The Sturgeon slowdown could be turning into the Sturgeon slump

The Sturgeon slowdown could be turning into the Sturgeon slump

by Murdo Fraser
article from Friday 21, April, 2017

ALL THE EXCITEMENT this week surrounding the announcement of a General Election rather overshadowed proceedings at Holyrood. Nevertheless, the Scottish Conservatives used our debating time to highlight our concerns about the Scottish economy, and in particular the growing divergence between Scotland’s economic performance and that of the rest of the United Kingdom – the Sturgeon slowdown. 

We wanted to examine the reasons behind this, press the Scottish Government for action, and propose our own solutions for improving Scotland’s economic performance. Above all, we wanted to ask the Scottish Government to drop its high tax agenda, its ruinous plans for a second independence referendum, and to focus on the day job.

The UK economy has defied all the dire predictions made in advance of the EU referendum about the impact of a Leave vote.  The unemployment rate has continued to fall, and the employment rate across the UK is now 73.3 per cent, the highest rate of people in work since records began in 1971. On Tuesday, the IMF revised upwards its growth projection for the UK economy by 0.5 per cent, the biggest change it has ever made. 

The one fly in the ointment is that this good news stops at the Border. For the situation in Scotland is markedly different from that elsewhere in the United Kingdom. And it is only in Scotland that we are seeing the economy underperforming compared to the rest of the United Kingdom.

In Scotland over the past year our economy has been flat lining, not growing at all over the twelve months to Quarter 4 2016, as opposed to growth of 1.9 per cent across the UK. In the 4th Quarter of 2016, the output of the Scottish economy actually contracted, by 0.2 per cent, when across the UK as a whole growth was 0.7 per cent. Another quarter of contraction, and we are officially in recession. The Sturgeon slowdown will have become the Sturgeon slump.

These headline figures mask a more serious problem, in that the “active economy”, defined as a measure which strips out public sector activity and focusses on private sector (non-financial) services, contracted by 0.6 per centover the last year compared with growth of 3.6 per cent across the UK. On this measure, Scotland’s active economy over the last four years grew at just 2 per cent, against 13 per cent growth for the UK: we are growing at less than a sixth of the UK average.

When it comes to the labour market, while unemployment in Scotland fell in the most recent figures, this is driven by a rise in economic inactivity, according to the Fraser of Allander Institute. This is not about jobs being created, it is about people taking themselves out of the economy altogether. 

So, what is the explanation for this divergence between the UK and Scottish economies? Well, we had our answer from the Finance Secretary Derek MacKay two weeks ago: it was all down to Brexit. Unsurprisingly, this was widely ridiculed. As Professor Graeme Roy of the Fraser of Allander Institute put it, much more diplomatically than many others: “With any Brexit uncertainty affecting the UK as well, it is hard to argue that Scotland’s relatively weaker performance can be explained by the outcome of the EU Referendum”.

No, it must be a specific Scotland-only issue. I proposed two possible causes. The first is the question of tax. The recent budget passed by the SNP with the support of their colleagues in the Greens means that one in seven income tax payers in Scotland will pay more tax than if they stayed in the rest of the United Kingdom, up to £400 more a year. 

In addition we have Council Tax rises, seeing families paying more than £500 a year extra in some cases, and we already have the increased taxes on business, with a Large Business Supplement being double the rate that applies south of the Border.  On top of that we have the Lands and Buildings Transaction Tax set at the upper end of the market of higher rates than elsewhere in the United Kingdom. 

But there is a second factor which is doing damage to the Scottish economy, and that is the ongoing uncertainty caused by this government’s obsession with a second independence referendum. The Royal Institute of Chartered Surveyors have said: “Threat of a second independence referendum is having a more detrimental effect on commercial property in Scotland than Brexit”.

A corporate survey by the law firm Burness Paull found that 88 per cent of firms thought that the prospect of a second independence referendum was creating uncertainty for Scotland, 50 per cent stated that their company would not feel comfortable undertaking investment activity until the outcome of another referendum was known, and 83 per cent said it is vital that Scotland remain part of the UK. 

The evidence is absolutely clear from those in business. The uncertainty caused by the prospect of a second independence referendum is damaging Scottish economic recovery. 

There are practical steps that could be taken to grow the economy. Firstly, the Scottish Government has very extensive powers on taxation, it should be using these to create a competitive tax environment, in terms of business rates, and in terms of personal taxation including LBTT. 

Secondly, we need constitutional stability. We need to rule out a second independence referendum, which the people of Scotland simply do not want. 

Thirdly, there needs to be a renewed focus on improving productivity. The Scottish Government should be working with the UK government to develop an industrial strategy, one focussed on innovation and promoting research and development. 

Fourthly, there needs to be a renewed focus on exporting, with the role of Scottish Development International enhanced, particularly in non EU countries. 

Fifthly, we need to do more to see our cities as drivers for economic growth. The UK government’s initiative for City Deals is now being rolled out to every city in Scotland. That is a welcome initiative, but it needs to be supplemented by Scottish Government action.

And finally, we should empower local government to assist growth, as set out in the Scottish Conservatives’ local government manifesto launched this week.

Above all, the Scottish Government needs to think again on its damaging policies for Scotland. It needs to think again on tax, and it needs to think again on a second independence referendum. If it doesn’t do these things, then we will continue to see jobs disappear, our economy will suffer, and the Sturgeon slowdown will turn in to the Sturgeon slump. 

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