Weak economic and fiscal backdrop sets challenging backdrop for new Finance Secretary’s first Budget

 

  • There remains a high degree of uncertainty around the near-term outlook for Scotland’s economy in the light of the EU referendum
  • On balance, the evidence continues to point to weak levels of growth for 2017 and 2018, although expectations have improved marginally on where they were in the summer
  • The Institute’s new central forecasts are for growth of 1.1% in 2017, 1.3% in 2018, and 1.6% in 2019
  • This implies three further years of below trend growth. The outlook for households appears particularly challenging with rising inflation, limited employment and earnings growth and a freezing in many UK wide in-work benefits
  • Faced with such an outlook, this week’s Scottish Budget is a pivotal moment with the new Finance Secretary delivering – for the first time – a budget that will increasingly depend upon the performance of the Scottish economy. With a number of spending commitments to deliver, supporting growth in the economy will be vital
  • But the backdrop is challenging, with Scotland’s economy growing at less than a third as fast as the UK. Closing this gap is a top priority.

Economic growth in Scotland is forecast to remain fragile over the next few years – in line with projections for the rest of the UK, according to a report launched today (Tue 13 Dec).

But whilst UK growth has slowed slightly since the EU referendum, it has remained relatively resilient, according to the analysis from the University of Strathclyde’s Fraser of Allander Institute.

This, coupled with glimmers of hope of a slightly better outlook for the North Sea, enabled the report authors “to make a welcome, small uplift to our forecasts for 2017 and 2018”.

However, there remains a considerable degree of uncertainty around the near-term economic outlook, particularly as the terms and timing of any exit from the EU remain unknown.

The report notes that Scotland’s economy has made a welcome return to growth but it continues to lag the rest of the UK with growth in the first six months of 2016 of just 0.3% compared to 1.1% for the UK as a whole. And although unemployment in Scotland is once again lower than in the UK, the recent sharp falls in unemployment appears to stem not from people finding work, but from people leaving the labour market entirely.

Under the new fiscal framework to manage Scotland’s new tax powers, Scotland will lose out if it does not match the performance of tax receipts per head in the rest of the UK so closing the gap in recent economic performance is essential. Whilst Brexit poses a long-term challenge to Scotland’s economy, the domestic economy deserves just as much attention.

Graeme Roy, Director of the Fraser of Allander Institute, said: “The Scottish economy has remained relatively resilient in the face of challenging headwinds with growth returning in the second quarter of 2016. Most indicators point to this growth having continued through the remainder of the year.

“But growth in the Scottish economy continues to lag behind the rest of the UK, driven in part but not entirely, by the ongoing challenges in the oil and gas sector.

“Over both the last 18 months and the first 6 months of 2016, Scotland’s growth rate has been around a third of that for the UK as a whole.

“The Finance Secretary will be thinking hard about how best to use his Budget on Thursday to narrow this gap and crucially whether or not to follow the UK Chancellor’s lead with a package of support to help business and boost productivity.

“But he has little room to manoeuvre. Whilst the Scottish Budget is forecast to rise slightly in real terms next year, as a result of ongoing efforts by the UK Government to tackle ever higher levels of public sector debt, it is still on track to be cut by over 3% in real terms by the end of the Parliament.

“And major manifesto budget commitments in areas such as the NHS, Childcare and Police funding – combined with new pressures in education – imply average real-terms cuts of more than 10% by 2020-21 in unprotected areas.

“To help his budgetary position he is likely to announce a modest increase in income tax for higher earnings in Scotland next year compared to the UK and increased council tax bills, but with a challenging economic backdrop he is likely to resist going much further.” 

 

Published: 13 December 2016



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