Businesses have sounded the alarm over the state of the Scottish economy after figures revealed output shrank at the end of last year.
The Scottish Government has been told to drop its calls for a second independence referendum and focus on economic growth amid claims that ministers are “out of touch” over the impact of their policies.
Business groups have demanded action to ease the tax burden over fears the Scottish economy was being left behind by the rest of the country, with overall growth across the UK remaining strong.
Finance Secretary Derek Mackay blamed the sluggish economy on “continued headwinds” including the fallout from Brexit, but experts said the figures confirmed the lack of growth in Scotland could no longer be tied solely to the EU referendum.
Economic growth in Scotland fell further behind the rest of the UK last year, with GDP growing by just 0.4 per cent compared to 1.8 per cent across the country.
Output fell by 0.2 per cent in the final three months of 2016, the first decline since the third quarter of 2015, led by continued falls in manufacturing. The UK economy grew by 0.7 per cent over the same period. The figures are worse than forecasts produced by the EY Scottish ITEM Club at the end of last year, which predicted growth in 2017 would only reach 0.4 per cent.
It is time for the Scottish Government to abandon this high tax agenda before it is too late, as these policies risk driving investment outLiz Cameron
The Scottish economy has not kept pace with UK growth since the start of 2015. Another quarter of decline would see Scotland tip into recession as the UK economy continues to defy expectations in the wake of the Brexit vote.
Mr Mackay said: “Despite these challenges, the foundations of our economy are strong with growth in 2016, unemployment falling and early signs that the situation is improving for North Sea operators.
“Before the EU referendum, the UK government told us Brexit will make us ‘permanently poorer’. What is now quite clear is the economic reality of the Brexit vote.
“We have already seen significantly lower consumer confidence in Scotland since the vote last summer. Now we see that feeding through into our growth figures and all of this is before the UK actually leaves the EU.”
But Liz Cameron, the chief executive of the Scottish Chambers of Commerce, said businesses were feeling the impact of the government’s “high tax agenda”.
“The news that Scotland’s economy is contracting at a time when the overall UK economy is growing healthily must ring alarm bells for both the Scottish and UK governments,” she said.
“This news must now bring an urgent change in policy from the Scottish Government in particular. The Scottish Parliament has just introduced a Budget in which medium and large businesses pay a higher rate of business rates than they would in England and where Scottish higher rate taxpayers pay more tax than they would anywhere else in the UK.
“The Scottish Government is also planning higher planning fees, a potential new infrastructure levy and the returns from the Apprenticeship Levy are also less direct than for businesses in England.”
Ms Cameron added: “It is time for the Scottish Government to abandon this high tax agenda before it is too late, as these policies risk driving investment out of Scotland.”
Professor Graeme Roy, Director of the University of Strathclyde’s Fraser of Allander Institute, said it was “hard to argue” that Scotland’s lower growth was because of the EU referendum.
“The GDP data released today are deeply disappointing,” he said. “We previously warned that this was a fragile time for the Scottish economy and that a contraction in output towards the end of 2016 was entirely possible. Sadly, these fears have now been realised.
“With the Scottish economy shrinking in the final quarter of 2016, this means that the Scottish economy did not grow at all through 2016. At a time when the UK economy grew at 1.8 per cent over the same period, this is a serious cause for concern.
UK government Minister for Scotland Andrew Dunlop said the figures should prompt the Scottish Government to “take a second independence referendum off the table.”
Lord Dunlop said: “There has been no growth over the past year and the gap between Scotland and the rest of the UK continues to grow.
“The economy in Scotland has huge potential, but what we need now is for the Scottish Government to use their unprecedented powers to make Scotland more competitive and return its economy to growth.”
The GMB union raised the prospect that Scotland could “sleepwalk back to recession” unless more was done to stimulate the economy.
GMB Scottish secretary Gary Smith said: “The news is full of political noise at the moment – but underneath all the words is a harsh, tough reality for the people of Scotland.
“These GDP figures show once again how the economy is struggling; unemployment is up; insecure employment is growing faster here; public sector workers and service users are being hit by huge cuts and those cuts in public services will get worse in the years ahead.
“And our politicians seem to be more interested in pursuing their own pet projects than confronting the problem.”
Conservative shadow finance secretary Murdo Fraser said the Scottish economy was facing a “crisis”.
“These are deeply worrying figures which show that Scotland under the SNP is now on the brink of a recession,” Mr Fraser said.
“Nicola Sturgeon’s Scottish Government must take responsibility for this mess.”