Kate Forbes & Nicola Sturgeon Square

Scotland’s economy has never been so mismanaged

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AS THE SCOTTISH ECONOMY battles to emerge from the Covid-19 pandemic, it is now imperative we finally tackle the underlying structural failures. Scotland has a long running productivity problem which continues to fester unaddressed. We are witness to high taxation levels coupled with subsequent revenue projections shortfalls. In brief, Scotland and its political parties are failing to face up to productivity stagnation and a looming crisis of tax and spending. All wrapped up in a context of declining innovation.

It is with this firmly in mind that I count myself disappointed with the Budget (Scotland) Bill debated last month at Holyrood. Whilst there were admirable elements which are aimed at some of the structural issues outlined above, these were few in number and far from adequate. In fact, it is far from clear the Scottish Government is anymore more than vaguely aware of them. But unless we tackle these underlying structural weaknesses, the Scottish economy shall remain lacking in entrepreneurialism, dynamism and all the potential benefits of a thriving competitive economy.

Scottish productivity stagnation

Finance Secretary Kate Forbes on February 10th informed the Holyrood chamber during stage three of the Budget (Scotland) Bill that “one of our key objectives in the budget was economic recovery – if households are struggling then businesses are identifying some of the challenges that they face”. Yet, she then proceeded to outline a series of grants and business support handouts which do not go to addressing the underlying weaknesses structurally of the Scottish economy. Do not misunderstand me, I welcome the Scottish Government’s efforts to provide support for businesses to recover. The £3m of additional funding to help small and medium sizes enterprises (SMEs) continue to transition to digital is positive. But let us be frank, £3m in additional support to “help SMEs to continue on their digital journey” is a drop in the ocean when faced with the reality that for 17 years Scotland’s place on the productivity international league tables has remained largely static.

If we review the CBI/KPMG Scottish Productivity Index of 2019 we discover that prior to the pandemic experts were already warning of Scotland’s long running productivity failure. It explained that

“It will be difficult to change Scotland’s place in the international league table on productivity (Exhibit 1) – which has remained largely static for over 15 years – unless we convince the individual workers, managers and leaders whose jobs, livelihoods and investments are the driving force behind these figures that it will benefit them, their families and their businesses.”

Exhibit 1: Scotland’s international productivity ranking (2017)

That was 2019, prior to the economic maluses inevitably felt due to the pandemic. The SNP entered power in 2007, so if the Scottish Productivity Index is to be believed, they have comprehensively failed to improve Scottish productivity their entire time ensconced in office. Scotland has remained stuck in the international league tables for productivity, stagnant with little indication of progress. And note, Scotland sits in the third quartile, behind the UK as a whole located in the second quartile.

Additionally, the latest CBI/KPMG Productivity Index (2021) reveals Scotland is actually less innovative now than in recent times,

“The percentage of businesses in Scotland that are innovation active fell from 45% in 2014-16 to 32% in 2016-18, the most significant decline across the UK’s nations. Scottish innovation has not been this low since 2008-10, when just 33% of businesses were reported to be innovation active.”

Historically failing to improve domestic productivity, increasingly less innovative. Forgive me when I conclude that the Scottish Government’s £3m additional funding to help SMEs with their “digital journey” is a drop of water in the ocean. It, bluntly, shall change little. Nor would the, although welcome, announcement of £6.5m for the childcare sector in the Scottish Government Budget. Neither of these things would hurt productivity (they might even help), but it is all fiddling on the margins of a much greater challenge.

Scotland’s looming tax and spending crisis

Moving past productivity, next we arrive at our tax challenges. Currently, Scotland already taxes those with the broadest shoulders the most. The higher earners in Scotland pay more tax than their English counterparts, and despite this (or maybe because of this?) we still face a tax revenue shortfall in coming years. According to the Scottish Fiscal Commission report from December 9th 2021,

“Scottish income tax revenues growing more slowly than the income tax Block Grant Adjustment means a negative net position and funding shortfall of £190 million in 2022-23. This funding shortfall is expected to continue, reaching £417 million by 2026-27.”

 

Exhibit 2:Income tax funding shortfalls forecast (Scottish Fiscal Commission)

Exhibit 2 (above) shows the income tax shortfall of £417m by 2026-27 when we are already asking richer Scots to pay more than their counterparts in England. And if that doesn’t represent enough of a challenge, let’s focus in on that bit about the ‘block grant adjustment’.

The SNP has been busily expanding social security eligibilities and benefits. Now there is nothing wrong with doing this providing you can afford it.  It is, however, very far from clear that Scotland can. According to the Scottish Fiscal commission the social security costs resulting from the SNP’s largesse has been growing and growing faster than projections anticipated.

“Overall, our forecast of spending in 2025-26 has increased by £1.0 billion since January 2021…This increase primarily occurs because the Scottish Government plans to launch new payments which are more generous or received by more people. In addition, most payments are uprated by inflation and the higher inflation forecast therefore increases spending. By 2025-26, our forecast is £190 million higher than in January 2021 because of higher inflation”

The new payments referred to are the Child Disability Payment and the Adult Disability Payment. If you look at Exhibit 3 you can see the projected growth in social security spending from 20233-23 and 2026-27; showing the enormous expansion of Scottish Government policy derived expenditure.

Exhibit 3: Social security spending in 2022-23 and 2026-27 (Scottish Fiscal Commission)

A key point here is to focus on the massive slice resultant from the ‘Adult Disability Payment’ (ADP). This is a valuable benefit which will help many people live more healthy and productive lives in the community. It is, however, not related to economic performance, instead relating to demographics. Or put simply, older people are more likely to receive ADP “and therefore a combination of an aging population and increases in the state pension age mean we expect the number of people receiving ADP to increase over the next five years”.

This is worth bearing this in mind since increasing eligibility to social security benefits will have significant longer term economic consequences given we are living longer. More people receiving ADP (which is replacing the Personal Independence Allowance) means more people drawing on it and for longer. This is not necessarily a problem… except it is far from clear the SNP government can afford it.

This is because Scotland receives Block Grant Adjustment (BGA) funding from the UK Government based on spending on the original DWP payments. So, the SNP’s newly introduced payments must be met entirely from the Scottish Government budget.

The additional amount cannot and will not be covered by the Block Grant Adjustment.

But the Scottish Fiscal Commission explains how things get even worse,

“Combining completely new payments and payments with BGA funding, we expect that by 2026-27 spending on the Scottish Government’s social security benefits will be £760 million more than the corresponding funding received, reducing the funding available for other parts of the Scottish Budget.”

So, to recap all of that: Scotland faces a £417m income tax revenues shortfall, despite already taxing the richest more than in England. And add to that the Scottish Government’s social security benefits are alreadyexpected to be £760 million more than the corresponding funding received. So that means by 2026-27 £760m more social security spending than received via the Block Grant Adjustment coupled with a £417m income tax revenue shortfall. And why is nobody alarmed at this prospect? Where are the measures in the Scottish Budget to head this major crisis off?

Conclusions

In 2019 Scotland entered the health pandemic with the lowest business innovation since 2008-10, the period following the financial crisis. It has struggled for years with stagnant productivity, which acts as a serious economic drag on its potential.

Yet despite all of that, it has a Scottish Government which has – all while presiding over the aforementioned – set its course on unsustainable levels of spending.

The SNP largesse in regard to social security is not of itself necessarily objectionable, but when taken in line with falling income tax revenue projections and escalating social security spending over and above the Block Grant Adjustment, it becomes an issue of sustainability. Especially when one of the social security benefits is the Adult Disability Payment- based on demographic as opposed to economic considerations.

Put simply, the single most expensive headline element driving up the Scottish Government’s social security spending going forward will be one where more as opposed to fewer people will be claiming it as people – thankfully – continue to live longer lives.

Scotland needs radical economic reform if any of these critical underlying structural challenges are to be addressed. The lack of awareness of these challenges or even the semblance of a plan to tackle it underscores the SNP’s chronic mismanagement of our economy over the last 14 years.

There is little evidence the Scottish Government is interested in or cares to attempt the necessary heavy lifting.

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Photograph of Financial secretary Kate Forbes with First Minister Nicola Sturgeon by Scottish Government – https://www.flickr.com/photos/scottishgovernment/49547201716/, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=100277300

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