LOST: one recovery – and an economy in fog. How do we solve the riddle wrapped in a mystery inside an enigma that is our economy now? The famous quote was Churchill’s in 1939 about Russia. It certainly fits our circumstance today.
This weekend there is not one enigma but four to unravel. Why in Scotland is unemployment rising while across the UK it is falling? Why, despite the longest downturn in living memory, has the company failure rate been so low? Why, in an era of low domestic demand, is inflation so stubborn? And why, despite monetary stimulus without precedent, has demand remained so weak?
Figures last week showed that while employment across the UK rose by 100,000 in the July-September quarter, in Scotland the number in work fell by 27,000. This extends a similar pattern over latest quarters. The mystery deepens when we find that the claimant-count unemployment rate has barely changed.
There is, I believe, a specific explanation and some more general ones. Specifically, over these three months, the majority of those leaving the formal workforce were women, possibly because child care costs make low wage employment barely worth the hassle.
More generally, Scotland is a public sector dominated economy. We know that government spending is under the cosh, public payrolls are under pressure, jobs are being shed and recruitment is a shadow of what it was. And private job creation in Scotland has not been as robust as in the rest of the UK. This may reflect the stronger dynamics of the south-east – the Olympics-boosted London in particular – and the continuing gravitational pool of this global city.
Recent figures on the growth of small and medium-sized companies here were encouraging. But is this rise in company formation being matched by labour hiring? Most new small firms are sole traders, their numbers boosted by shake-out and redundancy among bigger firms. And many micro businesses are scared by the regulation and responsibility that comes with taking on staff. There is really, as finger-wagging employment lawyers will tell you, no such thing as casual staff hiring any more.
This is why, when I view a profile of Scotland’s business composition, I see a figure reminiscent of Dolly Parton. Two features are immediately prominent: these are, of course, the large base of micro companies; and, at the top, a clutch of mega companies. What other features could you possibly be thinking of? The middle ‘waist’ of medium-sized companies is thin.
Policy needs to shift to help the survival and expansion rate and expand this middle area. Business Gateway assistance and incentives such as the excellent Edinburgh Guarantee scheme run by the city council, can make a difference in time. But for now many micro firms are too scared to make the important step of recruitment that can help soak up displacement elsewhere.
So prominent have been recent administrations in Scotland – the owners of Malmaison and Hotel du Vin are the latest – we seem chock-a-block with failures. But the latest Bank of England Inflation Report raises the worrying spectre that the forbearance of banks in supporting over-indebted companies may be creating an unintended consequence.
Because of forbearance on existing “dodgy” loans, business failures are low relative to previous recessions. This may be acting as a potential impediment to the effective reallocation of capital. This, coupled with ultra-low interest rates, may have allowed businesses that will face lower demand in the longer term to continue trading. Thus the cleansing, revitalising momentum of Schumpeterian “creative destruction” is blocked.
The Bank points out that company liquidations have risen only modestly since the 2008-09 recession, especially compared with the rise following the 1990-91 recession, even though data from companies’ accounts suggest that the proportion of companies making a loss has picked up sharply since 2007.
The third enigma is the persistence of inflation – the CPI rate climbed to 2.7 per cent in October from September’s 2.2 per cent. To be fair, a sharp rise in tuition fees down south did not help. But there is little sign that quantitative easing has driven up asset prices (see house prices and the stock market). The bigger issue is that not only has the Bank yet again missed its 2 per cent inflation target but it has also yet again failed to predict the movements in inflation. This may become a serious problem of credibility for the Bank and its new Governor: a central bank that is not believed will have big problems winning public support.
And the fourth enigma is arguably the biggest of all – why, despite £375 billion of QE thus far and counting, domestic demand in the economy is still flat on its back. This speaks to the continuing and deeply depressing effect of the government and private household debt overhang. And as long as debt remains such a big concern, confidence – and both corporate and household spending – will struggle to recover. Thus for the time being, Sir Mervyn King is like an ageing disc jockey with just one record left to play – but back on the turntable it goes till we get up and dance. Look out for another £50bn of QE over the next three months.
Killer fact on who pays most tax
FOR a guide to the big tax issues to be faced in an independent Scotland, the Institute of Chartered Accountants in Scotland (ICAS) has just produced an outstandingly helpful document. For accountants it is both strangely readable and unusually brief – just 14 pages. But they are packed with insight and information.
Here is one killer fact that made be sit bolt upright on reading it. The document rightly stresses that in any independent Scotland, Scottish taxpayers will need to be identified, particularly in view of the narrow income tax base. Just how narrow it is, the figures make dramatically clear.
Latest personal income tax statistics suggest that the top 1 per cent of Scots paid income tax of more than £2.1bn in 2009-10. Compare this with the estimated total corporation tax collection of £2.7bn and total council tax of £1.96bn in the same year. “Their mobility,” says ICAS, “may give bargaining power, but brings into focus too the question of the relationship Revenue Scotland should have with Scottish taxpayers, large or small”.
This issue of taxpayer mobility came up at an “Entrepreneurs and Independence” debate at the Edinburgh Business School last week supported by MBM Commercial. It attracted a sell-out audience and I hope more will be staged.
The point of particular relevance to this audience was not only that this critical part of the tax base could get up and walk, but that this was also the pool to which entrepreneurs look for venture capital funding. Hit the rich, kill the economy?