Chink, clink and clatter: how the pennies have dropped as the Scottish Fiscal Commission released its latest dismal figures for our economy and the public finances last week.
I don’t just mean the tumbling numbers for income tax and business rates receipts over the next five years. Nor is the cascade confined to its forecasts for lower wage growth and lower for longer sub-par performance by Scotland’s economy.
The loudest penny to drop, surely, was in Holyrood and the recognition – at last – of the glaring gap between Scotland’s performance and that for the UK as a whole.
No more bluster about Holyrood-inspired growth or “more powers” improvement or Scotland’s seemingly limitless welfare coffers.
The pennies – a shedload of them – have finally dropped about our economic state and the urgent need to address an under-performance that blights living standards, household wealth and aspiration as well as the government’s spending ambitions.
Recognition? Well, perhaps not at the top. Right to the end Scottish Finance Secretary Derek Mackay maintained a fiery bluster last week that this had nothing to do with the Scottish government, but the “ideological choice” of austerity by the UK government and a “fiscal straitjacket” which was to blame for weak growth. The grim forecasts, he declared, were “the consequences of UK choices on Scotland’s public finances, including UK-imposed decisions on austerity, immigration policies that don’t suit Scotland, and taking us out of the single market through Brexit.”
It wisnae me! Westminster austerity, immigration curbs, Brexit – it’s all other folk’s fault! But if that is the case, why has the rest of the UK not suffered as much? Why is Scotland’s growth rate set to be little more than half that of the UK overall (1.4 per cent, according to the latest OECD forecast)?
The key finding of the Commission’s forecast, running to a daunting 218 pages – a boom at least for Scotland’s tree fellers and the wood pulp industry – is that Scotland’s economy is set for five more years of “subdued” growth, failing to rise above one per cent even in 2023 and set to lag the UK even further.
The forecast income tax take for 2018-19 has been revised down by £209 million – and by £437m in 2022-23 due, it says, to weaker than expected wage growth. Indeed, real wages in Scotland – lower today than they were a decade ago – are expected to fall again this year and show no rise until 2020. And real household disposable income is not expected to see positive growth until 2020-21 because of a combination of slow wage growth, limited employment growth and inflation.
Revenue from business rates is also forecast to be £24m lower this year than the SFC forecast in December.
And as if all this was not enough, Scottish government capital borrowing is set to hit the buffers. There is a statutory overall capital borrowing limit of £3 billion and a 15 per cent annual limit, equivalent to a cap of £450m. The government will have borrowed 62 per cent of the total allowed by 2019-20, and will only be able to borrow the maximum amount per year with a 25-year repayment horizon until 2022-23.
In a small print footnote which surely deserved to be printed in letters three inches high, the SFC points out that if the government borrowed £450m every year up to 2022-23 the debt stock would be £2.98bn, or 99 per cent of that £3bn debt cap.
Snail’s pace growth, revenues falling behind previous forecasts, living standards in limbo – and now borrowed to the hilt: how Holyrood’s SNP MSPs would have howled and railed at this litany of failure and gloom had they been in opposition!
Now daunting though the SFC’s report is, finding policies that would make a significant uplift is no less problematic. No government has a magic wand to conjure up growth to order.
The Commission points not just to poor real wage growth but to a shrinkage in the working age population – those aged 16 to 64 more likely to be working and generating the highest tax receipts, for example, in income tax.
While the total population is expected to grow, the population aged 16 to 64 is set to shrink from 2018 onwards – and in contrast to a growing 16 to 64 population in the UK. This, says the Commission, “places a particular drag on growth in GDP in Scotland”. And slow growth in the potential size of the economy will act as a limit to GDP growth.
It also highlights slow trend productivity growth in Scotland since 2010. Growth in real wages has been slower still than growth in productivity would suggest. The Commission has looked in particular at the disconnect between productivity growth and real wage growth since 2010 – and as a result its forecasts of real wage growth are now lower than previously.
Following near zero or negative real wage growth since 2010, real wages are expected to fall by 0.5 per cent in 2018-19, before gradually starting to grow from 2019-20 onwards.
Now I can take issue with some of this. Productivity statistics are in hot dispute amid concerns that they are failing to capture the changes wrought by the internet and digital communication – the so-called “invisible economy”.
Similar doubts are building on GDP itself as an accurate measure of our economic performance and wellbeing. We should take care not to reduce the measurement of our economy to one statistic, subject as it is to frequent revision and which is often out of synch with everyday experience in the real world.
Rather, as I argued here two weeks ago in the summary of a presentation I made to the Scottish Council for Development and Industry, to keep watch on a range of figures covering employment, inactivity, inward investment, new business start-ups, business expansion, births and deaths and planning applications by firms. The City of Edinburgh Council’s monthly Economy Watch has been an outstanding example.
None of this, however, dilutes the outstanding range and depth of the SFC’s assessment – and the imperative need for a greater focus on measures to lift our economic performance. This shedload of pennies deserves wide attention.