As the dark clouds dissipate from over the British banking sector, after the Northern Rock debacle, the Scottish Labour Party is looking for silver linings. After the first run on a British bank in over a century, the Scottish opposition parties are hoping that the next run will be on the SNP’s fiscal credibility. That queues will be forming of Scottish voters determine to withdraw their credit from the Bank of Independence and lodging it back with good old Northern Labour.
It was always going to be a very tough comprehensive spending round, with the new Chancellor, Alistair Darling, reining in spending to inflation plus 2% over the next three years. The SNP are already complaining that they are being held to 1% above inflation, a long way short of the 3% that the previous Liberal-Labour executive enjoyed and considerably less than the UK average. This means that it could fall to the SNP finance minister, John Swinney, to have to announce the biggest public spending cuts since devolution when he makes his first budget statement in November.
Questions were already being raised about the ability of the nationalist government to meet its election promises, which include abolishing student debt, freezing council tax, cutting class sizes, giving grants to first time buyers and hiring a thousand more police officers. Their pre-election statement on finance envisaged paying for all this through a heroic assumption of £2.7 bn in efficiency savings over the lifetime of the comprehensive spending review and another £500m through cutting the size of government.
Labour always claimed that this was pure fantasy and are now hoping that the SNP’s experiment in “progressive nationalism” will come crashing down to earth. Under their new leader, Wendy Alexander, Labour are holding tripartite talks with the Scottish Conservatives and the Scottish Liberal Democrats to plan how best to make the fall as damaging as possible for the minority nationalist government. They intend to inflict a series of damaging parliamentary defeats in the run up to Alex Salmond’s black November.
The Scottish economy is peculiarly vulnerable to banking crises because financial services have been the big growth industry here over the last decade. A third of all new jobs have been created in this sector, and most of the rest were generated by the state. Edinburgh has boomed on the back of the Royal Bank’s emergence as one of the top five banks in the world. House prices have also rocketed in Scotland for the first time in modern history.
Scotland largely escaped the negative equity crisis that afflicted England in 1990, but Scots have got the borrowing bug and are extremely vulnerable now to any downturn in house prices. Values have been boosted by speculative money flooding over the border looking for capital gains. At the first sign of a downturn, this hot money may depart, leaving Scottish property prices teetering on a precipice.
What better end to Scotland’s experiment in nationalism than a full-blown credit crisis? say Labour. Repossessions and bankruptcies in Scotland are already increasing fast, and if there are cut backs in the financial services sector, that means unemployment too. The opposition parties can hardly believe their luck. Here is a chance, they believe, to kill nationalism stone dead.
But the SNP have seen it coming, and intend to mount a pre-emptive strike on the Treasury, challenging their spending numbers which, they say, discriminate against Scotland. They will also be demanding access to oil revenues and a more favourable distribution of tax revenues. The reaction from London will be abrupt and to the point: ‘no way’. It is likely to get nasty.