Lean Budgets, Big Ambitions: Scotland’s Path to Economic Prosperity

This is the second article in the ‘Squaring the Circle” series. The first article Squaring the circle | Scottish Fabian (fabians.org.uk), looked at how a Westminster Labour Government can fund its ambitions. It concluded that driving economic growth is the only sustainable way, whilst changing capital borrowing rules and the introduction of taxes like a wealth tax and land value tax would also help. The article below looks at the conundrum of how to drive growth when money is tight.

” Once you start thinking about growth, it’s hard to think about anything else,” as the Nobel laureate economist Robert Lucas once said. This rings particularly true for us in Scotland, and indeed for people across the whole of the United Kingdom.

The transformative power of growth is undeniable: it hoists billions out of the depths of impoverishment, furnishing the essentials — clean water, sanitation, abundant food, comprehensive education, proper housing, and accessible healthcare. These are not luxuries but foundations of a decent society. In Scotland we face over one million people in poverty, including, shockingly, one in four children. We face increasing homelessness and GDP still lower than it was pre-pandemic. Even prior to the pandemic growth was anaemic.

To demonstrate how growth is essential in fixing this: the divergent paths of Argentina and Austria, both once paragons of wealth at the dawn of the previous century, serve as a stark reminder. Stagnation can lead to a perilous decline in prosperity. Small differences in their respective growth rates have left Austria commercially prosperous and Argentina on the brink of economic collapse, too many of its people suffering from high inflation and poverty. With a modest growth rate of 2%, we witness national income doubling every 35 years; at 7%, as China has seemingly achieved in various years, this doubling reduces to a mere decade – albeit at costs not fully known. Moreover, as Thomas Piketty has pointed out, an economic landscape where the growth rate is higher than the return on capital – interest, dividends, rental income – heralds an era of rising wages and shrinking inequality.

On climate change: it’s not growth per se that’s the enemy of our environment, but the nature of that growth. We advocate for a growth that’s driven by productivity leaps, technological innovation, and smarter, more efficient ways of working — growth that aligns with our urgent march towards a net-zero economy. Innovation and technological progress are not options but necessities if we are to circumvent both environmental and human catastrophe.

Growth is vital for us politically too. People need to see real improvements in their daily lives. If we cannot fund improvements via growth, we need to look at raising funds through taxation. Some options include a wealth tax and a land value tax, as set out in my previous article in this series. Taxation without growth may provide some relief but will result in vast missed opportunities to improve lives in the long run.

The problems we face as a country are so fundamental and deep-rooted that they are not solvable by redistribution alone, and are not solvable within a 5 year term. We need a credible 10 year plan and full cooperation between the Westminster and Scottish governments to fully turn the economy around and repair the immense damage done by the twinned incompetence and myopia of the Tories and the SNP.

To be unequivocally clear: the brand of ‘growth’ peddled by the likes of Truss, anchored in free-market zealotry, low taxation, and reckless deregulation, is fundamentally flawed. It’s not the growth we need nor want. It didn’t even lead to growth at all, rather it just destabilised the economy.

In contrast, a Labour approach might instinctively call for a significant ramp-up in state spending to stimulate aggregate demand, echoing the Keynesian doctrine of old. However, challenges remain:

Firstly, interest rates are higher than they were, making borrowing more difficult, and the independent Bank of England is not minded to print more money.

Secondly, many of our hurdles are on the supply side, including not enough skilled workers and a deteriorating infrastructure — these are not remedied by simply pumping up demand.

Lastly, Rachel Reeves’ fiscal rules, which are prudent and necessary, bind us to a path where debt, as a proportion of GDP, must decline by the end of the parliamentary term.

Such rules tacitly acknowledge a truth: the higher the growth rate, the greater the leeway for investment under these constraints. We want a virtuous growth cycle, not a vicious spiral of austerity where cuts beget recession which begets cuts.

Creating the conditions for growth requires a synergy of individual, academic, business, and governmental innovation. Labour’s strategy for nurturing a pro-growth environment encompasses wisdom from industry, academia, think tanks, and the insights of Gordon Brown’s ‘Future of the UK’ report.

We know business investment thrives in stable conditions. In Scotland, the spectre of independence has arguably been a deterrent to investment. However, it’s the Conservatives who have truly unsettled the UK’s economic bedrock with austerity, Brexit chaos, and a mishandled pandemic response — culminating in the disastrous uncosted mini-budget under Liz Truss. Austerity was particularly foolish given low interest rates at the time, and business expectations that recessions will lead to countercyclical government spending. Labour’s commitment therefore is to fiscal responsibility, a growing economy, and clear rules, creating a fertile ground for investment.

Labour’s vision is to pinpoint and cultivate future high-growth sectors — from AI to clean energy. This will involve a collaborative effort with industry leaders, trade unions, and academia to build ecosystems of innovation across towns and cities, leveraging regional strengths. Scotland has huge strengths in engineering, finance, computer science, life sciences and clean energy among many others. There is untapped potential in fintech, biotech, genomics, cleantech and AI that with proper cooperation between industry, academia and government, and between governments and local areas, could be harnessed to create the high paying jobs of the future.

A joint effort between UK and Scottish governments on a comprehensive skills strategy is vital, alongside significant investment in critical infrastructure. A national training scheme for skilled workers in industries such as construction, and a national housebuilding programme, are necessary.

A Labour government would foster enhanced cooperation between UK and Scottish Governments and between regions, to bolster local leadership and cross-border initiatives, focussing on interdependence and devolved authority rather than independence.  Devolving powers and budgets will enable regions to capitalise on sectors where they have a comparative advantage.

Labour should also look to reforming the rules around the structure of government expenditure in order to enable a 10 year plan to grow the economy, consideration should be given to changing the rules on borrowing to exempt borrowing for capital spending from being part of the calculation of the debt to GDP ratio that needs to fall by the end of our first term.

Support for SMEs is essential with access to finance for small and medium enterprises, including those in the foundational economy, should be facilitated through more low-interest loans and well-calibrated risk assessments to encourage growth.

Increasing participation by women will also boost growth.  The gender employment gap in Scotland has increased and the gender pay gap is high. There is a plethora of policy ideas to help enable and empower women into the workforce and into high paying jobs, from improved childcare services to focussed, sector specific training.

To recover from the £100bn annual blow of Brexit, Labour seeks to smooth trade flows with regulatory alignment and dynamic cooperation to accelerate growth.  Alongside this sits labour market reforms ensuring job security and fair wages not only fulfils a moral obligation but also fuels productivity, allowing workers to focus on innovation rather than survival. We also need education reform to give people more options for part time courses and course flexibility.  Labour will also need to look at fixing and renewing the NHS so long term we  improve productivity by improving the health of the workforce.

Under a Labour administration, Scotland can reclaim its deserved prosperity. We are poised to mend the economic fractures caused by the SNP and the Tories, alleviate poverty, and rejuvenate our national wealth. The path forward is clear: with strategic investment, wise fiscal management, and cooperative governance, we can reignite Scotland’s economic engines and secure a future of inclusive, sustainable prosperity. We must get this right.  A brighter future may seem fraught with difficulty, but it is ours for the taking.

Daniel Coleman is an active Fabian member and economist who works in the green economy, competition, and tech.