Public Spending and the Scottish Economy Briefing 131

January 2006

The Impact on the Scottish Economy of Public Sector Spending

Introduction

Recently there has been a series of newspaper articles claiming that the public spending in Scotland has grown too big and is bad for the economy in general. Scotland on Sunday (9^th October) argued that the Scottish public sector was "cash bloated" and "efficiency challenged". Murdo Fraser, Deputy Tory leader, has recently repeated this theme along with the CBI. The solutions offered are increased private involvement in the provision of public services and reduced taxation. UNISON asked the Centre for Public Policy for Regions (CPPR) to review the evidence for these claims. They found that not only is Scotland's public sector similar in size to other small European countries but also that a large public sector can be good for growth.

Crowding out

The "crowding out" theory is central to the Conservative plans to cut public spending. Put simply it is a belief that public spending stops private industry from growing by talking up space in the economy. Arguments include: government borrowing raising interest rates and makes private investment in business less attractive; public sector displacing private companies for example in health; the private sector cannot compete with the high wages and conditions in the public sector and so cannot get good staff. Scotland's economic growth has been lower than the UK average. The argument is that Scotland's allegedly large public sector is holding back the economy. In fact although Scotland's growth has been lower than the UK average since the 1970s, long term trends show a decline in Scotland's public spending. The has been no growth in private sector to match. This is the Tory political dogma of cutting public spending dressed up as economic theory.

International comparisons

CPPR found that there is little evidence that countries with low public spending have high economic growth or that high public spending leads to stagnation. A look at OECD countries shows that the top (Ireland and Korea) and bottom (Japan and Switzerland) two performing countries have low levels of public spending. What does matter is: the quality of public administration and judiciary; and the quality of education, health and infrastructure.

Ireland is often quoted as an economic miracle, it is claimed that its growth is based on a small public sector and low taxation but net EU money in Ireland was worth four per cent of GDP, almost €400 per person. If EU money is considered the Irish public sector share of GDP is in fact on par with the UK. It could therefore be argued that Ireland is an excellent example of public spending as a key to good economic growth.

Public sector spending growth in Scotland

Scotland's public spending was around 50% of GDP in 2003. Although higher than the UK level of 44% this is less than other small European counties such as Sweden (57%), Denmark (56%) and Austria (51%). It has also been claimed that the growth of public sector employment is the reason for our lower than UK average economic growth but our public sector employment growth lags behind many other UK regions including the Southeast of England. The public sector share of employment actually fell recently. Public sector employment in Scotland is now at 24%. It is important to note that the ups and downs of Scottish manufacturing in recent times and the long term decline of Scotland's industrial base have a more significant impact on Scotland's lower than average growth than the size of public sector.

Public Sector's key role in economic growth

The quality of a country's infrastructure is a vital tool in economic growth e.g.

• an educated and healthy population
• a good transport system.
• a fair and binding legal system

The Government in Finland expanded research and development expenditure from 1% to 3% of GDP between 1980 and 1999 this was critical to the success of companies such as NOKIA. The public sector in Scotland has played a vital role in key new clusters of economic growth such as biotechnology.

Conclusion

The CPPR has reviewed the evidence and found nothing to indicate a link between high public spending and poor private investment in the UK. International comparisons show that low public spending has not been the key to successful economies, or high public spending to poor performance. Levels of public spending and the allocation of resources within them are decisions to be made by the people of Scotland and pushing forward the unsubstantiated "crowding out" theory does nothing to take the debate forward about the size and shape of Scotland's future vital public services.

A copy of the full report is available from: UNISON
14 West Campbell St
Glasgow G26RX
Tel 0845 355 0845
Fax 0141-307 2572

And can be downloaded at www.unison-scotland.org.uk/addingvalue.html

Contacts list:

Kay Sillars
k.sillars@unison.co.uk

Dave Watson -
d.watson@unison.co.uk
@ The P&I Team
14 West Campbell St
Glasgow G26RX
Tel 0845 355 0845
Fax 0141-307 2572