by Mark McHugh

At the time of the last finance bill, the first in the history of Holyrood which necessitated a reduction in overall spending, there was a lot of noise made about the moves to protect capital spending.

This was predicated on the idea that, in a recession, government should spend on infrastructure projects. Which is true, from an empirical perspective, as far as it goes.

But, and there’s always a but, that’s not the whole story. As the man said “I’ll think you’ll find it’s a bit more complicated than that”.

It’s true that there’s an important role for government spending to play in mitigating the worst effects of an economic downturn through capital spending. When businesses and individuals are reigning in spending and reducing aggregate demand it’s important that the government does as much as it can to avoid what Keynes identified as the paradox of thrift.

It’s also true that the best way for a government to increase the amount of demand it puts into the economy is through capital spending. It’s a very efficient transmission mechanism between government and the private sector and, provided they’re properly considered, the end product of capital investment continues to benefit the country after the recession ends.

Simply, it’s better to pay people to build cycle paths and schools than it is to drop bags of cash from helicopters.

But, I told you there was always a but, that’s not what the Scottish Government did last year.

What happened was that John Swinney diverted revenue spending into the capital budget, essentially relying on the increased efficiency of the transmission mechanism to boost the Scottish economy.

That might work for a year, but the differences in how government spending on services and on infrastructure affect aggregate demand aren’t that large and will even out over time, there’s no real difference in the levels of fiscal entropy. When Keynesian economists argue for increases in government capital spending they’re typically arguing for an increase in the total spent, not in one aspect of spending at the expense of another.

There’s also questions to be asked about whether what’s classed as capital spending really represents a better long term investment than revenue spending. The short term effect of the decision to prioritise, say, duelling the A9 instead of providing college places for thousands of young people is probably negligible but I’m not convinced that building more roads is a better bet for the future than teaching people.

We’ll see what the finance bill proposes soon enough, but I’m not optimistic it will offer more than smoke, mirrors and platitudes. A truly bold budget would use the powers Holyrood has to actually increase government spending rather than shuffling money from column A to column B.