Bill Jamieson: Economy should become our red line issue

The teetering service sector accounts for nearly three-quarters of GDP. Picture: Neil Hanna

The latest Scottish Government figures show that the economy north of the Border shrank by 0.2 per cent in the final three months of 2016. In marked contrast, growth across the UK as a whole was 0.7 per cent.

Government statisticians found output was flat in the service sector – and down in production and construction, by 0.9 per cent and 0.8 per cent respectively. Scottish GDP grew by 0.4 per cent over the calendar year – compared with growth of 1.8 per cent for the UK as a whole.

The disappointment does not end there. There is little sign that the economy enjoyed a bounce back in the first quarter of 2017. Indeed, evidence points to sluggish performance by the service sector – accounting for almost three-quarters of Scottish GDP – in March, this following a muted out-turn in February.

One quarter of declining GDP when the rest of the UK is growing is bad enough. But two quarters of decline puts us officially into recession.

And with most forecasters warning of a slowdown ahead across the UK as a whole later this year and next, this does not augur well for Scotland. Indeed, a disappointing package of data for the UK economy at the end of last week fuels suspicion that GDP growth across Britain is already slowing markedly, largely due, says Global Insight economist Howard Archer, to consumers becoming more cautious. He suspects UK GDP growth in the first quarter of 2017 slowed to 0.4 per cent quarter-on-quarter from 0.7 per cent in the fourth quarter of 2016 – the weakest growth rate since the first quarter of 2016.

Of course, comparison of Scotland’s GDP performance with the rest of the UK does us no favours. The UK figure has long been boosted by the dynamic growth of London’s economy – a global city state whose performance bears little relation to that of the rest of the nation. So the comparison gap is not as wide as the crude figures suggest.

Second, Greater London has benefitted from the high degree of skilled migrant labour. As a global magnet for financial services, IT, creative industries and service sector activity generally, it has enjoyed benefits in terms of innovation, sharper competitiveness and productivity. For all our strenuous efforts to promote skills and apprenticeships here, companies are still reporting a chronic shortage of skilled labour.

And much of the lagging performance of Scotland’s economy has been due to the slump in North Sea oil and gas activity that has rippled through specialist engineering and offshore services supply chains, affecting much more than just the Northeast economy.

Politics, too, have played a part: when all five political parties in Scotland warned that a vote to leave the EU would deal a big blow to Scotland’s economy, we shouldn’t be too surprised if that bombardment of negativity had an impact on consumer confidence and spending. In any event, if Brexit was the cause of our troubles, why has the rest of the UK economy not suffered equally as badly?

Perhaps when the administration is obsessed with a second Scottish independence referendum, we should not be surprised that this has affected business confidence and future investment.

Whatever the causes and the different weights we assign to them, Scotland is now staring recession in the face. And this points a gun to the head of the SNP administration. As economist John McLaren points out, if such relatively slower growth is maintained it will have significant budgetary implications for a Scottish Government with income tax powers or under full independence. In particular, it highlights the potential budget losses relative to what would have been the case under the Barnett formula.

For example, if the Scottish vs UK GDP per capita growth differential was maintained at around half the level seen in 2016 (0.5 per cent a year), then after five years the Scottish Government would have between £370 million (control of income tax) and £1.5 billion (full independence) less revenue than under the recent (full Barnett) system.

“This simply reinforces the importance,” he adds, “of ending the current slowdown in Scottish economic growth, although simple solutions are not readily available.”

At this point, strident calls are normally made for official policy action. The Scottish Chambers of Commerce has already called for urgent government action to restore confidence. Other calls will soon follow. Step up government spending. Ease taxes on small and medium-sized businesses. Push on with infrastructure improvement.

The problem with all these is that government spending is already at too high a level. Scotland already has higher income tax rates than the rest of the UK. We have already been spending heavily on transport and infrastructure improvement.

The amended Scottish budget contains an additional £220m of spending for 2017-18 beyond that set out in December’s draft budget. A large element of this is being directed toward local authorities with an additional £160m made available.

As for Scotland’s overall budget deficit, this now stands at £14.8bn (9.5 per cent of GDP). For the UK the equivalent figure is four per cent of GDP.

The reaction of the administration thus far has been astonishingly complacent, and highlights the absence of deeper thinking and analysis of the future for Scotland’s economy.

The administration well knows that the world has moved on since 2013 and that the economic and political background is different. But the scale of this changed landscape does not seem to have hit home yet.

We need to look afresh at what it is that Scotland can offer business and enterprise that is different to or better than the path of continuing decline that stretches before us. We can stave off a determined assault on our ailing performance for so long. But the cost of delay keeps going up.