Latest SOS message from HMS UK, somewhere in the Atlantic (signal weak): “Where are we? Cannot determine direction. Crew exhausted by heat and slumped on deck. Sargasso conditions, fog impenetrable and Continent fading from radar. Propellers turning but full steam ahead elusive. Two years of this. Send directions. Prime Minister on bridge but could be albatross.”
If the latest pointers on the economy are any guide, this is where we are: engines chugging but little by way of forward momentum.
ONS data shows the UK economy grew by 0.4 per cent in the three months to June, helped by a strong performance in construction (up 0.9 per cent) and services (up 0.5 per cent), lifted by the warmer weather.
At first glance, all this looks encouraging compared with first quarter growth of just 0.2 per cent. But manufacturing continued to fall back from its high point at the end of last year and industrial output fell 0.8 per cent. Underlying growth is still sluggish by historical standards, and new monthly data shows slowing growth. The UK’s trade deficit has also worsened as exports of cars and planes declined sharply while imports rose.
Nor can too much store be placed on services data. Consumer spending was helped by largely one-off events such as the World Cup, the heatwave and the Royal Wedding, which all increased sales of food and drink. But hot weather and wall-to-wall football deterred shoppers from buying other goods. The net effect was that household consumption grew at the same pace as in the first quarter of the year.
“Abstracting from these quarterly movements,” says the ONS, “the underlying trend in real GDP is one of slowing growth,” continuing the declining trend seen since the second half of 2014.
Brexit uncertainties continue to act as a drag, deterring large, export-focused firms from committing to investment plans. But it is not as if growth in the Eurozone is steaming ahead. In fact, seasonally adjusted GDP in the euro area is now lagging the UK – rising by just 0.3 per cent during the second quarter according to a preliminary flash estimate from Eurostat, the EU statistical office.
However, the weak pound should help buoy exporters. And prospects for consumers are looking up, supported by real terms growth in wages. The jobs market in Scotland is looking particularly robust. A Royal Bank of Scotland jobs report last week revealed a sharp increase in permanent staff placements during July, with agencies also signalling “marked growth” in billings for short-term staff.
RBS said labour market conditions had led to “greater pay pressures”, with starting salaries and temp wages rising more strongly. Permanent placements in Scotland outpaced the UK average, while salaries awarded to permanent starters in Scotland increased at the fastest pace in six months. Temp pay rates here rose “at the sharpest degree” since April 2017.
However, the outlook across the UK overall remains subdued. Senior economist at PwC, Mike Jakeman, says: “The overall picture is of an economy… struggling for any real momentum. Although a renewed fall in the pound will support exports and high employment, and slowing inflation ought to boost consumer spending, these positive factors are likely to be counterbalanced by a slowing global economy, a small increase in borrowing costs and further Brexit-related uncertainty. In short, tepid growth is likely for the next 18 months at least.”
Indyref: back to debt and taxes
Just in case you thought coming Brexit showdown was enough to preoccupy serious Scottish minds, the debate on Scottish independence has reignited with a detailed critique by economist John McLaren on the recent SNP Sustainable Growth Commission Report over the economics and public finances of an independent Scotland. Positive aspects he cites include support for an open immigration policy; widening the debate on currency options; sensible assumptions over the treatment of North Sea oil revenues; and accepting mutual ownership of existing UK assets and liabilities, including national debt.
But the rest makes uncomfortable reading. He cites a lack of transparency over the implications of future spending restrictions; no analysis of the negative implications of breaking up the UK free trade area; a lack of clarity over Scotland’s future debt position; and a potentially over-optimistic approach to both start-up costs and the assignment of UK assets.
Meeting rising health needs and other pressures would require real-terms cuts of more than 15 per cent in the rest (50 per cent) of Scotland’s budget in the decade post independence. “This scenario,” he argues, “seems unsustainable given the cuts already imposed on many of these ‘unprotected’ budgets.”
Slower rather than faster economic growth may occur in the short to medium term, and ways need to be found to reduce the inherited deficit to a more manageable level. Scotland could cut defence spending to that of low-spending European countries and reduce other areas of public spending such as economic support currently running well above the UK average.
As for revenues, measures could include increases in income tax and the removal of VAT exemptions; introducing new taxes (eg on whisky); and increasing some service charges, in line with working examples in other countries.
A 1p rise in Scottish Income Tax would raise around £500 million. And it would need to apply across all tax bands, not just for higher earners. If VAT exemptions and reductions were removed, such tax receipts could grow by over 25 per cent. New measures might be introduced, including some form of tourism tax, more local government control of tax powers, a form of land tax and a new whisky tax.
Service charges might be increased based on examples in other countries which do not appear to lead to undue problems. Overall, these could improve government finances by at least £3 billion.
Only two problems with all this: Scotland has an in-built bias towards higher government spending. Institutional resistance would be colossal. As for the revenue proposals, what with higher income tax, scrapping of VAT exemptions, higher property taxes and a whisky tax, who would want to live here with all of this? It wouldn’t just be the likes of Jim Ratcliffe of Ineos heading out.