including a Nobel prize winner and two of Scotland's most successful businessmen, insisted that constitutional change was required for Scotland to prosper.

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But its demands for the Scotland Act to be amended to allow the Scottish Government to borrow has raised the prospect of a massive tartan debt running into tens of billions of pounds.

The CEA has argued that the Scottish Government's inability to borrow money is holding the country back, especially in the recession, as it cannot invest in the massive infrastructure projects it needs to kick-start a recovery.

An example of this is a 100 million programme to build affordable housing which has been brought forward to stimulate the construction industry. But this has been achieved only by delaying other projects.

The council's members see the borrowing change as essential because of the current problems in the Scottish economy, with one Scottish bank, RBS, virtually nationalised; a second, HBOS, about to disappear into the Lloyds TSB group; and warnings from think-tank the Fraser of Allander Institute that the recession will hit Scotland hardest, putting 73,000 jobs at risk.

But the proposal carries risks. There have been suggestions that if it had borrowing powers, Holyrood would need to take responsibility for a share of the UK debt, which is due to reach 1 trillion by 2011.

Last night, the UK government seemed to rule out the recommendation, even though it is under review by the Calman Commission, which is looking at Scotland's constitutional future.

A Whitehall source said that borrowing powers were not what the Scottish Government needed.

"If you look at (Chancellor] Alistair Darling's speech to the Chambers of Commerce this week, it is clear Scotland could spend another 800 million on projects by using existing PFI (private finance initiatives], which they won't use for ideological reasons," he said.

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And the Conservatives warned borrowing was the cause of the economic problems, not the solution.

Gavin Brown, the Tory shadow enterprise spokesman, said: "If the Scottish Government is suggesting that borrowing is the answer, it has fallen into the age-old trap of being wrong. The solution to a debt-fuelled financial crisis is not to rack up more debt."

The CEA went further by also demanding that, in support of a building programme funded by borrowing, there needs to be a shake-up of the planning laws and fresh incentives to councils to encourage them to accept and promote commercial developments.

This was welcomed by CBI Scotland, the employers' organisation, although it was opposed to bringing borrowing powers north of the Border.

The 22 recommendations in the CEA's first annual report have also been criticised in a number of quarters and damned as "banal" by unions.

Stephen Boyd, STUC assistant secretary, said: "Following the publication of its first annual report, we simply have to ask of the council: what is it for? As a lesson in the banal, the report is peerless. It is difficult to discern any new or innovative thinking in its 60 pages."

One of the advisers, Professor John Kay, explained that borrowing powers were the preferred option for an alternative to private finance initiatives. He and his fellow council members argued that, because of low interest rates, now was a good time to borrow to pay for the infrastructure projects needed to both provide work and economic activity, to beat the recession and prepare Scotland for better times ahead.

"We need to look further ahead and discuss direct borrowing powers for the Scottish Government, which it doesn't currently have," he said. "The current financial relationship between the Scottish and UK governments is not very different to that of a (UK] government department and that has to be reconsidered."

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The CEA recommendation was welcomed by Alex Salmond, the First Minister, who argued that the Scottish Government needs control over all its own resources and the ability to borrow in the same way as other governments, especially during a downturn.

In the short term, the Scottish Government envisages a Treasury-controlled borrowing limit, on a similar basis to ones enjoyed by councils, although the SNP sees that as an interim arrangement on the way to full independence.

"The Council of Economic Advisers' recommendations make it clear that the current arrangements do not meet the challenge of the times," said a spokesman for the First Minister.

But while the Scottish Government welcomed most of the report, insisting that it was "very important" and would be considered "seriously", SNP ministers were unhappy that the council continued to refuse to rule out the need for new nuclear power stations in Scotland.

The council wants an independent review of Scotland's future energy options and has not discounted anything as yet. Mr Salmond said he would not countenance new nuclear power stations in Scotland.

"When it comes to energy, nuclear is the most expensive and unsustainable technology of all, as the rapid escalation in decommissioning costs illustrates," he said.

Elsewhere in the CEA report, there was apparent support for a 100 million measure proposed by the Greens for the next budget, to provide free insulation for all homes in Scotland that need it.

The CEA highlighted the need for better insulation and recommended that the Scottish Government looks at ways of putting off the up-front costs to consumers.

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However, unlike the Greens, the council suggested that people might pay these costs back in the future.

Patrick Harvie, a Green MSP, said: "Support for our proposal to put free insulation into every home in Scotland is spreading rapidly."

The six areas where cash could go

Aberdeen and Glasgow crossrails - Seen as a way to get commuters out of cars, they have been held back by cost. Glasgow crossrail, a train service across the city and an airport link, would cost 187million. Aberdeen's would cost up to 200million and mean building stations.

Interconnector from the Western Isles – To enable wind energy to be generated from the Hebrides. A problems with the recently rejected scheme on Lewis was that the farm needed to be so big to persuade the company to pay for the 1 million a mile connector.

A9 – For years, politicians have discussed dualling the A9, but it has never been done due to cost. The SNP promised to do it, but said that 500 million spent on trams, forced through by opposition parties, had limited its options. The 108 miles of work would cost an estimated 600 million.

Sub sea power cable – Essential for achieving the renewable energy dream by taking electric power generated by tidal, wave and wind power from the Pentland Firth down the east coast of Scotland, but costing 1.7 billion. Underwater cables are seen as problematic.

High-speed rail link – Needed to shorten rail times from Edinburgh to London and help boost the Scottish economy, but would cost an estimated 20 billion. It would also have the advantage of encouraging people to use the train instead of more environmentally damaging aircraft.

Schools – Scotland has 832 crumbling schools which need replacing or a large-scale make-over. Many buildings are falling apart, have leaky roofs, health and safety problems and no proper eating areas or sports facilities. The task will cost billions of pounds.

Who's who

THE members of the Council of Economic Advisers:

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Sir George Mathewson, chairman and former RBS chief executive.

Crawford Beveridge, executive vice- president of the Americas, Sun Microsystems.

Prof Andrew Hallett, professor of economics at George Mason University in America.

Prof John Kay, fellow of St John's College, Oxford, and visiting professor at LSE.

Frances Cairncross, former management editor for The Economist.

Prof Alexander Kemp, professor of economics at the University of Aberdeen.

Prof Finn Kydland, professor of economics at University of California.

Jim McColl, consulting civil and structural engineer.

Prof Sir James Mirrlees, Nobel prize winning economist.

Prof Frances Ruane, director of the Economic and Social Research Institute (ESRI) in Dublin.

Lord Smith of Kelvin, one of Scotland's leading businessmen since the Second World War.