Bill Jamieson: Scotland's economy desperately needs growth

There is a danger in the next few years of drifting into more borrowing and debt than ever before writes Bill Jamieson.

Scotlands economy is lagging behind the UK and is a growing threat to the countrys prosperity. Picture: Michael Gillen

All up in the air – and down to earth with a bump: in the chaotic wake of the election, seldom have the prospects for Scotland’s economy and well-being looked more uncertain – or more troubling.

How ironic that less than a week after an election that barely discussed the economy or how growth might be improved, Holyrood’s economy committee has now launched a probe into the “accuracy, utility and comprehensibility of Scottish economic statistics” and to consider “what data is required for effective delivery and scrutiny of policy”.

If you didn’t laugh, you’d cry. For well over a year, Scotland’s economy has been slowing, and badly trailing the rest of the UK. Buoyant data on jobs have obscured deeply worrying trends elsewhere. There may be more Scots in work, but real wages are falling.

We may be doing well on inward investment but five out of six key growth sectors identified by the Scottish Government – food and drink, creative industries, sustainable tourism, energy and life sciences - failed to secure any growth last year.

And while there are flickering signs of confidence in the oil and gas sector, domestic business and household confidence is reeling from the uncertainty presented by a hung parliament.

The bald facts set out by the Scottish Government’s chief economist Dr Gary Gillespie, are these: Scotland’s gross domestic product grew by just 0.4 per cent last year, compared with 1.8 per cent across the UK. In the final three months of the year it contracted by 0.2 per cent (compared with growth of 0.7 per cent across the UK) putting us on the brink of recession.

And little by way of early recovery is expected. Independent GDP growth forecasts for this year range between 0.9 per cent and 1.3 per cent and for 2018 between 0.7 per cent and 1.3 per cent.

First Minister Nicola Sturgeon has been quick to finger Brexit as the key threat to Scotland’s economy. But this view is arguable on two counts. First, the fall in Scottish GDP set in at the start of 2015 – well before the Brexit vote. And second, it does not explain how the rest of the UK managed to display resilience in the aftermath of the Brexit vote, while Scotland’s performance crumbled. What is so specific and particular that would explain why Scotland’s economy should behave in such a radically different way to the rest of the UK?

Scepticism is also evident over the GDP statistics: some, like Inverness-based economist Tony Mackay, suspect the latest Scottish government quarterly data may be painting an overly gloomy picture. But there is little doubt that both the production and construction sectors contracted during 2016, due in large part to sharp fall in the oil and gas sector since the oil price fall. As a rule of thumb, says Gillespie, a £10 million reduction in output in the oil and gas supply chain will result in an additional £5-£7 million reduction in output from the wider economy.

This is the troubled backcloth to the Holyrood committee enquiry on ‘Are our economic statistics working?’ Businesses and economists are urged to share their views and concerns and submissions and evidence should be sent in by 1 September. A separate independent assessment will follow this autumn from the recently-formed Scottish Fiscal Commission which will provide its own appraisal and forecasts for 2018 and beyond.

Earlier reporting of quarterly GDP is long overdue: it is farcical that Scottish quarterly economic numbers are routinely ‘lapped’ by UK data typically five months ahead.

And we need more Scotland specific data. For example, we need more frequent and more detailed figures on business formation – one of the key drivers of economic growth. A high business birth rate drives up innovation, competitiveness and productivity, as firms are replaced by more competitive enterprises in the important process of business churn.

In 2015, Scotland had 49 new business registrations per 10,000 of the adult population – well below the UK figure of 72. Even excluding London, the UK figure is 61 per 10,000 adults.

A review of the limitations and strengths of Scottish economic statistics in March by Richard Marsh at 4-consulting made several criticisms including inadequate data on capital investment and export trade. Scotland is still heavily reliant on ONS and other UK–garnered data, with the result, says Marsh, that Scotland’s number-crunchers may have come to regard themselves as “more opportunistic, but relatively powerless, statistical scavengers”.

His report also highlighted an observation by the UK Statistics Authority that the current system may work “to focus the statisticians’ attention not on the public utility of their advice but on how it will be received within their department… This may give rise to an imperative within the department for all officials to ‘pull together… to present the best possible outward face environment. In such an environment, departmental statisticians who present evidence that is seen as unhelpful run the risk of being perceived by departmental colleagues as naïve or disloyal”.

So why does all this matter? Because if we are to get ourselves out of the current rut and lift our prospects we desperately need economic growth. And this needs to be less about vast public spending projects requiring even more public borrowing and debt, but more about private sector enterprise and endeavour.

One bold step to counter the threat of reduced consumers and business spending from higher inflation would be, as advocated by the Scottish Chambers of Commerce, to announce a temporary reduction in VAT. The rate was cut in the wake of the 2008-09 financial crisis to give people the confidence to spend and to reduce the pressures on business margins. “Everything possible must be done,” says SCC chief Liz Cameron, “to maintain consumer confidence in these uncertain times to provide a route to business growth and economic prosperity.”

A second bold step at UK level would be to reduce land held in state hands to help enable a huge house-building programme. Figures this week showed overall housing output in Scotland continuing to flatline with only 88 more homes (one per cent) built in 2016 than the year before. As Nicola Barclay, head of Homes for Scotland, points out, while there has been a 29 per cent increase in funding approvals for ‘affordable housing’, the big picture shows total completions across all sectors are still more than 36 per cent down on 2007 levels, and still less than what was built in 2010.

Meanwhile Andrew Murphy, chairman of the Scottish Retail Consortium, has called on the Scottish Government to bring forward proposals from the SNP’s 2016 Holyrood manifesto to create a new zero-rate income tax band. This, he says, would allow it to effectively raise the tax-free personal allowance in Scotland over and above that applicable in the rest of the UK.

If we are not to drift into years of low growth and more borrowing and debt than ever, it is time to get on the case.