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Experts warn Scotland needs recovery boost

SCOTLAND and other parts of the UK should receive state support to boost investment and ensure they are not left behind by the increasingly dominant London economy, an influential think tank has said.

FINDING BALANCE: With London booming, the institute warned that Scotland must not be left behind. Picture: Getty Images
FINDING BALANCE: With London booming, the institute warned that Scotland must not be left behind. Picture: Getty Images

That suggestion came as Strathclyde University's Fraser of Allander Institute (FAI) upped its GDP growth forecasts for Scotland.

In its Economic Commentary, the institute said it now expected the Scottish economy to grow by 2.3% this year, an upward revision from the 1.7% it had predicted in October last year, while its 2015 projection was increased by 0.2% to 2.3%.

Brian Ashcroft, emeritus professor of economics at Strathclyde University, highlighted the unbalanced nature of recovery across the UK, which the institute believes poses a major threat to the sustainability of any upturn.

The FAI estimates UK business investment was 10% below its pre-recession peak in the third quarter of last year, while in Scotland it was 14% behind.

As such, Mr Ashcroft is adamant the UK Government has to realise a growing need to re-implement regional policies, either through tax or cash incentives, to spread the recovery more widely than current hot spots such as London and the south east of England.

While acknowledging budget limitations and the limitations of European state aid regulations, Mr Ashcroft expressed a desire for the Scottish Government to allocate more funds towards Regional Selective Assistance grants and also give Scottish Enterprise a larger budget.

He said: "Investment is depressed in Scotland, even though there is some evidence of a pick-up and we really do want some hard effort to get this done. We can only grow on a sustained basis if we are adding to the capacity to produce more goods and services in the future."

On a UK level, Mr Ashcroft suggested accelerated depreciation as one tool which could be used to boost business investment as it would allow companies to defer some taxable income over the next few years.

He also outlined that regional policies, which were in place in various forms across the UK from the 1930s to the 1980s to help boost investment, should not penalise areas which are growing quickly.

He said: "We do not want to dampen London's growth, we want to spread it. As we say in the notes [to the Commentary], this policy works better at a time when the economy is in recovery, as this is when investment decisions are starting to be made."

The case for a policy-led boost to business investment was also backed by Paul Brewer, senior Edinburgh partner at accountancy firm and Commentary sponsor PwC.

He said: "We need stronger investment to underpin a sustained recovery. We'd like to see this week's UK Budget focus on stimulating both domestic and inward investment. This is the right time for the Scottish Government to step up the pace here too, sustaining its own investment programme, making the most of EU investment support and by supporting our cities to develop as great places to invest and do business by investing in their infrastructure and business locations."

Asked whether the uncertainty created by the Scottish independence referendum was leading to businesses delaying investment decisions Mr Ashcroft said: "There is no hard evidence to support that."

The institute pointed out that many business sectors, other than financial and business services, remain well below pre-recession peaks.

Mr Ashcroft is hopeful real incomes will start to rise this year but remains concerned that the household spending that has fuelled much of the recovery is unsustainable in the long-term.

He said: "The problem issue is households in Scotland and the UK are significantly indebted and that degree of household debt is still very high. What we have seen recently is a drop in the saving ratio. So they are spending more but are probably borrowing more. We have some concern here as we don't feel the household debt in the aggregate is sufficiently low to sustain continuing borrowing on a large scale.

"Lack of real income growth is a big issue as clearly you can sustain spending if your income is growing but what we have seen is real income actually falling over the last few years."

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