For all the growing heat and noise of Scotland’s election campaign, we are losing sight of the main driver of our prosperity and well-being. It is not Holyrood or the deliberations of politicians, important though these are. It is the economy and the tens of thousands of businesses that comprise it.
The overall state of Scotland’s economy is worrying on two fronts. The first is an anaemic rate of growth. It is badly trailing that for the UK as a whole. Tempting though it is to blame this on the catastrophic decline in the North Sea oil sector, the deeper problem is with our on-shore economy. And while employment figures have held up well, there is real doubt as to whether this progress can continue in the period ahead.
The latest Office for Budget Responsibility forecast given in the Budget was that the UK economy overall would grow by 2 per cent this year (down from a previous estimate of 2.4 per cent) and recover only marginally to 2.2 per cent in 2017. Both estimates lag the UK’s long-term growth rate.
But the comparable forecasts for Scotland are worse. Inverness-based Mackay Consultants predicts growth of just 1.7 per cent for 2016 and 1.9 per cent for 2017. Ernst & Young is little better, with a forecast of 1.8 per cent for this year and 1.8 per cent for 2017. Fraser of Allander’s numbers are more optimistic but set for downward revision.
The second concern is the state of the Scottish Government’s finances. We have run up a chronic budget deficit. The most recent year, 2014-15, has the total deficit at £15 billion or 10 per cent of GDP – almost twice the level of the rest of the UK and one of the highest in Europe.
Public finance analyst John Dalgety has crunched the numbers and warns that next year is unlikely to be any better as oil revenues still have some way to fall – and with little by way of offsetting uplift from the onshore economy.
Nor is this a problem that has only recently emerged. His analysis shows that, taken over the past 17 years, Scotland’s share of the UK non-oil deficit was more than twice that of its share of the UK population.
He argues that on the onshore deficit, there is a culture of denial. “Lots of countries have deficits so what’s the problem? And anyway it’s all Westminster’s fault. It is as though this is all just theoretical – that, if we close our eyes tight shut and wish very hard, the problem will all go away.”
Now all this matters. Because it is economic activity and growth that generates employment, wages growth and taxable revenues. And if taxable revenues fall short of Holyrood’s ambitions for spending on services and welfare, the ferocious battle that has already opened up on the respective spending plans of the competing parties will be doomed to continue.
The simple solution would be to raise taxes. But the problem here is that higher taxes can act as a disincentive to enterprise and work to lower the rate of economic growth from what it would otherwise be. Taxes have behavioural effects. And this is critical for Scotland when a lower and more benign tax regime is set to prevail just over the Border.
What is to be done? Enter last week a timely, well-argued submission from the independent, non-political Institute of Chartered Accountants in Scotland. Its document, “Counting On Change”, calls on politicians contesting the Scottish elections to put “promoting the performance and productivity of the Scottish economy first”.
“We want to see”, says ICAS chief executive, Anton Colella, “a debate in the coming weeks which recognises that growing the economy by making Scotland a more attractive place to do business is the best way to improve our public finances and benefit wider society. “
Its precepts are simple to grasp and many candidates I am sure would readily endorse them.
Further devolution of taxes should not add to the complexity and burden of doing business in Scotland and must not put Scottish businesses at a competitive disadvantage.
The next Scottish Government should do all it can, within its power, to simplify the tax system.
The next Scottish Government must renew its focus on education to deliver the right skills and the right people to support the current and future needs of the economy.
ICAS also believes that as more tax powers are devolved, there is a need for greater independent scrutiny of the public finances. I have repeatedly argued in this column for full forecasting responsibilities to be given to the new Scottish Fiscal Commission and support for this has been widespread – from Scottish Conservative MSP Gavin Brown to Labour’s Jackie Baillie.
ICAS has also published “Making Tax Work For Scotland”, which sets out the information and issues around tax that it believes should be at the forefront in the election battle. Here are the three key principles: simplicity, clarity and consistency.
And these are especially relevant when we consider the composition of Scotland’s economy and its dynamics. It is no longer dominated by giant manufacturing and engineering concerns but is comprised of tens of thousands of small and medium-sized companies. Of a total of 361,000 businesses, we have 2,295 employing more than 250; 3,870 businesses employing between 50 and 249, and no less than 355,000 businesses employing less than 49.
This vital SME sector, says ICAS, “faces an escalating compliance burden for taxes as HMRC transforms itself into a digital tax authority and increases its requirement for businesses to administer and collect taxes in real time.”
Send a copy, please, to all candidates, preferably in big print – and with a magnifying glass thrown in.