Where does the economy go from here? Storms gather as economists chart Scotland’s perilous road to recovery

It has been a rocky and uncertain road through the pandemic but, according to leading economists, the route to recovery may be even more tortuous.

They have warned ministers must quickly grip and move forward Scotland’s industrial strategy to forge a route through some worrying storms ahead.

The experts were speaking in the wake of a stark report from Holyrood’s finance and public administration committee which, despite being controlled by the SNP and Greens, suggested Scotland is trailing the rest of the UK in key economic areas after scrutinising figures members described as “deeply worrying”.

The committee warned latest forecasts showing Scotland’s income tax receipts falling behind Westminster’s block grant adjustment by more than £400 million by 2026-27 could, if proven correct, “put Scotland’s future fiscal sustainability at risk”.

It also said that, while there was optimism the economy would return to pre-pandemic levels by the middle of the year, recovery and economic performance in Scotland was not as strong as across the UK, mainly due to a reduction in oil and gas production.

The committee was advised by Mairi Spowage, director of the Fraser of Allander Institute, an independent research unit. She said: “In terms of growth and earnings over the period of the pandemic, several areas of Scotland seem to be lagging behind other areas of the UK. In particular, we can see quite a big impact on north-east Scotland, both in terms of the number of people in payroll employment and median earnings.

“One of the concerns obviously for the Scottish economy is the structural change or transition from oil and gas as we decarbonise our economy. The oil and gas sector is still pretty significant for the Scottish economy with relatively high-paying jobs. It makes up about 6% of the economy, about the same size as the construction industry.”

According to National Records of Scotland projections, the population will fall by 1.5% over the next 25 years, while the UK’s overall population will grow 5.8%. By 2045 there will be 200,000 fewer children and 300,000 more people over 65.

Spowage said: “If you look at the working-age population, where you are going to get most of the tax from, the projections are concerning. It is wrapped up in this issue of where the growth in the economy is coming from to raise the tax revenues we need to support all the public services that we want to fund.

“We have seen a rise in inactivity over the period of the pandemic, and there are a lot of policy questions there about how we ensure that anybody who’s willing to participate in the labour market is able to do so.”

Economist David Phillips of the Institute for Fiscal Studies says in a new report that to avoid higher taxes or lower spending, an independent Scotland would need to improve economic growth. Between 2014/15 and 2019/20, spending was £1,550 higher per person in Scotland than the UK average, while revenue was £325 lower per person.

But he was “more optimistic” about Scotland’s finances than the committee’s report. He said: “If you look at the level of earnings, level of productivity, level of tax revenues per person, Scotland actually does reasonably well among the regions and nations of the UK.

“It is only really behind London and the south-east. It performs better than the south-west of England, the Midlands and the north of England, and certainly better than Wales and Northern Ireland. So, out of 12 nations and regions, in terms of its overall economic performance, Scotland is in the top three.

“Over the 20 years since 1999, there has been an improvement in productivity, earnings and employment in Scotland compared to the UK average.

“But that was really a story of between 1999 and about 2014. Since then, North Sea oil declining and the knock-on effects to the onshore economy in Scotland have seen earnings growth and employment do less well in Scotland than in the rest of the United Kingdom.

“The point at which earnings started to slow down compared to the UK happened just at the moment of tax devolution.”

Phillips added: “It’s wrong to see Scotland as a laggard in the UK. It’s actually one of the richer parts of the UK. Its big deficit is not because it lags behind economically and has low revenues. It’s because public spending is a lot higher in Scotland.

“The concern in the committee is that with tax devolution performance now matters a lot more and in the past couple of years there has been a relative decline in earnings. If that persists, that could be a big issue for Scotland now that its funding depends on the income tax revenues raised locally.”

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In a new book, economist Gavin McCrone points out Scotland attracts more foreign investment than any part of the UK outside London. But the former chief economic adviser to the Scotland Office also highlights “problematic investments” by the Scottish Government, such as engineering company BiFab, Prestwick Airport and the ferry contract with Ferguson Marine.

He said there had been a lack of proper planning, unwillingness to face up to difficult decisions and no government minister or officials with the ability to negotiate “tough but imaginative solutions”.

McCrone argues that, if Scotland becomes independent, its policy on tackling industrial problems would need to be “substantially improved”.

He told The Sunday Post: “There are a number of industrial issues which have turned out pretty badly, and there seems to be a need for someone to take a really firm grip.

“There is a lack of somebody with the kind of knowledge and expertise to deal with these kind of things.”

McCrone said his book, After Brexit: The Economics Of Scottish Independence, published by Birlinn next month, was not taking a position for or against independence.

He said: “I’ve tried to take a balanced view, and I can see major problems with Brexit in the longer term for Scotland, indeed for the UK as well.

“Being out of the world’s biggest trading market is bound to affect Scotland’s and the UK’s economic growth. On the other hand, coming out of the UK union means a hard border with England. We do more trade with the rest of the UK than we do with Europe at the moment, so that would require a major change.

“It’s the sort of change that Ireland has done over half a century. Where Ireland became independent, it was almost entirely dependent on the UK market. Of course, now it isn’t but that takes time.”

He added: “If Scotland became ­independent, I think it would go through a period of difficulty and incomes might fall for a while.

“But it could be argued that, in the long run, it would be to Scotland’s advantage. It seems to be to Ireland’s advantage to be in the European Union but you have to remember that Ireland spent 30 years doing pretty badly before it actually started to do better. So I think it would be a tough period. I don’t think it would be 30 years like Ireland, but I think it would be a tough period.”

McCrone called for both sides in the Scottish independence debate to properly inform the public about the key issues. He said: “Whatever decision is taken, it should be taken with some knowledge. The trouble with the Brexit referendum was that most people didn’t know what it amounted to, and I think that was pretty dangerous.”

He said of the ­Scottish independence referendum in 2014, when the No campaign won with 55% of the vote: “The Scottish Government at least produced a big paper, which the UK Government didn’t do in the case of Brexit.

“So the Scottish Government deserve to be credited for that. But, on the other hand, there were a lot of issues that were not properly dealt with, like the currency. If we are going to have another referendum, we need to analyse these things properly.”