Scotland's growing pains

Douglas Fraser
Business/economy editor, Scotland

  • Published
Empty walletImage source, Getty Images

MSPs sounded a bit confused by all the commissions going on.

They're still digesting the meaty, chewy implications of the SNP's Sustainable Growth Commission, published last Friday.

That was the one that had a bunch of ideas to stimulate economic growth, and some targets for Scotland to aim at. And in getting there, it conceded a lot of ground in the challenges an independent Scotland would face in getting its budget deficit down, while looking to London to run its currency.

But less than a week later, another commission comes along to drench the Holyrood parade even more.

This is a statutory one, the Scottish Fiscal Commission.

It assesses and forecasts the state of the Scottish economy, and the consequent expectations of what Holyrood will receive in revenues.

If you follow the workings of the Office for Budget Responsibility, it's got a similar role for Scotland.

You might wish to point out how inaccurate OBR forecasts have been, but what you should keep in mind is that its forecasts still matter, a lot.

With all of income tax revenue now going to Holyrood, the Fiscal Commission (let's call it the SFC) effectively tells the finance secretary, Derek Mackay, how much he has to spend - unless, that is, he changes tax rates and thresholds, in which case it tries to figure out how much his alterations will alter revenue.

So let's leave the Growth Commission to one side for now, and the political blame game being played with great vigour at Holyrood, and focus on what the Fiscal Commission is telling us.

Why, for instance, are things looking so much more downbeat than when it published its initial forecast last December? That was, you'll recall, the day Mr Mackay published his draft budget for 2018-19.

It's complicated

The growth forecast has not changed for this year, at a dismal 0.7%. It has been downgraded for next year, and remains below 1% for the duration of the forecast horizon.

The explanation given is that the SFC has had more time to look at the data, particularly on productivity - output per hour worked - and the link to real wages.

They have quite a complex relationship.

What's been concluded is that both productivity and real wage growth are worse than previously thought. Real wages are below the level of ten years ago.

Image source, Getty Images

Productivity didn't grow at all last year and nor the year before, it seems. This year, it's struggling to signs of life with 0.2% growth forecast, then 0.5% next year, and on to 1.1% by 2023. Still not great, but at least an improvement.

Without more being produced per hour, then employers are - in the round, on average, over time, other things being equal (don't you hate economists' weasel words?) - unable to find more revenue for wage growth.

So while wages may go up 1.6% this year, that's less than inflation. It's still below target inflation next year, at 1.8%, and picking up to 3.2% in 2023.

Factor in inflation, and real wages - real spending power - were down 1% last year, they're on track to be down half a per cent this year, flat next year and then up to 1.2% by 2023.

Training lift

The obvious question is: why? It's a question that has occurred to the Fiscal Commissioners, and they conclude that, well, "the underlying reasons are not fully understood".

To some extent, productivity follows investment. Put in the capital for new, better equipment, or spend a bit on training up your staff, and productivity should get a lift.

Investment, however, is weak because of uncertainty about the sustainability of consumer demand, when real wages are this poor.

There's uncertainty about the impact of Brexit, and not only that, but an expectation that Brexit itself, when the uncertainty is removed, will harm economic performance.

And there's uncertainty about the trade war being pursued from the Oval Office, which took a big lurch towards open hostilities with the European Union only a few minutes before the Scottish Fiscal Commission published its forecast.

Negative spiral

All of that is true of the UK economy as a whole. So what, asked the SFC, is so special about Scotland, that its forecast growth for this year is less than half that forecast for the UK by the Office for Budget Responsibility?

It comes up with a familiar culprit of the weakness in the oil and gas sector, and, more broadly, Scotland's "industrial profile".

I guess that means its low industrial profile.

It then spells out something that we discuss a lot around the weakness of the Scottish economy - and on which there's a broad consensus: demographics.

We know there's a challenge from an ageing population, requiring expensive public services. But that's not the only problem.

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The part of the population that works and pays tax on income, is falling. That is, Scotland's population as a whole has picked up in recent years, but from this year, the population aged 16 to 64 is in decline.

Yes, I know there are quite a number of people who work past 64, but I'm allowed to generalise here, as the SFC did.

So if there's weak investment, and there's poor productivity, linked at least loosely to a lack of real wage growth, and if there's less growth, and fewer people of working age to pay tax on their income, and then... well, you can probably figure out the negative spiral for yourself.

The SFC puts some figures on it - a £209m income tax revenue shortfall compared with the budget Derek Mackay had last February.

Next year is £302m less than previously expected, and that will surely change again before 2019-20 is under way.

Other tax revenue is changing too. Due to appeals against business rate bills, the estimated revenue from that source is £24m short.

Per capita

To put a better face on this set of figures, it's worth bearing in mind that UK growth is almost entirely explained by its advantage in population growth, much of that into the south-east corner of England

In other words, if you look at growth per head, Scotland's outlook is much closer to UK growth.

And when you look at growth per person aged 16 to 64, then the growth rates are very similar, from 2019-20 onwards.

But returning for a moment to that Sustainable Growth Commission, chaired by Andrew Wilson, that's only a comparison with the UK, which is itself in the international slow lane of growth, wages and productivity.

The targets, suggested Mr Wilson, should be to match other smallish countries.