Bill Jamieson: Statistics are affecting devolution

It was soon after the Great Depression when the basic framework used by the ONS was developed. Picture: Getty Images

Nothing stands still for long – not in life, in work or what we consider “objective truth”. This week a former deputy governor of the Bank of England has fired a rocket at the UK’s leading statistics agency. He says its approach is out of date and that official numbers on the economy may be giving a misleading and incomplete picture of the way we now live and work.

If that has ruffled the feathers of the Office of National Statistics, I suspect it may also cause disquiet within the Scottish Government. It is not just that in measuring economic activity Scotland tracks the ONS approach fairly closely – and with several months’ delay – but that it is soon to be handed significant new tax powers with little certainty at present as to how any tax changes would work and the consequences on individual and business behaviour in the digital era. The attack on the ONS has come from Sir Charlie Bean, former chief economist and deputy governor of the Bank of England, as he launches an official review into the accuracy of the UK’s economic numbers.

His central critique is that the basic framework used by the ONS “was developed in the aftermath of the Great Depression” and has been overtaken by the internet revolution and dramatic changes in communications technology.

These changes have not only transformed industries around the globe but are also transforming the composition of the business base here at home with an explosion in internet and e-commerce trading. Indeed, the biggest change in Scotland’s business base since 2010 has been the rapid growth in the numbers of micro firms, many of them providing specialist services to a range of customers via the internet.

“As an economy develops,” says Bean, “the traditional ways of thinking about it cease to be so relevant.”

One indication of the potency of this change was discussed in The Flat White Economy, a study of digital enterprise by economist Douglas McWilliams. While primarily focused on businesses in the EC1 district of London, he calculates that this sector already accounts for 7.6 per cent of UK GDP and could rise to 15.8 per cent by 2025, making it the single largest business sector.

Here in Scotland there has been all too little analysis or commentary on the biggest single change in the business universe since 2000: the dramatic increase in small firms. This sector is often dismissed as insignificant for macro-economic performance purposes and of little relevance for employment.

What do the numbers show? As of March last year, there were an estimated 335,015 private sector enterprises operating in Scotland. Almost all of these enterprises (98.2 per cent) were small (0 to 49 employees). SMEs accounted for an estimated 1.1 million jobs, or 54.8 per cent of private sector employment. Still too small to matter?

Between 2000 and 2014, the total number of small firms (sole traders plus those employing up to 49) has exploded by more than 94,000, a rise of 40 per cent, far outstripping the rate of growth in the numbers of medium and large sized firms.

Even if we examine only registered firms (those above the VAT threshold), the number of small firms has grown by 17,380 over this period or 12 per cent, again far outstripping the growth in numbers of larger businesses.

“Cluster development” – micro firms informally exchanging products and services or sharing staff and other resources – is another significant development generating activity greater than the sum of the constituent parts, and which formal measures of economic activity fail to capture.

It is argued that the development has been exaggerated by the temporary bulge in one-person consultancies following the post-crisis shakeout and will diminish as firms step up recruitment. But while some may wish to return to formal salaried employment, others value the freedom to “be their own boss”.

Meanwhile, the number of spin-outs from Strathclyde and Edinburgh universities continues to grow. And there is little sign of a diminution in the numbers of start-up enquiries or small firms looking to expand. Business Gateway, Scotland’s national business advice service, has just reported the number of people contacting the service has reached its highest level since it was decoupled from Scottish Enterprise in 2008. Contact numbers have risen by almost a third to 26,240 for the 12 months ending in March. Many start-ups will fold or sell up before growing into medium-sized businesses. But nonetheless, business start-up is the seed corn from which companies can grow into successful and significant contributors to Scotland’s economy.

Now, digital businesses – those operating in IT, communication, digital marketing, online retailing and web business related activity - are likely to account for only part of this small firm surge. But I suspect the numbers will be significant – and growing exponentially. For example, numbers employed by sole traders and small firms in the information and communications sector have shot up 27 per cent to more than 28,000 since 2010, with a 25 per cent rise to almost 105,000 in employees of small firms in the professional, scientific and technical category.

This development has implications for tax policy in several ways. First, many in the micro business sector will be subject to income tax and changes in the thresholds and levels of higher and additional rates. These are a small proportion by number of taxpayers but a significant contributor to Scottish income tax revenues, and susceptible to “behavioural change” should rates be increased or thresholds lowered.

The government may also be looking to raise more revenue through changes to business rates, already at £2.9 billion the highest source of revenue after income tax. Among changes being examined is a devolution of business rates to local authorities – powerfully argued by Cosla, but a possible concern to businesses in cash-strapped areas.

There are calls for a tax on internet trading, to bring more equity of tax treatment between online businesses and retail premises in struggling high streets paying business rates. This may be difficult to implement if the online business HQ is outwith Scotland.

In a fast-changing world, Charlie Bean has asked some uncomfortable questions about changes in how we live and work and the statistics on which we base economic and tax policy. It bristles with challenges, and for devolution particularly. For this reason alone, the debate on “more powers” has a long way still to go.