'˜Scots economy faces many challenges' despite new powers

The finance secretary role, previously held by John Swinney, will see some responsibilities go to the new economic secretary. Picture: Getty Images

SCOTLAND is facing the prospect of a multi-million-pound black hole in public spending under new tax powers coming to Holyrood as the economy continues to slump, a report by a leading economist has found.

Even the higher income tax rates that have been earmarked by the SNP for Scots under the new financial controls would not offset the likely shortfall in revenues from a gloomy economic outlook in the years ahead, according to the latest Scottish Trends report.

Professor John McLaren’s report follows figures from the Scottish Retail Consortium showing Scotland’s high street has suffered another slump in sales, with falls across all retail categories. Like-for-like sales dropped 3.3 per cent year on year in April, and online sales were down 2.6 per cent as Scots tightened their purse strings.

The extent of Scotland’s “downbeat” economic performance is set out in Prof McLaren’s report as First Minister Nicola Sturgeon prepares to unveil her new cabinet secretary for the economy, who will be charged with driving growth.

Prof McLaren said: “The imminent appointment of a new economic secretary to the Scottish Cabinet is a welcome move by the Scottish Government given the current headwinds being confronted.

“Scotland’s economy faces many challenges in the short to medium term, from the decline in North Sea activity to trying to reinvigorate the financial sector.

“At present, our understanding of Scotland’s performance is not good … Better data is needed and more analysis of it in order to be able to identify, and correctly administer, good economic policies that can help to overcome these headwinds and move the Scottish economy forward.”

It emerged recently that the Scots economy saw a brief downturn in the middle of last year. Meanwhile, unemployment has been rising, with the most recent figures showing a 20,000 increase.

With Scotland gaining control over income tax rates and bands, MSPs are now more responsible for raising the taxes needed to fund public spending – but Scotland is no longer “sheltered” from the impact of a slump in the economy which generates these taxes. Last year Scotland’s economic growth was 0.4 per cent behind the UK.

Prof McLaren’s report states: “If the UK’s economy growing faster than the Scottish economy resulted in UK IT [income tax] revenues increasing by, say, 4.5 per cent a year (cash terms), while those in Scotland grew by only 4 per cent a year, then the differential, in terms of the tax take, would amount to £370 million by 2021-22. This is slightly more than the £350m that the Scottish Government expects to ‘gain’ by 2021-22 through slowing the rate at which the higher rate threshold increases.”

The SNP will not mirror the increase in the 40 per cent higher rate threshold which George Osborne unveiled in the Budget. This takes thousands of middle earners back to the 20 per cent rate – but Scots earning the same will effectively be paying more income tax than their counterparts in the rest of the UK.

Meanwhile, official figures revealed yesterday that inflation fell in April for the first time since last September as air fares dropped and clothes shops slashed prices.

The Office for National Statistics (ONS) said Consumer Price Index (CPI) inflation dropped to 0.3 per cent from 0.5 per cent in March as air fares fell by 14 per cent month-on-month, having surged 23 per cent the previous month due to the timing of Easter.

Shoppers saw clothing prices cut by 0.4 per cent during the month as womenswear retailers discounted amid flagging sales in the cold weather.

But the ONS said April saw prices on the forecourts rise, while food prices fell by less than they did a year earlier.

James Tucker, head of CPI at the ONS, said: “After five months of inflation gently rising, we have again seen a fall in CPI. The main reason for the drop was a fall in air fares, which saw a large rise in March due to the timing of the Easter holidays.”

The fall is expected to be brief, given the recent bounce in the price of oil. Petrol prices rose by 3.6p between March and April to 105.9p a litre; diesel lifted 3.4p to 106.5p a litre.

Inflation is predicted to rise gradually over the year, but remain well below the UK government’s 2 per cent target.

Like whisky? Take part and win with The Great Scotsman Whisky Survey