A lack of hard information and robust debate obscures what’s really going on in the economy, writes Bill Jamieson
Something worrying – something strange but certainly worrying – is happening to our economy. It has not been widely picked up in the Scottish media. But it deserves more discussion than so far received.
It seemed only yesterday – so slow are the memories of that ferocious referendum battle to fade – that we were being boldly told how prosperous we were, how we were the eighth most prosperous country in the world, doing better than the rest of the UK, that our economic future was all that we could wish it to be.
But then came the oil price crash. Not a wobble, not a temporary dip but a wholesale slump, decimating oil tax revenues. It has now persisted for more than a year, companies in the North Sea have slashed investment and employment – and with no early sign of recovery.
Then came the economic slowdown – little to worry about, it seemed, no more than a mild oscillation in the pace of growth. Except this, too, looks to be more persistent than first thought.
So how are we faring, exactly? Better or worse? Richer or poorer? It would be good to know the answers to these questions as we head towards the Holyrood elections next May, the arrival of more tax and spending powers and the opportunity to improve our own wealth and well-being.
So let’s start with a look at the Scottish Government’s own statistics and in particular the publication of the latest Quarterly National Accounts Scotland data out this week. The Scottish GDP figures for the April-June quarter are marginally higher than the UK but for a broader perspective we should look at the figures for the first half of 2015.
These show that, in comparison to the pre-crash peak second quarter of 2008, Scotland’s GDP remains one per cent lower by the second quarter of this year. By contrast, the UK GDP per capita figure since the second quarter of 2008 has risen by more than 16 per cent. So we have moved from being almost 15 per cent higher than the UK level in 2008 to being one per cent lower in the first half of 2015.
This dramatic shift, says economist John McLaren of Fiscal Affairs Scotland, “highlights the impact of the falling value of oil production to Scotland (and to the UK but with a much smaller relative impact)”.
Better, he says, to look at Gross National Product, GNP (or Gross National Income) which adjusts for the inward and outward movement of overseas profits to and from Scotland. However, at present this figure is not calculated on a regular basis by the Scottish Government – a significant statistical omission.
The net impact of such an adjustment to GNP would be to reduce the absolute and relative decline in Scotland’s position since 2008 but also to increase the existing negative differential between Scottish and UK GDP per head.
Now all this, it could be argued, is statistical sophistry: it does not really have an impact on the lives or well-being of the Scottish people. But it does affect our economic standing: how we fare relative to other countries and to the rest of the UK are important measures of performance. And such data is a crucial backdrop to any decisions we may make on the levels of borrowing, spending and tax.
Worryingly, this publication also carries an estimate of Scottish North Sea revenues for the first quarter of the financial year which reveals a miserly total of just £20 million. So how are the government’s ambitious spending plans to be funded?
Only in the past week SNP ministers were warned that raising income tax in Scotland would risk an exodus of the wealthiest and brightest young Scots.
Professors David Bell and Gavin McEwen both told Holyrood’s finance committee that international evidence shows that the wealthy and “young, well-educated individuals who anticipate rising earnings” would be the groups most likely to move elsewhere.
With the wealthiest 10 per cent of taxpayers providing half of income tax revenues, they warned this had the potential to harm Scotland’s finances and urged ministers to tread cautiously.
Their intervention came after Scottish Labour announced plans to revive the 50p top rate of income tax. Prof Bell, of Stirling University’s Centre on Constitutional Change, said only 130,000 people contribute 40 per cent of Scottish tax revenues and their reaction to any changes “will be very important for the health of the Scottish economy”.
More immediately, how are we doing? The latest commentary from the University of Strathclyde’s Fraser of Allander Institute provides no room for complacency. It finds that Scotland “has begun to diverge quite markedly from the UK despite being boosted by public investment in infrastructure”.
The slowdown in recovery during the first half of the year has caused the FoA to take the red pencil to its previous growth forecast. This is now chopped to 1.9 per cent – a 0.6 percentage point drop from the June estimate. Its forecast for 2016 is 2.2 per cent – barely keeping pace with the long term trend rate.
Weakening export demand and the strength of sterling has also had an adverse impact on manufacturing growth, both in Scotland and the UK, with the current crisis in the UK steel industry a case in point.
While domestic demand is clearly driving growth across Scotland and the UK, there is a divergence across underlying sectors. Construction provides the main impetus here, with public spending on infrastructure underpinning growth.
But the service sector has been weakened by the onshore impacts of lower-for-longer oil prices, hitting business services in particular, as well as mining and quarrying. This picture is the reverse of the UK where the service sector is the main driver with construction weakening.
But actual and potential threats to this growth remain. Its incisive concerns extend to Scotland’s weak productivity and poor export performance, which it suggests could have long-term growth implications.
Brian Ashcroft, emeritus professor of economics at the University of Strathclyde, says Scotland’s weak productivity and poor export performance “necessitates that the Scottish Government tackle these issues more directly if it is to raise the long-term growth rate of Scotland’s economy”.
And Paul Brewer of PwC notes how the effects of the low oil price are now “manifesting themselves across other onshore sectors from engineering to hospitality – this is no longer the preserve of the oil and gas industry.”
These are important contributions from independent analysts and economists in a country where such commentary is marginalised and all too rare and thus all the more worthwhile and important to note. We need to know more – much more – about how we are really faring, and to see a more incisive level of understanding and analysis from Scotland’s politicians as to how things really are.