Fraser of Allander: Austerity threat to economic recovery

Further austerity measures in next month's Budget could threaten economic recovery in Scotland, a leading economic forecaster has warned.

The Fraser of Allander Institute said Scottish growth was being fuelled by infrastructure and consumer spending.

But it warned recovery could be hit by the UK government "continuing, or even tightening, planned austerity measures" in the Budget on 8 July.

It said it was "crucial" the chancellor took action to minimise the threat.

The report argued that Chancellor George Osborne should consider "a slowing in the pace of his fiscal consolidation plans" and urged him to encourage productivity and "real-wage enhancing investment".

The institute also identified other threats to recovery, including the threat of a Greek exit from the euro with the risk of contagion to other economies including Scotland.

The report also warned that sustainable recovery was being threatened by a combination of rising household debt and the UK's overall weak trade performance.

Its forecast for GDP growth of 2.5% in 2015, 2.3% in 2016, and 2.3% in 2017 is a slight downward revision from its forecast given in March.

The institute, which is part of the University of Strathclyde, said that reflected evidence of a slight slowing in the recovery in the first half of 2015.

'Dark shadow'

Brian Ashcroft, emeritus professor of economics at the University of Strathclyde, said: "We should not underestimate the threats to the recovery from rising household debt, little growth in real wages, the dark shadow of further austerity and the rising possibility of Greece leaving the euro."

The report also found that while the Scottish and UK economies continued to grow and recover from the recession, some variances were beginning to emerge.

It said that the service sector had been a significant driver of growth in the UK, but made no contribution in Scotland during the final quarter of last year.

In contrast, the Scottish construction sector was a principal driver of growth over that period, while in the UK construction acted as a drag.

Paul Brewer, from PwC in Scotland, which sponsored the report, said: "There is some real evidence of recovery across Scotland, with infrastructure and construction in particular making a real contribution to growth, reflecting both growing business confidence and the impact of major projects like the Forth Crossing and M8 completion.

"While we hope that these trends continue, the service sector has not demonstrated the levels of growth experienced in other UK regions and that remains a cause for concern."