Fraser of Allander Institute Economic Commentary Vol 42 No 4 Foreword The past 12 months have provided both good news and Like many before them, this year’s finalists demonstrated bad for Scotland’s economy – economic growth has exceptional leadership skills. Their vision and picked up during 2018, but overall growth remains low. commitment, combined with ongoing investment in their One reason for the low growth is a lack of productivity people, technology and other assets, has ensured they growth. continue to run strong, sustainable businesses which can adapt to ever-changing marketplaces. This mix of fortunes is also evident in the latest of Deloitte’s Power Up reports, Power Up: UK-Wide Growth. As we face the challenges ahead including the continuing It showed that Scotland’s economy has only grown at uncertainty around Brexit, it is important that business around half the UK average rate and while the country has leaders in Scotland continue to plan for the future. outperformed the UK average in productivity growth over Similarly, it is important not to lose sight of the importance the last 10 years, productivity growth remains low. of announcements such as the upcoming Scottish Budget, detailing the Scottish Government’s spending and tax The latest Power-Up report looked at many years of plans for the year ahead. employment and productivity data to help identify where Scotland can maximise opportunities by learning from the The Scottish Government’s use of income tax powers has past, before combining this with the very real experiences certainly been the main focus of recent Scottish Budgets, and views of current business leaders, educators, local and with the announcement in October’s UK Budget that government officials and other stakeholders. the Chancellor intends to raise the higher rate threshold to £50,000, from April next year, it is likely to dominate One of the findings is that Scotland’s businesses need to once again. collaborate further with educators and policymakers to develop the vital skills required to harness productivity Scotland’s Finance Secretary, Derek Mackay, has for regional growth. Another key finding is that Scotland’s indicated he does not intend to match this for Scottish business leaders will need to remain open and agile to income tax bands, which apply to earnings and pensions transformational opportunities, as digital strategies and for Scottish residents, and that will result in a noticeable technology innovation continue to influence productivity difference in the tax paid between Scotland’s higher rate gains in the short term. tax payers and those in the rest of the UK. Our report also highlighted that Scotland needs more What impact this will have on investment and growth in businesses of scale that are competitively positioned Scotland is the subject of much debate. However, it is across international markets. important that Scotland is seen as an attractive place for people and businesses. We have an ageing population, Scotland can grow these businesses. Innovation and a shrinking working age population and it is vital for our entrepreneurialism are embedded in Scotland’s roots, future that we do not deter people from choosing to come standing businesses in good stead to respond to the to Scotland. challenges ahead. This was reflected in the recent Summit Entrepreneurship Awards which Deloitte was proud to There are no easy answers to how to improve Scotland’s sponsor once again. productivity growth, our economic growth or how to balance the nation’s books. As the country’s business landscape continues to evolve, it will be important for all leaders to think innovatively and plan differently, to identify solutions from which everyone can benefit. John Macintosh Tax Partner Deloitte December 2018 Deloitte supports the production of the Fraser Economic Commentary. It has no control over its editorial content, including in particular the Institute’s economic forecasts. 1 Fraser of Allander Institute Fraser of Allander Institute Contents Economic Commentary 3 4 5 Summary At a glance Outlook and appraisal 6 8 11 Global economy UK economy Scottish economy 15 18 20 Scottish Fiscal Scottish labour Latest Scottish Commission’s market indicators forecasts 21 23 25 Our forecasts ‘No deal’ Policy context 29 53 75 Economic Economic Economic Perspectives Perspectives Perspectives Ewan Sutherland Scott McGrane et al David Waite et al For regular analysis on the Scottish economy and public finances please see our blog www.fraserofallander.org Copyright © University of Strathclyde, 2018. ISSN 2046-5378 Economic Commentary, December 2018 2 Summary The vote on the UK’s EU Withdrawal Agreement will Given the Brexit debate, the Scottish Government’s be one of the most significant in a generation. It upcoming Budget has received little attention. has the potential to shape the future of the UK and Scottish economies for decades to come. But the government faces a number of decisions that will shape the direction of Scotland’s public Whatever happens, it will not mark the end of the finances for years to come. uncertainty. A vote in favour will see the UK enter a near two-year transition process. But the most Will Mr Mackay choose to follow – at least in part challenging issue – a future UK-EU trade deal – has – the decision by the Chancellor to raise the Higher yet to be agreed. Rate threshold on income tax? Or will he take a further decisive shift to differentiate Scottish and Some will argue that a vote against will increase rUK income tax policy? the likelihood of ‘no-deal’. Others argue that it provides a last opportunity to secure a softer As a minority administration, what might be offered Brexit. to secure parliamentary support? Will Scottish Green Party backing lead to a more fundamental In such times, any economic forecasts must come look at the funding of local government? with major health warnings. And what is the long-term strategy for public What we can say with some confidence however, services? With the NHS on track to soon account is that ‘no deal’ would be a substantial (negative) for around £1 of every £2 spent by the Scottish economic shock. The Bank of England have set out Government, pressures on other budgets continue a ‘worst-case’ scenario which could see the UK to increase. We have heard a lot about plans for economy shrink by around 8% from 2019. priority areas of spend, but what about other areas? To put that in context, that is around double the During the coming months of debate and size of the recession Scotland witnessed during negotiations, the Scottish budget will no doubt play the financial crisis. Whilst some people have second fiddle to Brexit. But we should not forget questioned this analysis, even under a less the importance of the budget, not only because it disruptive ‘no deal’, the Bank’s analysis suggests determines how much income and council tax we that the slowdown could still be significant. all pay, but because of what it will tell us about the long term outlook for public spending and tax All this comes at a time when the Scottish economy competitiveness in Scotland. had been showning signs of picking-up. Growth in Scotland for the first six months of 2018 had outperformed the UK as a whole. Fraser of Allander Institute December 2018 In the event of a ‘smooth’ Brexit with a full transition period, we expect growth to pick up. We have kept our forecasts broadly unchanged on September at 1.4% for 2019, followed by 1.5% for 2020 and 1.4% for 2021. 3 Fraser of Allander Institute Scottish growth forecast Unemployment forecast We expect growth to pick up but Job 2019 3.9% remain below down from Market trend - even 4.2% assuming a broad based agreement with the EU. 2020 3.9% down from 4.3% 1.5% 1.4% 1.4% 1.4% 2021 4.1% 2020 2019 2021 Fraser of Allander Institute At a glance Chart: Scottish growth (since 2013) – year and quarter Table: Employment & unemployment rates, July - Sep 2018 3.0% Employment (16-64) Unemployment (16+) Scottish quarterly GDP growth 2.5% Year Year Scottish annual GDP growth - Q on Q Rate (%) Rate (%) Change Change 2.0% Scotland 75.0% ▼ 3.8% ▼ 1.5% England 75.8% ▲ 4.1% ▼ 1.0% Wales 75.0% ▲ 3.9% ▼ Percentage change (%) change Percentage 0.5% N. Ireland 68.5% ▲ 4.1% - 0.0% UK 75.5% ▲ 4.1% ▼ -0.5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018 Chart: FAI forecast Scottish economic growth range 4% Forecast Table: FAI forecast Scottish economic growth (%), 2019 – 2021 3% 2019 2020 2021 2% GDP 1.4% 1.5% 1.4% 1% Production 1.6% 1.7% 1.6% 0% Construction 1.1% 1.1% 1.1% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Annual GVA GrowthAnnual GVA Services 1.4% 1.4% 1.4% -1% -2% -3% Economic Commentary, December 2018 4 Fraser of Allander Institute Outlook and Appraisal Whilst economic growth in Scotland remains below trend, it has picked-up in 2018 to its fastest pace since 2014. However, businesses are increasingly nervous about the prospects for the UK and Scottish economies in the light of the looming Brexit impasse and the potential political crisis it could usher in. Chart 1: Scottish growth since 2013, year and quarter Introduction 3.0% Scottish quarterly GDP growth As we outlined in our last Commentary, growth in the 2.5% Scottish annual GDP growth - Q on Q Scottish economy has picked up in recent times – 2.0% consistent with the forecast we set out this time last year.