A Tale of Two Scotlands - Christmas Newsletter 2007

13 Dec 2007

One of the prominent features of public life in Scotland is the division between the public and private sectors. 

On the one hand a healthy consensus is emerging that market capitalism is the driver of prosperity and progress, and that our businesses must be allowed to thrive if we are to enhance economic growth.  

Whether this consensus is reflected in actual policy is another matter – the proposed local income tax springs to mind – but at least the market concept is now widely accepted. 

But the half of the economy still controlled by the state remains frozen in an intellectual ice age. Whole sectors – health, education, much of transport – and other important economic functions such as land-use planning, are still run on soviet-style lines. 

This leaves worthy attempts to enhance economic growth severely handicapped. Essentially we are trying to grow only half the cake, and our economy has only half the potential it should have. 

Wasted education 

Take education as a topical example. State education accounts for some 6.5% of GDP. Spending on it has doubled over the last decade, but on all measures output has stalled or even declined slightly. 

As we pointed in How Good Are Scotland’s Schools earlier this year, the key exam pass rate for fifteen-year-olds has declined alarmingly. 

Meanwhile various international studies have shown similar lack of progress. The government sets great store by an OECD survey, the Programme for International Student Assessment. This month the latest figures showed Scottish pupils’ performance falling relative to those from other countries in the survey. 

None of this data gives us a definitive picture, but it is difficult to avoid the conclusion that the extra money has been wasted. A significant fraction of our overall growth potential has therefore been squandered.

Opportunity and motive

Nonetheless, the political establishment still refuses to acknowledge the need for reform. As a result the main powers devolved to Holyrood – on health, education and so on – remain largely unused. 

This is double shame because both opportunity and motive exist for reform. Across
Europe there is generally much less distinction between the public and private sectors. The continent abounds with examples of market systems for delivering publicly funded services. And a new book by the Swedish think-tank Timbro, The Guide to Reform, shows how market reforms usually reap political dividends for parties bold enough to embrace change. 

A new constitutional settlement? 

Why is Scotland so tardy on public sector reform? One theory is that the political obsession with the constitution has inhibited debate on other issues. With that in mind, the Policy Institute has published a new book compiling our work on this question over the last four years. We hope (forlornly no doubt) that The Scottish Constitution – Towards a New Settlement will be the last word on this subject. It’s certainly pretty definitive, covering all the big issues from the Barnett Formula to local government. Order your copy for Ł15 from us. 

Lecture on The Mound 

The economic importance of public sector reform was stressed by Brian Ashcroft in this year’s lecture sponsored by HBoS (see The Key to Economic Success in Scotland). In February Professor John Kay will address us at the HBoS headquarters on The Mound. He is a member of the Council of Economic Advisors established by the new SNP administration, and will talk on The Economics of Small States. Look out for your invitation next month. 

Also forthcoming is a paper on the optimum currency arrangements for Scotland. The author, Professor Lawrence White of the University of Missouri, is among other things an expert on ‘free banking’ – that unique episode when Scotland had no central bank, and a number of privately issued, competing currencies to choose from. We’re hoping to persuade him to visit Edinburgh during one of his trips to the UK. 

In the meantime have a merry Christmas and a happy New Year. 

Bill Jamieson, Director

Tom Miers, Executive Director