THE next big strategic argument at a UK level will be between those who want to tighten the belt of public finances far too soon and those of us who want government to invest on a grand scale to support the recovery and reforming of the economy that is now urgent.

The economic impact of Covid-19 has been extreme in 2020 and will continue for many years to come. The overall size of the economy, measured by GDP (think of it as all of the wages plus all of the profits and the net impact of government finances), is forecast to fall this year by 11.3%, which is the largest reduction in more than 300 years. The UK’s performance is one of the worst in the industrialised world.

According to the forecasts of the UK’s Office for Budget Responsibility (OBR), growth will bounce back, but the UK economy won’t return to pre-crisis levels until the end of 2022. By the time we get to 2025, our economy will be 3% smaller than had been anticipated in the budget delivered in March of this year. The outlook is grave and the risks are probably mostly to the downside on this forecast.

The life-support schemes have been effective at saving many jobs but unemployment is rising fast. Existing inequalities are sharper in the UK than most other European countries and Covid makes them much worse by gender, geography and generation.

And yet there is no clear strategy or intent from the Government to make the intervention that is needed to invest for recovery. Right now is precisely when the Government needs to use its financial policy to boost demand in the economy and plan for massive long-term investment in creating a more sustainable, fairer and greener economy.

Change needs capital and the one silver lining on the Covid cloud is that the world’s debt markets have colossal appetite to provide it and at historically low costs.

The National:

UK’s debt interest as a share of GDP

The National:

Public sector debt as a share of GDP

These charts provided by HM Treasury at this week’s spending review are instructive. While we know debt is at extremely high levels, it has been much higher in the past. Look especially at the second chart – the effective cost of servicing that debt is reduced significantly. While debt can be seen increasing by almost 30% in the 15 years to 2025, interest payments over the same period fall by almost half.

This proves what analysts from the International Monetary Fund (IMF), Institute for Fiscal Studies (IFS) and others all point out: the Government has far greater scope to use its financial firepower to invest in the economy through crisis to recovery and beyond.

The debt market’s appetite for government debt supports a more ambitious demand intervention and investment for recovery. This is an opportunity that must be taken now.

While I support the Scottish Government’s call for that intervention to match Germany, I don’t think that goes far enough. This is because Germany is way ahead of the UK in economic performance and equality. Their government expects the hit from Covid to be less than half that which the UK will take and they were already more than 20% richer than the UK. We need much more because the risks and reality of the UK’s situation are much worse.

Also, the accompanying forecast from the OBR reminds us that Brexit negotiations are accompanying this crisis in real time. It is of note then, that the OBR forecasts that a deal not being concluded within that period will result in a 2% hit to the UK economy, or around £40bn. The stakes could not be higher. The self-harm could not be more ill-timed.

But rather than boosting the economy, the announcements in the spending review will harm it. The hit on public sector pay is, again, precisely the opposite of what demand stimulation should look like in a time of what we hope will be recovery.

Amidst the eye-watering numbers, the net impact of the review announcement is to reduce fiscal demand stimulus by nearly £71bn in specific measures for the next five years announced today. The timing of this is hard to explain.

And while the £4bn cut to overseas aid won’t hurt the UK this year, there are consequences to bear in what it says for the countries values now.

As Raghuram Rajan, the noted economist and former governor of the Central Bank of India, argued in the summer: “Out of self-interest, the world’s more industrialised countries need to avoid beggaring the rest. What happens elsewhere will not stay there.” He is right.

The UK just is not working for Scotland economically or in terms of our place in the world. The stakes right now are sky-high. Whom do the people of Scotland trust more to lead them out of the twin harms of Covid and Brexit and through the great reform era that is upon us now?

The Conservative Government in London or ourselves and whichever government we vote for in Edinburgh every election with independence?

The reforms that have to come are colossal but can, in the end, transform our society and economy for the better and for all.

This will take time, a generation’s work. It will be an effort. It will be worth it.