Bill Jamieson: Only one place to seek solace after bleak budget

For some time Scotland's economic performance has been lagging the UK. But since last summer this divergence has become increasingly marked and worrisome.

Derek Mackay conceded to the Greens on income tax. Picture: Andrew Milligan/PA

The UK overall has been enjoying a performance markedly more positive than the official forecasts at the time of the Brexit vote. Last week the Bank of England upgraded its growth forecasts for 2017 (from 1.4 per cent made in November and 0.8 per cent last August) to 2 per cent. For 2018 it is forecasting 1.6 per cent and for 2019 the prediction is for growth of 1.9 per cent (previously 1.6 per cent).

This followed similar upgrades by the National Institute for Economic and Social Research – the body that warned of the likelihood of recession as a result of Brexit. Now it is forecasting growth of 1.7 per cent this year.

In Scotland, little such resilience can be detected. The Scottish Government recently reckoned our economic output in the third quarter of last year at just 0.2 per cent. The Fraser of Allander Institute has raised its forecast a little since its grim forebodings last summer. But for this year it still predicts growth of just 0.5 per cent, rising to 1.3 per cent in 2018. Forecasts from accountancy firms EY and PwC are even gloomier at 0.4 per cent and 0.3 per cent respectively. All these are well below Scotland’s long-term average growth rate of two per cent.

This is a troubling development for Scotland and merits far greater official attention. Easy though it is for politicians to blame “Brexit effects”, Scotland’s absolute – and relative – slowdown was evident well before the Brexit vote. And to the extent that Brexit has been a factor, why has it not impacted at least as severely across the rest of the UK?

Of official Scottish Government response there is, with one exception, little sign. Instead, it is proceeding with increases in business rates that threaten the survival of hundreds of tourist businesses, an effective rise in income tax for higher rate taxpayers, and a costly apprenticeship levy.

The lamentable Holyrood Budget debate last week focused almost exclusively on ever more public spending, with a concession to the Greens – the “lentil-munching watermelons” in Murdo Fraser’s vivid phrase – involving a further £220 million to a spending total including a further £160m for local authorities to spend as they wish. All this preceded by the now ritual denunciations of “austerity” though Scottish government spending is higher than ever.

Of the concerns across Scotland’s business community there was little mention, while business rates continue to rake in ever higher sums and our high streets are fighting for survival. Taking in the bigger picture of Scotland’s relative economic decline, with an economy growing at barely half the pace of the UK, the SNP administration shows every sign of living in La La Land.

The one concession was a £25m restoration of funding for Scottish Enterprise – a paltry gesture after cuts to SE of more than £120m from 2009-10 to the latest budget – a reduction of 41 per cent.

Now there are many causes of Scotland’s economic malaise: the dramatic decline in North Sea oil activity with cutbacks being felt across the onshore specialist engineering and business services sectors; the relapse in construction activity after the “freak peaks” of 2013-2015; and a slowdown in private sector services. Scotland is suffering from deep-seated, structural problems that are not remediable by immediate headline-grabbing measures.

The 50-page report of Holyrood’s Economy, Jobs and Fair Work Committee, chaired by Bruce Crawford, on The Economic Impact of Leaving the European Union bravely struggled with incomplete statistics and patchy analytical assessment. But how could a full assessment have been possible while we have barely set out on the departure road with detailed negotiations on a post-Customs-Union arrangement still to begin? And even if the committee had a truckload of new “facts”, what is it within Holyrood’s competence to do? This vacuum is failed with the SNP’s repeated talk of a second independence referendum – as if there weren’t uncertainties enough.

None of this is helping those struggling SMEs and tourist-facing hotel, pub and restaurant businesses I referred to last week. For years critics have called for improvements to Scotland’s tourist offer – that many smaller hotels and restaurants are not investing enough and undertaking refurbishment. With visitor numbers likely to swell with the 20 per cent fall in sterling against the dollar, the need for such upgrade is all the more imperative if we are to maximise visitor spend.

But that is hard to do when earnings are hit by higher tax imposts and business costs: for many, it’s all they can do to maintain staff numbers and survive from one season to the next. The administration needs to listen to the examples of stress and hardship produced by bodies such as the Scottish Tourism Alliance and mitigate proposed rises in the business rates poundage – particularly in rural areas and in the North-east, where occupancy and business conference activity have been badly hit by the oil sector downturn.

For the moment, we can take some comfort from those upwardly revised forecasts for the UK and hope that some of this cautious optimism may filter through to Scotland’s enterprise sector. The Bank of England in particular has painted a brighter outlook for the UK economy this year, with faster growth, lower unemployment and a more modest rise in inflation.

Its latest upward revision takes its 2017 growth forecast for the UK overall to two per cent. But it comes with a warning of risks to business investment and consumer spending as rising inflation eats into household budgets. As if on cue, figures late last week showed that growth in the UK’s dominant service sector slowed last month, according to the Market/CIPS purchasing managers index (PMI).

This recorded its first slowdown in the services sector for four months, with a slightly slower pace in manufacturing and construction. But Markit said the surveys together suggested the UK economy would grow by a “robust” 0.5 per cent in the first quarter of the year, if current trends continued. Thus, for the foreseeable future, it is to the rest of the UK and not to Holyrood, that business looks for better news.