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by Alex Porter, Economy Editor

With the UK budget deficit accelerating, the British pound plummeting and austerity cuts just around the corner, the issues of jobs and the economy will cast a long shadow over the fast approaching Holyrood election campaign.  What effect will Labour leader Ed Milliband's choice of shadow chancellor, Ed Balls, have on the crucial economic debate on Scotland?

To answer that question we have to realise that the UK economy is not in the same robust shape that the Scottish economy is in.  While Scotland's national accounts show a surplus, the UK's deficit reached a staggering and unprecedented £23.3 billion in the single month of November last year, according to the Office of National Statistics.  As government debt (minus off-balance sheet debts) are soon to pass the £1 trillion mark there is no real sign that Britain PLC can stop the deficit from ballooning further out of control.

Labour's Crisis

Gordon Brown's fiscal, monetary and regulatory policies sped up the process of refocussing the UK from a manufacturing economy into a service sector economy.  If you manufacture fewer products then a national economy suffers as it cannot earn income by selling goods abroad.  As consumers Britons spent money on goods from abroad meaning more money left the economy than came in.  This is unsustainable as deficits continue to rise.  Britain's economy under Labour was driven by more debt, not growth.

Deficit finance is no longer a disaster waiting to happen, it is happening.  Unable to pay its debt the UK government and the Bank of England are indulging in money printing.  This policy devalues assets and wages and is effectively legal fraud.  After money printing there's a lag and then price inflation visits and you realise you have the same money in your pocket but it buys a whole lot less.

Of course most currencies around the world are now devaluing.  The developing world must now print to devalue their currency so that their exports remain competitive in a world of ever increasing dollars.  Britain is simply the worst offender.  However Britain is printing money not to be competitive - it's an importing country after all - no, it's printing money to pay its debts.

The tax take from the financial sector has fallen off a cliff.  Bail outs and stimulus had to be paid for and so drained the private sector, meaning tax receipts are not recovering and firms are now dependent on increased government borrowing to maintain earnings.  Decreased tax receipts are what is causing the deficit to grow not an increase in public spending.  While the City was selling dodgy derivatives around the world the UK government had a good rake but that's largely gone.  Unless the public keeps stuffing banks with newly printed or borrowed money they would not be posting any profits at all.

Printing money to pay debts means Britain is technically bankrupt.  And if you thought there was some kind of economic benefit to devaluation you were wrong.  Sterling has lost 20% of its value against key trading partners but whereas public confidence in the UK economy continues to tumble, Germany is recording its lowest ever unemployment figures.

The devaluing pound will mean that importers will have to use more pounds to import goods for consumption inside Britain and those costs will be passed on to the consumer.  Food prices are already rising but we're only at the start of this process.  The price of oil is set to rise too meaning transport costs for food will make matters worse.  An early indication of problems can be seen in recent food riots in Algeria, Tunisia, Morocco, Yemen And Jordan.  Tunisia's President fled after failing to quell public unrest by slashing staple food prices.  In the developing world a larger percentage of expendible income goes on the family food budget and so nations with poorer populations act as canaries in the global economic mine.

Gordon Brown's drive to shift the British economy in the direction of services means that the UK is now trapped.  The massive wealth generator that was the City of London was an illusion based on fraud.  The Treasury was aware of the problem but Gordon Brown facilitated the rapid expansion of City activities through 'light touch' regulation.  Britain looked flush for a while and then the truth emerged.  The City was packaging and selling fraudulent derivatives around the world which resulted in the financial crash of 2008.  The reality was that the City was a giant economic parasite sucking the rest of Britain dry and relying on North Sea oil to guarantee its debts.

Britain's sovereign debt, financial and currency crises will, when the history books are written on the subject of Britain's fall from its status as a global to a second-tier power, be attributed to Fife's Son of the Manse.

Balls's name is inextricably bound up with Brown's, so he too is closely identified with the financial crisis.  He was close to Brown and the Treaury throughout the years when the crisis was incubating.  Balls was appointed as an economic adviser to Shadow Chancellor Gordon Brown (1994–97) before becoming chief economic adviser to HM Treasury from 1999 to 2004.  During this time he was once described as the 'most powerful unelected person in Britain'.  On becoming an MP he stepped down as chief economic adviser to the Treasury and spent some time at the Smith Institute, a political think tank, before being made Economic Secretary to the Treasury in 2006.  When Gordon Brown became Prime Minister in 2007, Balls was promoted to Secretary of State.

Balls was at the heart of the Treasury and was a key ally of Gordon Brown when the policies of light touch regulation were rolled out and legislation was designed to favour the financial sector. He was therefore central to the creation of the derivatives bubble and the 2008 crash which ensued.

Will Balls help or hinder Labour in Scotland?

Iain Gray will attempt to shift the debate onto the ConDem coalition's austerity programme but according to YouGov 40% of the UK population blame Labour for the public sector cuts, 22% blame the coalition and 25% see both London parties as equally culpable.

For Gray to win the keys to Bute House he will have to convince the Scottish electorate of his party's economic competence.  People are extremely worried about jobs and the economy and are rightly angry about the reasons the crisis happened.  Labour strategists will have their job cut out for them in refocussing attention away from the causes of the crisis and onto the current UK government's management of it.  Given that Balls is so closely associated with the last Labour government and closely identified with Gordon Brown, putting this recent economic record behind Labour will be much harder to effect.  The electorate are no fools and know that the financial crisis happened during Labour's time in office.

By making Balls the UK Shadow Chancellor, the SNP has been handed an electoral gift.

The new Shadow Chancellor has a combative style and that may resonate with voters over time and as austerity bites.  The problem for Labour UK is that this will bring the ConDem coalition out fighting.  George Osborne will seek to pin the blame for the deficit on Labour's legacy but fortunately for the Chancellor there is now a Shadow Chancellor to point the finger of blame at.

As the Holyrood campaign focuses minds on Scottish politics the benefit Labour accrues from coalition bashing will dissipate.  Iain Gray will be asked searching questions on a subject he is weak on - economy.  And he faces the big beast of Scottish politics - former economist and sitting First Minister Alex Salmond.

Salmond has no need to attack Tory cuts during the campaign.  He can simply blame Labour and Balls for causing the crisis.  Labour will be put on the spot and forced to point to the ConDem cuts as the root of the problem.  The SNP will have the luxury of killing two birds with one stone.  And it gets better for the Nationalists.  As Labour are forced to defend themselves they will struggle to pin the blame both on the ConDem coalition and the SNP government simultaneously.  Salmond can jab Labour but Labour's counterpunch will be weakened.

Of course Iain Gray and Labour have a seemingly pathological obsession with attacking the SNP and so with some calm economic logic Salmond can lay traps and watch Gray and his campaign team walk into them with predictable regularity.

The Nationalists have another trump card.  If Labour tries to blame the SNP over the state of the economy the SNP can retort that the powers needed to drive the economy are reserved to Westminster and so the crisis is London's fault.  The case will be made that what few powers the Scottish Government does have were used effectively.  After all, Scotland's economic state is healthier than the rest of the UK's.  And the kicker for the Nationalists is that the argument that the UK umbrella protects Scotland from volatile international markets can be presented by the SNP as having always been a myth.

So, blaming the SNP will only serve to move the economic agenda on to their turf - the case for economic independence.  On this territory the SNP have a majority of public opinion behind them.  A significant majority of Scots, if polls are to be believed, want their parliament to have complete control over taxation and benefits in Scotland.  At the same time Labour must defend the Scotland Bill from heavy criticism by internationally renowned economists and business leaders who have characterised it as "dangerously flawed", "unworkable" and "a perfect storm".

For Labour the longer the media focus is on the ConDems and London politics the less they will come under real scrutiny in Scotland and the higher will be their poll ratings.  By contrast a specific media focus on Scotland can't come quickly enough for the SNP who are currently behind Labour in popular opinion surveys.  The fact that there will be a referendum on the AV voting system on the same day as the Scottish elections will not be helpful to the SNP.  Neither will the royal wedding scheduled for a week before.

With the all-important economy issue such a key advantage for the SNP, Labour will need to try and bury their role in causing the crisis or the Scottish electorate will migrate towards Salmond and the SNP's case for economic independence.  With Balls as Shadow Chancellor, Iain Gray's strategy of shifting the electorate's attention away from Labour's role in the financial crisis is now much less deliverable.

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