Wednesday, October 19, 2005

Scotland's economic problems

Matthew Lynn:

Scottish economic growth hasn't been as strong as in the rest of the U.K. In 2004, the Scottish economy expanded 1.9 percent, compared with 3.1 percent for the whole of Britain, according to the Scottish government. From 2000 to 2003, the Scottish economy grew at an average rate of 1.7 percent annually.

The country is aging rapidly as well. Without immigration, Scotland's population will slip below 5 million by 2017 from 5.08 million now, the executive predicts. The number of inhabitants peaked at 5.24 million in 1974.

None of that sounds like a robust, thriving economy.

In reality, modern Scotland isn't very dynamic. It is kept afloat on a wave of public spending. According to the Scottish Executive, public expenditure accounted for 50 percent of Scottish gross domestic product in 2001-2002. That compared with 41 percent for the U.K. as a whole, and a euro-area average of 48 percent.

The public sector accounts for 23.5 percent of all employment in Scotland. In some regions, the private sector has shriveled to levels that are more reminiscent of Eastern Europe before the fall of the Berlin Wall than a modern capitalist economy. According to a report in the Scotsman newspaper this month, John Ward, chairman of the economic development agency Scottish Enterprise, pointed out that in the Ayrshire area, government spending accounted for 74 percent of the economy. Those were "Eastern bloc" levels, he complained.

The determination of the Scottish Parliament to boost public spending is crowding out the private, wealth-generating economy. "They are big on zealous regulation, but they are not very good at real economics," said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh, in a telephone interview. "They have the power to make micro improvements to the economy, but they haven't even tried it."

Just across the Irish Sea, there is an example of a small, Celtic economy that has taken a different path. In Ireland, taxes have been cut consistently. The state accounts for 33 percent of the economy, according to a 2004 report by the Paris-based Organization for Economic Cooperation and Development. The result: Ireland has been rewarded with one of the highest growth rates in the world. The OECD this year ranked it as one of the five "high- income" countries in the world, along with Luxembourg, Norway, Switzerland and the U.S. Ireland now has net migration into the country.

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