Scotland’s 2016-17 fiscal deficit falls to 8.3% from 9.3% in the previous financial year; still pretty huge

Government Expenditure & Revenue Scotland (GERS) 2016-17 was published this morning. It shows that in 2016-17 Scotland’s notional net fiscal deficit was 8.3%, down from 9.3% in 2015-16. The UK’s deficit for the same period was 2.4%.

The figures also show that non-North Sea oil and gas revenue increased by 6.1% on the previous financial year, and that public spending in Scotland is £13,175 per person, £1,437 per person greater than the UK average.

We reported back in May on experimental statistics by the ONS showing how Scotland compared with the other nations and regions of the UK in terms of public spending deficits. The Fraser of Allander Institute referred to this data in its analysis of GERS today, noting that “[t]he key reason for Scotland’s ranking behind other parts of the UK is not because of lower revenues, but higher levels of spending. Indeed only London, the South East and the East of England are estimated to raise more revenue per head than Scotland.” Scotland is second only to Northern Ireland in terms of public spending.

As for the next few years, the Fraser projects that Scotland’s deficit will be at around the 7% mark by 2020-21.

Finally, on the notion that GERS is unreliable, Dr Graeme Roy, Director of the Fraser of Allander Institute said the following1:

Some have dismissed GERS as it relies, in part, on estimating some Scottish tax revenues. This is unfair. All economic figures are subject to a degree of estimation, including GDP and unemployment statistics. So estimation is not unusual. Furthermore, radically changing the estimation techniques do not alter the headline conclusions of GERS.

It is important to remember that GERS takes the current constitutional settlement as given. If the very purpose of independence is to take different choices about the type of economy and society that we live in, then a set of accounts based upon the current constitutional settlement and policy priorities will tell us little about the *long-term* finances of an independent Scotland.

But GERS does provide a pretty accurate picture of where Scotland is in 2016-17. In doing so, it sets a useful starting point for a discussion about the immediate choices and challenges that need to be addressed by those advocating further constitutional change.

All countries face big fiscal challenges in terms of what will replace declining revenues in the face of rising spending pressures over the next few years. Changing the constitutional set-up doesn’t alter the fact that these fiscal challenges need to be addressed by all governments in all countries. But a more autonomous Scotland will be forced to meet such challenges sooner rather than later.

Fraser of Allander Institute publishes latest GVA growth predictions

The Fraser of Allander Institute has published forecasts for growth in the Scottish economy over the second and third quarters of 2017:

GVA growth in 2017 Q2 is estimated to be 0.49% which, at an annual rate, is 1.98%
GVA growth in 2017 Q3 is estimated to be 0.40% which, at an annual rate, is 1.62%

They add: “[W]e note that the UK economy — which had a surprisingly strong 2016 — has weakened in recent quarters. This will have an implication for Scottish trade with the rest of the UK and may therefore dampen growth in Scotland through 2017.”

Aberdeen “worst hit” by hard Brexit, experts predict

BBC, today:

Aberdeen could be the city worst hit by falling economic output due to a “hard” Brexit, experts have predicted.

A new report from the Centre for Cities and the Centre for Economic Performance at the London School of Economics said all cities would see a fall in output due to increasing trade costs.

Aberdeen and Edinburgh were both ranked among the ten most affected cities.

However, the study said both cities are also among the best-placed to respond to any predicted economic turbulence.

The full report can be read here.

Most and least affected cities (% change in Gross Value Added)
Most affected cities (% change in Gross Value Added). Source: Centre for Economic Performance analysis, 2017. From report Brexit, trade and the economic impacts on UK cities (figure 3, page 5)

 

Scotland’s economy edges close to recession — but growth forecast to return in the coming months

The Fraser of Allander Institute (FAI) published its latest Economic Commentary yesterday. You can read it here. The main points from the press release:

  • With the Scottish economy shrinking in the final three months of 2016, Scotland is just one data release away from re-entering recession (defined as two consecutive quarters of falling output) […].
  • However, the Institute forecasts that the Scottish economy will pick-up in 2017, although its central forecasts for growth of 1.2% in 2017, 1.4% in 2018 and 1.6% in 2019 are below trend with Scotland likely to continue to lag behind the UK as a whole.
  • The Institute’s new analysis finds that Scotland’s recent economic woes can no longer be explained just by the downturn in the North Sea or indeed by Brexit. Instead, Scotland’s economy seems to be stuck in a cycle of weak growth, declining confidence and poor investment and net export figures.
  • With Holyrood’s Budget now much more dependent upon the relative performance of Scottish tax revenues, getting the economy moving again must be a priority for everyone with a stake in Scotland’s long-term prosperity.

FAI director Graeme Roy added:

“What has been surprising is how little the economy has featured in recent policy debates in Scotland — including in the General Election. With Holyrood now responsible for over £11bn of income tax revenues, it is vital that politicians from all sides come forward with practical policy initiatives that will support businesses, secure new investment and create jobs whatever the constitutional settlement.”

In the “Economic Perspectives” section of the Commentary, David Eiser looks in detail at the new fiscal powers being devolved to the Scottish Parliament as part of the Fiscal Framework agreed in 2016. These include, since April of this year, responsibility for a large proportion of income tax revenues (with some exclusions, such as the personal allowance), and from 2018 complete control over Air Passenger Duty. Then in 2019 the Scottish Government will start receiving half of VAT revenues raised in Scotland.

The report includes a nice summary of the various devolved taxes:

Fraser of Allander Institute: Devolved, shared and assigned tax revenues in Scotland
Source: Fraser of Allander Institute Economic Commentary Vol 41 No 2, June 2017 — Table 1, page 27.

Growth figures for the first three months of 2017 are due to be published on 5 July.

Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland

Common Weal has published a new white paper, “Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland”, authored by Peter Ryan. From the preface:

The successful management of an independent country’s currency is often tied to its ability to raise and maintain an adequate level of foreign currency reserves. These reserves would be used to stabilise the currency’s exchange rate, protect against speculative attacks on the currency and service debt obligations, amongst other uses. In the case of Scottish independence, it will be important to show that sufficient reserves can be established quickly enough after the launch of a new currency to ensure its stability. It is the purpose of this paper to demonstrate that this proposal is viable.

Ryan reckons that approximately $40 billion (20% of GDP) could be raised to support an independent Scottish currency. Denmark similarly holds in the region of 20% of GDP in foreign exchange reserves1. He estimates that the costs of servicing the debt would be around $70.2 million annually, which is “substantially less than the current annual contribution by Scotland to the UK’s foreign reserves (£500 million per year) which are being built up by the UK government to bail out the City of London in the event of another crash.”

From The National’s reporting of the paper:

Dr Jim Walker, chief economist of Asianomics, said while it was “absolutely correct” that an independent Scotland could raise $40bn in foreign reserves, it was also “absolutely unnecessary”. He described the Common Weal report as a “well-thought-out contribution”, but said many successful independent countries had levels of reserves considerably smaller than 20 per cent of GDP.

“The Czech Republic, until the last two years, had historically a substantial current account deficit making the currency much more vulnerable,” he said. “For Bulgaria that was also historically true but not in the last decade. However, these reserve levels [at 40 per cent GDP] are a result of past deficits. Scotland would run a large surplus.

“Two ‘small’ non-European players with open capital accounts and free-floating currencies, Australia and New Zealand, maintained reserves of 4.5 per cent of GDP and 10 per cent of GDP, respectively, for 2016.

“There is absolutely no need [for an independent Scotland] to be aiming at a 20 per cent of GDP reserve level.”

Peter Ryan’s previous paper, “How to make a Currency — A Practical Guide”, may also be of interest.

Revealed: The plan to keep EU workers in Scotland

From this morning’s Herald:

Detailed plans have been drawn up for Scotland to set lower barriers than the rest of the UK for low-skilled immigrants after Brexit.

Experts at the University of Edinburgh believe they have devised with a “politically viable” way of sustaining the net inflows of EU workers currently propping up key industries such as tourism, hospitality and food processing.

The landmark report has been welcomed by the Scottish Government who described the current UK-wide approach to immigration as “damaging to Scotland’s economy”.

Business leaders fear the end to freedom of movement and hardline cuts to UK-wide immigration targets following Brexit will spark crippling labour shortages in Scotland.

You can read the paper—‘Scottish Immigration Policy After Brexit: Evaluating Options for a Differentiated Approach’—at the University of Edinburgh website. It looks at the merits of four main schemes1:

  • Human capital points-based systems, drawing on examples from Queensland (Australia) and Quebec (Canada)
  • Post-study work schemes, informed by the examples from Scotland and British Columbia (Canada)
  • Employer-led schemes, with examples from the Alberta (Canada), Switzerland, and the EU Blue Card
  • Occupational shortage lists, drawing on examples from the UK, Canterbury (New Zealand) and Spain

Scottish economy expected to grow between 0.9% and 1.3% in 2017

Dr Gary Gillespie, the Scottish Government’s Chief Economist, on the growth outlook for 20171:

Looking ahead, the outlook for growth in 2017 remains positive but at below trend growth.

There are emerging signs that confidence is returning to the oil and gas sector which, coupled with the structural improvements made by the industry since 2015, will put it on a stronger footing to take advantage of the opportunities which will emerge as cyclical factors improve.

The low value of Sterling is expected to support export led growth for the manufacturing sector, whilst continuing to rebalance the economy as rising import prices feed through to higher inflation, impacting real income growth and household consumption.

Brexit continues to present a significant risk to business and consumer sentiment in Scotland with investment sensitive to changing market signals. The range of independent forecasts for Scotland suggest growth of between 0.9% and 1.3% in 2017.

Said forecasts2:

Annual Output Growth Forecast (%) 2017 2018
Fraser of Allander Institute (Mar 2017) 1.2 1.3
EY ITEM Club (June 2017) 0.9 0.7
PWC (Mar 2017) 1.3 1.1

Unemployment in Scotland falls to 4%

Employment statistics for February to April 2017 were released this morning. They show a continued decline in unemployment in Scotland. The figure now sits at 4%, the lowest of the four UK countries1, a decrease of 0.6% on the previous quarter (Nov 2016 to Jan 2017), and down 1.8% year on year. The BBC notes that 4% “equals the figure recorded between March and May in 2008.” In fact, it’s the joint-lowest since records began in 1992.

Economically active (aged 16-64) Employment (aged 16-64) Unemployment (aged 16+) Economically inactive (aged 16-64)
Country Rate (change since Feb – Apr 2016) Rate (change since Feb – Apr 2016) Rate (change since Feb – Apr 2016) Rate (change since Feb – Apr 2016)
England 78.9% (+0.3) 75.2% (+0.6) 4.6% (-0.4) 21.1% (-0.3)
Wales 76.8% (+1.1) 72.9% (+1.0) 4.8% (+0.1) 23.2% (-1.1)
Scotland 77.3% (-0.4) 74.1% (+0.9) 4.0% (-1.8) 22.7% (+0.4)
Northern Ireland 72.8% (-1.4) 68.8% (-1.0) 5.4% (-0.3) 27.2% (+1.4)

Source: ONS dataset A01: Summary of labour market statistics (Table 22: Regional Labour Force Survey Summary). Further information: ONS June 2017 UK labour market bulletin.

Other notes from the ONS’s publication:

  • Of the 12 UK regions and nations, Scotland saw the second biggest increase in workforce jobs (56,000) between December 2016 and March 2017.
  • In March 2017 82.6% of jobs in Scotland were in the services industries. This compares to 91.9% in London and 77.9% in Wales.
  • For the period from January to December 2016, Scotland—along with the North East and North West of England—had the lowest average actual weekly hours worked in full-time jobs, at 36.9 hours. This compares to London’s 38.4 hours, the highest in the UK during 2016.

SNP took right-wing constituencies for granted and paid the highest price

Thought-provoking commentary by Michael Fry in The National today:

One thing that has struck me in all the commentary and analysis since the General Election is the refusal to accept that there might be a kind of right-of-centre Scottish nationalism, and that its alienation from the present leadership of the SNP could be a reason for the setbacks last Thursday.

… While Salmond was personally a lefty he could, as a former bank executive, walk the capitalist walk and talk the capitalist talk. That was what he and his colleague John Swinney did at a crucial stage more than a decade ago as they made the rounds of Scottish finance and industry persuading moneyed men that the independence of the country might be good for them too—and that, at any rate, things could hardly get worse than they eventually got under New Labour. All the while Salmond remained First Minister, he continued to cultivate these connections, and with a good deal of success. George Mathewson, Jim McColl, Brian Souter, Tom Farmer, Bill Samuel, Peter de Vink and many others have all endorsed or donated to his SNP. But since 2014 the ample flow of business funding has dried up.

The reasons are not far to seek, and can be found conveniently summarised in the election manifesto the SNP published a couple of weeks ago. Looking inside we find, against dozens of spending commitments and calls for higher taxation, only a couple of lines on how the private sector of the economy (from which all other blessings flow) is to be encouraged and expanded.

Fraser of Allander Institute publishes latest Scottish Labour Market Trends report

The Fraser of Allander Institute has today published its latest Scottish Labour Market Trends report.

Some excerpts from the report summary:

Despite apparently very little growth in the overall economy, Scotland’s labour market continues to hold up remarkably well.

Over the year to the 3-months January to March 2017, unemployment in Scotland fell 48,000 whilst employment levels rose 41,000.

The current rates of employment and unemployment are close to the best on record.

Levels of underemployment—that is people in work but who would prefer to work longer hours—have also fallen back towards pre-recession levels.

Scotland’s youth unemployment rate continues to outperform all other parts of the UK and compares favourably internationally.

…since the financial crisis there has been a rise in part-time employment (up around 9% since 2007). Within the part-time figures, there has been a 60% increase in the number of people who say the reason they are working part-time is that they cannot find a full-time job.

…nearly [three quarters] of the growth in Scottish employment over the last year was in the form of self-employment.

…there has been a further rise in economic inactivity—that is people not actively seeking work—of 15,000 over the last year.

In 2016, productivity as measured by output per hour worked in Scotland fell 1.5%.

Weak productivity levels will make it difficult for businesses to find new resources to support sustained wage increases.

The FAI also notes in its analysis that “the lack of growth in the wider economy—coupled with rising inflation—means that there is little prospect of a sustained improvement in people’s take-home pay.”