ANOTHER week, and another tumultuous spasm – in markets and in politics. Just when you thought we were set for post-referendum calm, we have growing signs of a Eurozone plunge into recession, while here finance secretary John Swinney gave Scotland its first worrying taste of “more tax powers”. As if this was not enough, voters in England have sparked a convulsion set to end in fractious gridlock in the general election next May.
All this under a black cloud of £1.4 trillion of public debt and an annual interest charge of £53 billion, equivalent to the entire amount spent by Westminster on education. More cuts are certain, and this may well fuel a lurch here to European-style hard-left anti-austerity politics.
Last week I was asked to chair a joint Institute of Directors Scotland/PwC event on prospects. David Glen, tax partner at PwC Scotland, gave an outstanding presentation of the 2012 Scotland Act and the “new powers” outlook.
I was given strict instructions from IoD boss David Watt to be positive, forward-looking and upbeat, so fell back on a time-honoured format for positive presentations: where are the aces to be found? And since there are four aces in every pack, I had to find four reasons for encouragement.
I had just finished the first draft when news dropped of the Land and Buildings Transactions Tax. The charge on the average-priced home in Edinburgh, Aberdeen and leafier parts of Glasgow is to rocket from 3 per cent to 10 per cent. Middle-income households will be outraged.
I hastily amended the title of my talk to “Four Aces and a Black Eyed Jack”. If this is to be the direction of travel, one shudders to think what lies in store should “more powers” extend over capital gains tax, inheritance tax and “other taxes on income and wealth”.
Further budget details last week were not reassuring. Scottish Enterprise and Highlands and Islands Enterprise face a £40 million cut just when we need support for boosting exports and internationalisation. All told, the enterprise budget is chopped by £125m. So, another urgent heading rewrite loomed: “Four Aces and Two Black Eyed Jacks”.
Finally, businesses are being asked to cough up another 8 per cent in business rates over the next two years to more than £2.8bn. When the council tax freeze was introduced in 2007-8, local business taxes and the council tax brought in similar amounts, about £1.9bn. By 2014-15, business taxes will have risen by 40 per cent.
As David Watt pointed out, we heard little about wealth creation in the long referendum campaign. But this sets us down the road of wealth and enterprise suppression.
Now that I’ve run out of Black Eyed Jacks, I’ll push on with the aces.
First, there is broad agreement that, despite signs of a slackening of the growth pace, the upturn has some resilience. Scottish growth forecasts range between 2.5 per cent and 2.8 per cent – our strongest year of growth since 2007.
Employment in Scotland is at a record high, standing at a rate of 73.5 per cent – higher than the UK rate. The number of Scots out of work has fallen to 6 per cent.
The Bank of Scotland August PMI report pointed to business activity rising “solidly” during the month, with a “robust” increase in incoming new business. Private sector employment grew for the 21st consecutive month. Indeed, it noted, the biggest problem in recent months has not been a shortage of jobs in the private sector but a shortage of applicants.
And for the UK overall, last week brought an upbeat assessment from the British Chambers of Commerce, with strong readings for investment and hiring intentions, cash flow and profitability among manufacturing and service sector firms.
Citigroup economist Michael Saunders said: “The readings for hiring intentions strengthened this quarter among both manufacturing and service sector firms, and both readings are the second-highest since the measures began 25 years ago. The average readings across manufacturing and services for profitability and cash flow are both at record highs.
“These readings reinforce the view that there is still substantial pent-up demand for capital expenditure and staff after the weakness of investment in the recession … and this is likely to be reflected in a further rapid drop in unemployment in coming quarters.”
My second ace is that we should not overstate the impact of higher interest rates. Forward rates in money markets are predicting rates will rise by just 0.25 per cent to 0.75 per cent in the next nine months. More encouraging is that forward markets believe rates out to 2020-21 will still be down at around 3 per cent – historically very low and which should act as a spur to further business lending for expansion and investment.
My third ace is that some of the deferred or delayed commercial property decisions will now come forward in the wake of the referendum result. A major uncertainty for businesses in Scotland has been removed. While there are worrying legacy issues for the financial sector in particular – some firms, I’m told, have kept relocation plans on the table – the nature and composition of the business base is changing and we have seen a healthy increase in business start-ups and SMEs looking for office accommodation tailored to their needs.
Finally, the Ace of Hearts: Scotland still offers an attractive and competitive proposition for many businesses compared with London, where costs are notably higher and where staff struggle to find living accommodation they can afford. We have a skilled and educated workforce, world-class universities, house prices that staff can afford compared with the South-east and a fantastic environment for leisure, pleasure, arts and culture, sport and recreation.
Now there are low-score cards in every pack, and jokers too – though I suspect there will be little to laugh at in the upcoming battles at Westminster and over “more powers”. But there are aces to be found and I believe these four should help us through the turmoil ahead. «