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Budget 2015: Austerity Doesn't Work but Osborne Is Fixated

06/07/2015 14:43 BST | Updated 06/07/2016 10:59 BST

Ahead of this week's UK Budget, there is much to be positive about in the economic outlook for Scotland. Last year our economy grew at its fastest rate since 2006. The number of people in employment increased by 53,000 over the past year, and we continue to have the highest employment rate of any UK nation.

However, challenges around the nature and sustainability of the recovery remain. More than eight years since the start of the crisis, both UK output per head and real wages remain below pre-recession levels. At the same time, the on-going uncertainty in the Eurozone continues to have a negative impact on international trade and investment.

In particular, current events in Greece represent a significant risk to the European economy. Since its bailout in 2010 the Greek economy has contracted sharply, unemployment has risen to more than 25%, youth unemployment to as much as 60%, and, despite billions of euros of bailout money going to banks, the country's debt-to-GDP ratio has grown. An exit from the Euro would only compound these problems.

A sensible compromise based on a reform programme which prioritises growth and competitiveness would be the best outcome, both for Greece and for its Eurozone partners. Greece can't simply be allowed to walk away from its obligations to creditors but the point has been reached where some form of debt relief must be on the table.

In Scotland, we have consistently argued that our own recovery has been held back by the Chancellor's fixation with austerity with the burden more often than not being borne by the most vulnerable in our society.

The experiment in austerity has been a failure by any benchmark. GDP per capita - a key measure of our economic strength - is forecast to take two years longer to return to pre-recession levels than it did following the Great Depression in the 1930s.

Austerity has even failed in its principal objective of cutting the deficit. Over the six years to 2016, the Chancellor is likely to miss the borrowing targets he set for himself when he first entered office in 2010 by a staggering £150billion. It is simple economics that a programme of austerity and cuts that reduces household income and damages economic confidence weakens rather than strengthens the public finances.

This week I have called on the Chancellor to use the Budget to end his ideological fixation with austerity and to instead focus attention on measures to strengthen the recovery, improve productivity and to support those in low pay.

Similar arguments have been put forward by a wide number of internationally renowned economists including Professors Paul Krugman and Joseph Stiglitz. The economic rationale is clear - to provide long-term economic and financial stability we need to invest in the skills of workforce, our economic competiveness and our business enabling infrastructure. Only by securing long-term inclusive growth will we create the conditions necessary to reduce the deficit and ensure that the public finances return to a sustainable path over the long-term.

We know for example that the UK is held back by a lack of investment with some of the lowest investment levels in the G20. This lack of investment is a key reason for the UK's well documented productivity problem.

Indeed, the UK economy has seen little or no productivity growth since the Chancellor came to office in 2010. Whilst the Chancellor has been keen to contrast the recent positive economic news in the UK with the challenges in the continent, it is worth noting that the UK economy lags well behind the likes of France and Germany in terms of productivity. Productivity is the key driver of long-term economic growth and, as we look beyond the current headwinds of the post-financial crisis period, an alternative investment-led approach focussed on boosting competitiveness and supporting internationalisation and innovation is needed.

Our recently published Economic Strategy sets out the actions we are taking in Scotland to deliver this. In recent years we've seen improvements in Scotland's productivity performance relative to the UK, but our aspiration is to keep improving.

However, even under the Smith Commission recommendations, we remain bound by the UK Government's austerity agenda. That is why we have put forward sensible amendments to the Scotland Bill at Westminster to enhance the economic powers of the Scottish Parliament.

In the meantime, I will continue to argue strongly for the UK Government to take an alternative approach by ending austerity and undertaking a moderate and responsible increase in spending on public services of 0.5% a year in real terms.

This approach would reduce the budget deficit as a proportion of national income over the duration of the current parliament; but it would also free up an additional £140 billion across the UK, compared to the UK Government's current plans, which could be used to invest in infrastructure and protect the public services we all depend on.

In contrast, the current plans of the UK Government are for further cuts - cuts that go significantly beyond what is needed to meet even its own Fiscal Mandate. For example, the Chancellor could increase public spending by £93 billion over the next four years relative to these plans and still meet his fiscal targets.

Further cuts won't be driven by economic necessity or responsibility but by ideology and an attempt to erode the vital contribution that public services make to our society and will continue to ensure that those on the lowest incomes bear the greatest cost.