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Alex Salmond may be cheering, but his cash crisis has only just begun

The SNP swept to victory in Holyrood on the back of popular policies such as maintaining free univer

What an interesting time to be in Scotland. I arrived just after the Scottish National Party's landslide victory in the polls, as the leaders of not one but three opposition parties toppled following their devastating defeat. I was in Edinburgh to address chartered financial analysts at the CFA Institute's annual conference - but first things first. Straight off the plane, I headed to Gullane No 2, for a serious discussion of economics and an incidental 18 holes with my co-author Professor David Bell from the University of Stirling.

It was beautiful weather for a while, but inevitably I had to spend half an hour sheltering in a gorse bush as a rainstorm charged across the golf course. I was four holes up with six to go, but lost as my energy ebbed away - well, that's my excuse and I'm sticking to it. Fortunately, we forgot to talk about economics, even when ensconced in the bush.

Back in the city, though, there was no escape. The SNP leader, Alex Salmond, seems to have conducted a fine campaign, but his economic problems as First Minister are only just beginning. The unemployment rate in Scotland, which stands at 8.1 per cent, is already higher than the UK rate of 7.8 per cent. And in 2010, according to the Halifax, house prices rose in every part of Britain except Scotland, where they fell by 2.9 per cent compared to an overall increase of 2.7 per cent.

Adding up the bill

Among the numerous economic worries that Salmond will have to deal with is how to fund his party's promise to maintain free tuition for Scottish students at Scottish universities. His options include reducing the number of students, closing universities or doing a U-turn.

I still find it hard to understand why it is appropriate to make those who do not go to university pay for those who do, even though those who do are the ones who accrue almost all of the benefits. It seems simple to me: those who cannot afford to pay should be subsidised, but those who can afford to pay should do so.

A difficulty for Salmond is that, right now, Holyrood has no power to raise taxes or to borrow. He hopes that the Scotland Bill, still being debated at Westminster, will provide it with such powers - but that won't be an end to his problems. He is going to have to decide on a set of policies that will generate growth and jobs. A first step, if the bill finally delivers what Salmond wants (which seems likely following the landslide vote), would be to lower corporate tax rates in order to encourage investment and jobs, and to hope that revenues increase as a result.

It would also make sense, surely, for the Scottish government to borrow in order to fund investment projects such as offshore windpower or even nuclear, though the latter looks controversial again, given the ongoing crisis at Japan's Fukushima nuclear plant. One sensible scheme would be to share the cost of an undersea cable to Iceland, which lies about 725 miles north of the Shetland Islands, to enable the Scots to tap into that country's vast and potentially cheap thermal-energy resources. This would likely be a hugely profitable investment, as the Scottish government will be able to borrow on world markets at historically low long-term rates of interest.

More controversial is the question over the oil and gas resources in the North Sea, which the Scots could claim belong to them. The SNP argues that, if you take into account oil revenues, Scotland is a net contributor to the UK economy. There is precedent for a state or region keeping its oil revenues. The Alaska Permanent Fund, created by an amendment to the US state's constitution, sets aside a certain share of oil and mineral revenues to benefit current and future generations of Alaskans.

Each year since 1982, every person who has been a resident of Alaska for the previous year and indicates an intention to remain has received a Permanent Fund Dividend payment from the state. Everyone gets an equal share, with parents responsible for their children's cheques. The annual payment to the state's roughly 700,000 residents was $1,281 in 2010 and $1,305 the year before.

Salmond has been criticised for a speech, given in Edinburgh in August 2006, in which he claimed that "Scotland can change to a better future and be part of northern Europe's arc of prosperity. We have three countries - Ireland to our west, Iceland to our north and Norway to our east - all in the top six wealthiest countries in the world. In contrast, devolved Scotland is in 18th place. We can join that arc of prosperity. By matching their success, Scotland would be £4,000-a-head better off. It's time we seized this opportunity."

Just like Ireland and Iceland, Scotland has since had its own banking crisis, with the failure and then nationalisation of HBOS and RBS. But it's hard to blame the SNP. In the future, if financial services are to play a major role in an independent Scottish economy, it will likely be necessary to separate investment from retail banking to provide some protection against further negative financial shocks. Perhaps Scotland needs its own banking commission - and one that has the guts to recommend real reform, unlike the largely worthless Vickers commission, which seems happy with the failed status quo. Smaller may well be better.

Join the club

Norway, with a population of a similar size to that of Scotland, has proved a better model in Salmond's "arc of prosperity". It is more richly endowed with natural resources, including petroleum, hydropower, fish, forests and minerals, but Scotland has a comparative advantage in its universities, whisky distilling, building worthless aircraft carriers that won't have any planes, and tourism. Half the people on my flight from Newark, New Jersey, were coming to play golf, judging by the number of bags of clubs being unloaded.

Scottish golf has not been hit as hard as Irish golf, which is stuck with the euro; the depre­ciated pound has helped to maintain the in-flux of American golfers. Scotland should stick with the pound. Scotland is the home of golf, after all. Boris Johnson may go on about ping-pong coming home in the London Olympics next year, but the Ryder Cup is coming home to Scotland for the first time in 2014. The late Seve Ballesteros, the artist of the links, will be sadly missed.

David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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The Tories' aim is to put Labour out of business for good

Rather than merely winning again, the Conservatives are seeking to inflict permanent damage on the opposition. 

The Conservatives are numerically weak but politically strong – that is the peculiarity of their position. Their majority is the smallest of any single-party government since October 1974. Yet, to MPs at the Tory conference in Manchester, it felt like “2001 in reverse”: the year of Tony Blair’s second election victory. Then, as now, the opposition responded to defeat by selecting a leader, Iain Duncan Smith, who was immediately derided as unelectable. Just as Labour knew then that it would win in 2005, so the Conservatives believe that they have been gifted victory in 2020. David Cameron has predicted that the party’s vote share could rise from 37 per cent to a Thatcherite 43 per cent.

For Cameron and George Osborne, who entered parliament in 2001, this moment is revenge for New Labour’s electoral hegemony. They believe that by applying Blair’s lessons better than his internal successors, they can emulate his achievements. The former Labour prime minister once spoke of his party as “the political wing of the British people”. In Manchester, Cameron and Osborne displayed similarly imperial ambitions. They regard Jeremy Corbyn’s election as a chance to realign the political landscape permanently.

Seen from one perspective, the Tories underperformed on 7 May. They consistently led by roughly 20 points on the defining issues of the economy and leadership but defeated Labour by just 6.5 overall. It was their enduring reputation as the party of the plutocracy that produced this disparity. Those who voted for Labour in spite of their doubts about Ed Miliband and the party’s economic competence may not be similarly forgiving of Corbyn. To maximise their gains, however, the Tories need to minimise their weaknesses, rather than merely exploit Labour’s.

This process began at conference. At a dinner organised by the modernising group the Good Right, Duncan Smith, Michael Gove and the Scottish Tory leader, Ruth Davidson, affirmed their belief that, contrary to Thatcherite orthodoxy, inequality is a problem. Only the Business Secretary, Sajid Javid, an admirer of the libertarian heroine Ayn Rand, insisted that equality of opportunity was the defining metric.

George Osborne’s assured speech was most notable for his sustained appeal to Labour voters. Several opposition MPs told me how unsettled they were by the Chancellor’s declaration that Labour’s new leadership calls “anyone who believes in strong national defence, a market economy and the country living within its means” a Tory. He added, “It’s our job to make sure they’re absolutely right. Because we’re now the party of work, the only true party of labour.” The shadow minister Jonathan Reynolds told me: “We’ve got to be extremely clear that this is not business as usual. This is a real attempt by the Tories to put us out of business – possibly for ever.”

The Conservatives’ aim is to contaminate Labour to the point where, even if Jeremy Corbyn were deposed, the toxin would endure. For those opposition MPs who emphasise being a government-in-waiting, rather than a protest movement, the contrast between the high politics of the Tory conference and Corbyn’s rally appearance in Manchester was painfully sharp. They fear guilt by association with the demonstrators who spat at and abused journalists and Tory delegates. The declaration by a rally speaker, Terry Pullinger, the deputy general secretary of the Communication Workers Union, that Corbyn’s election “almost makes you want to celebrate the fact that Labour lost” was regarded as confirmation that some on the left merely desire to run the party, not the country.

But few Tory MPs I spoke to greeted Corbyn’s victory with simple jubilation. “It’s a great shame, what’s happened to Labour,” one said. “We need a credible opposition.” In the absence of this, some fear the Conservatives’ self-destructive tendencies will reassert themselves. The forthcoming EU referendum and leadership contest are rich in cannibalistic potential. Tories spoke forebodingly of the inevitable schism between European Inners and Outers. As the Scottish experience demonstrated, referendums are almost never definitive. In the event of a close result, the party’s anti-EU wing will swiftly identify grounds for a second vote.

Several cabinet ministers, however, spoke of their confidence in Cameron’s ability to navigate the rapids of the referendum and his pre-announced departure. “More than ever, he’s the right man for these times,” one told me. By this December, Cameron will have led his party for ten years, a reign exceeded in recent history only by Stanley Baldwin, Winston Churchill and Margaret Thatcher. That the Conservatives have so far avoided cataclysm is an underappreciated achievement.

Yet there are landmines ahead. An increasing number of MPs fear that the planned cuts to tax credits could be a foul-up comparable to Gordon Brown’s abolition of the 10p tax rate. Despite the appeals of Boris Johnson and the Sun, Cameron and Osborne have signalled that there will be no backtracking. At such moments of reflection, the Tories console themselves with the belief that, although voters may use Corbyn as a receptacle for protest (as they did Michael Foot, Neil Kinnock and Ed Miliband), they will not elect him. They also acknowledge that the current Labour leader may not be their opponent in 2020. The former paratrooper Dan Jarvis is most often cited as the successor they fear. As with Cameron and Blair, his relative lack of ideological definition may prove to be a strength, one MP suggested.

William Hague is fond of joking that the Tories have only two modes: panic and complacency. If the danger before the general election was of the former, the danger now is of the latter. 

George Eaton is political editor of the New Statesman.