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Last Updated: Tuesday, 16 January 2007, 09:21 GMT
Battle for Scotland's economic soul
By Gavin Stamp
Business reporter, BBC News, in Central Scotland

Scotland's First Minister Jack McConnell addressing Parliament
Business leaders want politicians to take them more seriously

With Parliamentary elections less than four months away, arguments about Scotland's economic performance and its growth prospects are intensifying.

The debate has been sharpened by recent surveys on both sides of the border showing growing support for Scottish independence.

With the SNP promising to hold a referendum on independence should it win power and calling for an end to Scotland's current financial relationship with the rest of the UK, the stakes are high.

'Debate needed'

The rhetoric may be escalating, but many economists - even those who oppose independence - say a debate on the financial arrangements underpinning devolution and their benefits to Scotland is needed.

"There is a case for a sensible debate about fiscal decentralisation within a unionist framework," says Professor Brian Ashcroft, from the Fraser of Allander Institute at the University of Strathclyde.

He opposes enhancing the Parliament's current powers to give it full control over taxation, a position known in academic circles as "fiscal autonomy".

Many politicians appear not to appreciate the economic context of their deliberations and, ultimately, their decisions
Melfort Campbell, CBI Scotland

But he agrees that there are tensions over the existing position, which are fuelled by Scotland's inability to determine tax levels and retain revenues, and by concerns over the amount of funding the nation gets from the UK Treasury compared to the English regions. All this, says Professor Ashcroft, makes a debate essential.

"The debate will move further forward. This will be an increasing matter of debate not just in Scotland but the rest of the UK."

'Economic underperformance'

Of course, others want to do more than just talk.

The SNP argues that the Scottish parliament is "powerless" in economic matters and says the economy has "underperformed" since the historic move to devolution in 1999.

Giving parliament full taxation powers - adding to its already extensive powers over expenditure - could help boost competitiveness, stimulate economic growth and boost prosperity.

The SNP cites the comparatively stronger growth of Ireland, Norway and Finland, countries of similar size to Scotland but with a full range of economic powers at their disposal, to back its argument.

Some commentators share this view, arguing the financial framework - based on Edinburgh receiving block funding from Whitehall - does not impose enough constraints or incentives on ministers to spend money productively.

"One has to wonder for how many more years Scotland and the rest of the UK are to labour under this failing fiscal mechanism," Ronald Macdonald, from the University of Glasgow and Paul Hallwood, from the University of Connecticut, argued in a recent economic analysis.

Balloon at SNP conference
The SNP has forced economic debate to the top of the agenda

The bare facts show the Scottish economy has underperformed the UK as a whole since 1975, seeing average annual growth of less than 2%.

The situation has not improved much since 1999 but the headline figures do not tell the entire story.

Growth in key sectors of the economy, such as business services, financial services and construction, has actually been higher in Scotland than the UK as a whole under devolution.

According to the Fraser of Allander Institute, the economic picture is generally bright with annual growth set to top 2% in each of the next three years and unemployment stable at just over 5%.

The arguments marshalled against fiscal autonomy, articulated forcefully in recent months by Labour ministers, are lengthy.

Their main claim is that scrapping the financial status quo would imperil Scotland's economic stability.

In this nightmare scenario, ministers may have to resort to raising taxes to fund increased welfare spending as more people retire, pensions must be paid out of Scotland's own pocket and the working population falls.

A rising tax burden would then hit consumer spending and deter corporate investment.

Business priorities

Business has often found itself caught in the political crossfire over constitutional arguments.

Recent comments by the CBI that Scottish ministers would do better to ensure they used existing powers to improve the economy rather than push for new ones inevitably attracted criticism from some quarters.

But the employers' body says it can not be "taken for granted" that economic growth will still be the executive's number one goal following the next election.

Logo outside Standard Life's Edinburgh headquarters
Financial services have flourished since devolution

"Gradually, the economy has become recognised as a priority, certainly at senior ministerial level," says Melfort Campbell, chairman of CBI Scotland.

But he bemoans the fact the executive does not set its own economic growth targets: "Many politicians appear not to appreciate the economic context of their deliberations and, ultimately, their decisions."

Scotland plc has been unhappy with what it feels is a lack of understanding among MSPs about the importance of business to society, resenting being seen by some as just another pressure group.

Some, however, feel official attitudes have changed for the better.

"There were historical issues but they are gone and people are paying a lot more attention," says Hugh Aitken, a senior executive with Sun Microsystems, one of Scotland's largest foreign investors.

"The good thing about Scotland is that it is a very small community. It is not difficult to get all the way to key decision makers to get an idea over and get things moving."

Birth pangs

Hovering over current discussions is the spectre of Scotland's falling population and the economic implications of this drop.

The number of Scottish people has fallen steadily since the 1970s and, if current trends continue, could plunge over the next 30 years below the magic mark of five million.

Shoppers in Glasgow
It is a totem that we want to remain above five million
Professor Brian Ashcroft

"The population is declining and that is a big issue," says Professor Ashcroft.

"It is a totem that we want to remain above five million."

Annual death rates have exceeded births since the late 1990s and, if the situation continues, the impact on productivity could be stark.

But the Scottish Executive's call for more people to make Scotland their home and reverse decades of emigration seems to have been heeded.

There has been net migration of nearly 55,000 in the past three years, boosted by a growing number of arrivals from Eastern Europe.

"We have been giving our health and safety notices in Russian," says Gerry More, managing director of Edinburgh building firm Cala, reflecting the influx of labour which has boosted the construction and fish processing industries in particular.

For many years, many Scots have looked to Europe for a solution to its perceived economic problems.

It seems that Europe is providing an answer - at least to one of Scotland's main weaknesses.

But other concerns clearly remain.

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