SNP budget a winner but with the UK economy nosediving should Scotland now head for the lifeboats?
by Alex Porter, Economy Editor
The good news in Scotland is that the economy grew by 0.5% in the third quarter of last year but the bad news is that in the fourth quarter of 2010 the UK economy contracted 0.5%, according to the Office of National Statistic (ONS).
Economic growth right now may be a blessed relief for Scottish job-seekers and businesses although the bitter-sweet reality is that Scotland must face cuts to its block grant from Westminster in order to pay for the UK’s spiralling budget deficits.
UK crises deepen
If you are in the habit, as most are, of swallowing the mainstream media’s economic analysis whole then you will now know that the UK economy has gone into a “shock reverse”. Apparently “analysts” had predicted modest growth and told us that the UK was experiencing a fragile recovery. Suddenly “analysts” are telling us that the UK economy is already showing symptoms of stagflation. This is when prices rise but growth contracts.
A shock turn of events? No.
Readers of Newsnet Scotland will note that this outlet was never on-message and the ‘recovery’ meme was never pumped out for mass consumption and distraction here. Indeed two years ago when the “green shoots of recovery” baloney was being disseminated as if it were one of the ten commandments this observer warned elsewhere that “analysts” were smoking those green shoots.
Just to recap. In 2008 the financial crisis happened because of the implosion of the rapid expansion of a fraudulent market in financial products called derivatives. This market was valued globally at around £500 trillion. To put this in context, global GDP at the time was around £50 trillion. Not everyone understands money on this scale so think of it this way: imagine you earn £1 per year and from that you have to pay taxes, pay the rent, eat and pay your bank charges. At the end of the year you have managed to save 5p (well done, most are already using behind on credit card payments). Then someone tells you that you suddenly have £10 debt to pay. How long will it take if you can save 5p every year to pay off that £10 debt? 200 years and that’s excluding interest. That’s the situation the world is in.
Now draw a deep breath because the worst is yet to come – Britain was the epicentre of the derivatives market. The City packaged and sold the majority of them around the world. Hence the “global crisis”.
To put it another way, the UK financial sector is dead. They are being allowed to hide those losses so that they are not forced into liquidation. Meanwhile the government is borrowing like a drunken sailor and the Bank of England is printing money like confetti to keep the banks on a life-support machine.
Keeping the City on life-support means the UK economy is being squeezed and the pips are starting to squeak. Printing money, for a short while, feels like economic growth but it’s debt and illusory economic performance. The outcome is devaluation and so we now have the situation where sterling is nose-diving and products are becoming more expensive. Inflation is nearing (officially) 5% while at the same time the economy is contracting – this is the definition of stagflation.
The citizen of Britain PLC has money which is rapidly losing value as the UK government gets out the epson money printing machine and goes to town. That’s really dangerous not to mention worrying if you’re a pensioner or low paid. That’s life in the UK; banking buddies of the political class in London get socialist state hand-outs to the tune of trillions of pounds while the poor get the capitalist medicine – pull your socks up.
If it were all that easy it would simply make you livid. However the real problem is that all this money the government is borrowing to keep the banks going has to be paid for. In the single month of November 2010 UK borrowing reached a record £23.3 billion and the trend line is upward. Government tax receipt showed a small recovery last year but that is clearly dependent on the government pumping more money into the economy.
What’s so worrying is that as tax revenues are not recovering owing to economic growth then how is the UK supposed to be able to keep paying back the money it’s borrowing – and with interest? The point of bankruptcy has been reached. UK PLC is printing money to pay its debts. It may only be a matter of time before those who own long terms UK debt realise that they will be repaid in devalued currency and dump their UK bonds before everyone else does. That means currency collapse and capital flight ala Argentina circa 1999.
What about all the indicators and stories of recovery? Ok, think about it. All the borrowed/printed money is going to the City. Where are the “analysts” based? All the borrowed/printed money is going to the financial sector. Who do “analysts” work for? And why is it that when the government borrows money which then enters the economy and is spent then that money is not subtracted from GDP figures? You know, the figures which show “growth”. And why are the unemployment figures massaged for that matter?
I’m sorry to have to tell you this but the mainstream media is pumping you full of propaganda.
Now, I doubt very much that the Scottish growth figures can be trusted because UK government borrowing is not subtracted, but official figures do show that fiscally the Scottish economy shows a surplus while the UK deficit is now completely out of control. Make no mistake, borrowing is premised on growth projections so that the principle can be repaid with interest. That’s why the government does all it can to protect the population from the truth. Money printing and devaluation makes the economy look like it’s growing on paper but that’s nominal growth not real growth. Real growth was probably last achieved in the UK in 1976. Ever since then Britain has used the credit card to party on and they had future oil revenues so the credit card company were happy to extend credit, but that’s all over now boys and girls.
There are calls for the Osborne to do a U-turn on economic policy but let’s be clear ‘austerity’ has not started yet. The problems being experienced now are caused because of the banks. Yes, the wars and the missile systems are exorbitantly expensive but the reason the economy is going down the tubes is because of the bail outs and debt.
Opposition and trade-unions will argue for stimulus which means add to the debt meaning more of the problem cures the problem. You can’t cure an drug addict or a ideologue by giving them more of what they want. Stimulus suits the financial sector and that’s why it was and still is current economic policy. Stimulus sounds good but don’t forget it’s debt and keep in mind that Britain PLC is printing money to pay its debts.
Mervyn King (BoE) is warning of 5% inflation. The key mandate of the Bank of England is to keep inflation below 2% so why are interest rates not rising? Believe me, there’s more inflation coming. You can’t print money without prices rising eventually. Commodity prices around the world are surging. Prices like sugar and silver are skyrocketing and these type of commodites go into everything you consume such as chocolate bars and mobile phones. There’s a time lag before rising commodity prices hit the main street but it’s starting.
Inflation figures can be massaged too, but let’s say the official rate goes up to 6% by spring. “Analysts” will start to panic about inflation rising very quickly. Interest rates will then be used to reduce the supply of money in the economy to bring down prices. Now with public and private debt at 449% of GDP and with the government already printing to pay debts how are interest payments going to be met?
In Scotland around 5% of the population, or 207,500 people, according to Shelter Scotland, are already using credit cards to pay their mortgages. So what happens if mortgage interest rates spike by say only 2%? I prefer not to imagine it.
Ugly stereotypes will be peddled from the London media as the UK government seeks to blame the economic malaise on subsidy junkies up North, the EU, the Welsh, the immigrants and yes, the poor will be blamed for being lazy. All this already happens so just imagine the magnification of those images in the dishonourable dash for political cover. Expect a rise of extreme right activities.
Scottish economic debate
As I said, the good news is that Scotland has an economic surplus in its accounts. It really is remarkable how Scotland has managed to remain in robust economic shape during the crisis and that is testimony to the sound economic management of the SNP government in Holyrood.
Our national parliament has few of the powers needed to effect real economic change but those which it does have are being handled more than capably by Alex Salmond and John Swinney – credit where it’s due.
Large corporate businesses, and the parties they donate and lobby heavily to, have a dispropotionate influence over how economic news is reported. What the mainstream media seldom tells you is that the health of the private economy is essentially down to small businesses. Many more people work for small companies than large corporates and so the small business relief policy has been an SNP economic master-stroke. It is the probably the single most important reason that Scotland remains in surplus.
In order to help small companies compete with giant retailers the SNP introduced into its budget a levy on the the big out-of-town supermarkets. The move was well received by Scotland largest business organisation the Federation of Small Business. Today, it was voted down by the Unionist opposition parties which perhaps is a reflection of where supermarket polical donations will be going in the run-up to the Holyrood elections.
The Nationalists have also, after a suspension lasting a generation, undertaken council house construction projects and the Scottish construction sector is now contributing to Scotland’s economic growth.
Crucial to protecting families and communities has been the SNP’s freezing of council tax payments. This has saved family budgets from being plundered and so with a little more to spend in the shops small retailers have been thrown a lifeline to support them in times of UK crises. To prevent council services from being cut the party has achieved public sector efficiency savings especially by making public sector procurement more efficient. This is, for me, one of their most impressive achievements in government demonstrating ministerial capability and sound management.
I mentioned above that the current parlous state of the UK economy is not related to austerity. That is not to say I think austerity will help. Indeed, I believe it will cause further economic decline.
Throwing hundreds of thousands of public sector workers on the dole and slashing benefit payments is the wrong way to deal with a problem caused by the financial sector – especially wealthy finance houses. Look no further to the collapse of the Irish government to see where this policy will take us. With the private economy contracting how will the burden of the austerity cuts be borne? Now, you can argue that cutting down the public sector is a good idea and that’s a valid poltical viewpoint to hold under normal circumstances. However cutting public sector jobs and services at the same time as a private sector contraction is the economics of the madhouse.
Laid off public sector workers will have to be paid benefits. Many struggling to pay their mortgages will experience repossession. And with salaries gone and benefits cut there’ll be less money going into the shops, already suffering from a VAT hike, and so there’ll be a further drop in retail sector jobs. And do not public sector workers pay taxes? You might deduct their salary from the cost of running government departments but you must at the same time calculate the hit on the Treasury in terms of the consequent income tax revenue and VAT receipt losses.
With the Holyrood elections looming, the UK sovereign debt, currency and financial crises will be the central theme of the campaign.
In the red corner will be disgraced former leader Wendy Alexander priming Labour spokespersons on the benefits of the Scotland Bill. Internationally renowned economists and academics have characterised the Scotland Bill as “fatally flawed”, “unworkable” and “a perfect storm”.
Adding to the opprobrium being heaped on the Scotland Bill this week saw the Institute of Chartered Accountants of Scotland (ICAS) claiming that the tax changes proposed by the Scotland Bill could mean a “disproportionate” amount being spent on collection and a backlash from workers who consider them unfair. The institute calculates that anomalies in the system could see an epidemic of evasion costing the Scottish taxpayer £150 million. The Scotland Bill is widely perceived as a Unionist project designed by opposition parties to prevent significant new economic powers being transferred to the Scottish parliament.
Economic independence, as espoused by the SNP, is very popular with the Scottish electorate. The Scottish Social Attitudes Survey 2010 showed that 57% of Scots would like their parliament given full control over Scottish taxes and 62% full control over benefit payments.
Economic indepependence would see Scotland fiscally protected from the dire UK economic situation and is supported by a large number of business leaders, economists and academics. Such shelter would be welcome news for Scottish families, businesses and institutions such as the university sector all of whom must now plan for Westminster austerity cuts.
Alex Salmond’s cabinet has shown itself to be very competent and many commentators who are not aligned to the SNP will tell you that, albeit privately. Despite the SNP minority government facing a hostile and often feverishly anti-independence media the party has survived its first term with dignity and kudos. Many in Scottish civic society have praised its professionalism and commitment to the nation.
Salmond and his advisors must then point not simply to their economic successes but to get re-elected they must compare the healthy state of the Scottish economy with the UK’s crises. Yes the Nationalists really only benefit from upbeat messages, but if they must be sparing in their criticism then negative criticism must be spared to point out that the UK’s deficit was caused by the Labour party. That will give them the opportunity to ask the electorate to think twice about believing that Labour can be believed to solve a problem that Labour themselves caused.
For Gray, economics is not his strong point and to win control of Holyrood he must defeat a popular and charismatic sitting First Minister who is a former economist. Gray’s strategy then must be to avoid the subject when possible and when he must simplify his message and use Labour’s ubiquitous influence over the mainstream media to focus all the blame for the UK’s economic crises on the ConDem coalition.
As far as the electorate is concerned the next electoral term is not about getting elected but keeping a roof over the head and food on the table.
Scots will have to decide whether they believe that the size and prestige of the British economy and currency is going to help their family survive and prosper over the next few years or whether they they should opt to have their own parliament take the important decisions over the Scottish economy.
The propaganda is thick when it comes to politics and economics and so deciding how to vote will be a difficult decision to make. In times of crises people tend to be conservative but when you are on a sinking ship and you see a lifeboat, radical and decisive action is widely believed to be an appropriate response.