Bill Jamieson: Election victory only start of SNP's problems

The new Queensferry Crossing is one infrastructure project that has helped boost the construction industry. Picture: Scott Louden

What has changed in the approach to the Scottish parliamentary elections in May? The result appears a foregone conclusion. Further advances by the SNP look assured.

On the economy, we were cheering clear signs of growth barely a year ago, with a rate of expansion equal to that of the rest of the UK. A surge in construction, further falls in unemployment and a buoyant services sector all augured well for the arrival of extra tax varying powers, particularly the Smith Commission proposals post 2017. The administration could look forward with confidence to implementing its social welfare aims.

But today it looks much less reassuring. Even a year ago predictions that the oil price would fall below $40 a barrel would have been scoffed at as too pessimistic. But in recent days the price has dipped below $30. Forecasts of further falls to $20 look credible. And in the past week Standard Chartered, RBS and Goldman Sachs have warned of a collapse towards $10 a barrel.

Government revenues from North Sea oil taxation are being pulverised. But little of this dramatic reversal of oil price fortune has impacted on support for the SNP. It continues to enjoy a commanding lead in the polls. And why should the oil price plunge matter? Oil revenues are not being devolved. It is not a concern for John Swinney’s budget. It is a UK, not a Scottish, budget concern.

But the oil price collapse is set to have a huge impact on Holyrood and its ambitions. It has brought a slump in investment both directly in oilfield activity and across the hundreds of onshore companies working to service the oil giants.

It has brought wave upon wave of redundancies, the latest this week from BP, which announced plans to shed about 600 jobs from its operations in the North Sea. The majority of the staff and contractor posts would go this year. The job losses amount to about a fifth of BP’s North Sea workforce. The sharp retrenchment across the oil industry and those onshore companies dependent on it have been a major contributor to the slowdown and now reversal of falling unemployment in Scotland. And it has also impacted on overall economic growth.

Figures yesterday for the third quarter showed that growth in Scotland’s economy has slowed to just 0.1 per cent, with the annual rate of growth reduced to 1.7 per cent. Both figures trail equivalent numbers for the UK overall – 0.5 per cent and 2.1 per cent respectively.

Scottish GDP is only 4 per cent higher than in 2007, the previous peak year of output. The UK by contrast has improved by almost 9 per cent over this period. The services sector, accounting for more than 70 per cent of the economy, grew by just 0.3 per cent in Q3, while the production sector shrank by one per cent. Were the overall GDP measure to include offshore activity, the out-turn would be notably lower.

And all this matters for Holyrood, because with the gaining of substantial new tax powers, Scotland’s budget will be far more critically dependent on our economic performance and the tax revenues we are able to generate. These revenues will be more sensitive to underlying economic performance than distributions under the Barnett Formula. In terms of yield, income tax will be by far the biggest tax devolved in Scotland, raising (on 2013-14 figures) £10.9 billion, more than double the amount of all other devolved taxes combined.

A static or slowing economy with nil or shrinking employment growth will radically circumscribe the spending plans of whatever administration is in charge at Holyrood. It is a dynamic whose implications are yet to be grasped – for there is very little discussion at present on the economic and taxation plans of the contending parties.

In a period of tax revenue constraint it may be tempting to adjust income tax rates so that top earners pay more. For example, Scottish Labour leader Kezia Dugdale is already pondering a 50p tax rate for top earners.

But Scotland’s income tax revenues are already critically dependent on the contribution of higher rate taxpayers. Additional rate taxpayers representing just 0.7 per cent of the taxpayer population already contribute 13.9 per cent of all tax revenue in Scotland. Changes here would have exponentially higher impact – increases or decreases – and in particular on the behavioural responses of taxpayers in this segment.

Some may opt to move in the event of a 50p tax rate. Others may find other ways to mitigate the tax impact – switching, for example, to forms of dividend or surplus distributions that would fall under (non-devolved) taxation of savings and investment income rather than the Scottish income tax rate.

But we can take comfort that the economy is still growing, albeit more modestly than previously hoped. And we should not overlook the many positive benefits for the wider economy of a sharply lower oil price, both for households and for high-energy consuming enterprises. These should help cushion the negative impact on North Sea activity.

But our problems are by no means confined to oil. Of particular concern is the construction sector. This has been a powerful driver of Scottish growth, up by a remarkable 17 per cent on the previous 12 months, helped by an exceptional bunching of infrastructure projects – the new Forth Road Bridge, the Borders Railway, schools and hospitals.

How long might this continue? Gary Gillespie, the Scottish government’s chief economist, has warned of a slowdown ahead. And in any event, how genuine is the sector’s contribution to Scotland’s economy? As the economist John McLaren points out, construction employment in Scotland has remained flat while output has risen by a third since the start of 2013.

“A possible explanation for such contrasting trends”, he writes, “ is that many of the, often highly skilled, jobs in these big projects are being filled by workers who live outwith Scotland and who may be missed on the employment surveys (which are based on place of residence).

“If this is true, or if many of the companies involved in the projects are also non-Scottish, then the GDP figures are being exaggerated, as much of the profits and wage income from the infrastructure projects is ending up outside Scotland.”

Overall, we are heading into the Holyrood election in May on a prospectus altogether different from that which prevailed a year or so ago. A further SNP advance looks assured. But the election is less the end of the administration’s problems than a new beginning.

Political victory may be in prospect – but so, too, an under-performing, slow growth, cash-strapped and over-taxed Fool’s Paradise.