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As I See It

Stop expecting Holyrood to fix Scotland’s economy

Terry smiling headShould we be surprised that Scotland could slip into recession next week? Not really. What is perhaps most surprising about the current speculation is that Scotland has managed to stay out of it for so long.

There has been the usual foot-stomping indignation, hand-wringing and demands that “something should be done”.

There are three main reasons why Scotland’s economy generally lags the UK: its large public sector which is a spending rather than an income driver; its reliance on oil, and the low number of exporters. Therefore, any action designed to improve performance has to start with re-balancing the economy, reducing dependency on oil (or providing more stimulus), and boosting the roll-call of export businesses.

Fundamentally, comparison with “the rest of the UK” is flawed. The UK is a patchwork of economies, and the figures for the UK are heavily weighted to the London and south east economy which differs markedly in composition and scale to other areas.

It is home to industries and activities that either do no exist anywhere else, or not in any meaningful way: investment banking, currency trading, stock market activity. It finances mega deals and is home to the majority of listed companies and overseas headquarters. Scotland is an SME economy, and more S than M. More accurate comparisons for Scotland, therefore, should be made with similar economies such as Yorkshire and Humberside, north east England and Wales.

As for the specific causes of Scotland’s difficulties, oil is a disproportionately larger part of the economy and the oil price crash did the country no favours. It didn’t just affect the oil industry itself. It impacts all other businesses throughout the supply chain and those who rely on the spending power it creates. That means every business from the nuts and bolts manufacturer to the corner shop sees a slump in income.

With the exception of food and drink, Scotland has few big exporters. Indeed, the number of exporters in Scotland is woefully small and many of those that do ‘export’, are selling no further than south of the border. This also explains why Scotland did not benefit immediately from the fall in sterling which has helped prop up the economy in those parts of the UK that do export more goods.

So what’s to be done?

I must have written this piece a dozen times over the years and the causes and solutions are exactly the same. For a start, let’s stop pretending the Scottish government can do anything to significantly improve the economy. Opposition politicians and a few short-sighted commentators demand more from Holyrood, but no Scottish administration can meaningfully stimulate the country’s economic performance, even with the new powers switched from Westminster.

This is because the main levers of the economy still lie with institutions that are outwith Scottish control. The Bank of England manages monetary policy, principally interest rates and money supply. The Treasury determines the level of public spending and most taxes, such as corporation tax and petroleum tax, and decides the major tax relief measures.

Even the powers that Holyrood has been given are not sufficient to make a difference. It can now set new income tax thresholds, its own business rate, and the SNP will almost certainly cut air passenger duty (APD). It will soon have limited control over VAT.

But in each case, Westminster would not stand idly by and let Scotland gain an advantage. Already there is a campaign among English airports to demand that Westminster matches any cut in APD that is introduced in Scotland.

The proposed cut in APD merely highlights the limits to the Scottish government’s powers. The SNP claims it will help boost the economy, but with record numbers of passengers already flowing through Scotland’s airports there is little evidence that it will make any difference and will only reduce the tax take.

So should we just hold up our hands and surrender? Of course not. But instead of focusing on the largely “imaginary” powers of the Scottish government we should be looking at those things it should not do.

It should not take measures that make Scotland less competitive. This means ensuring income and property taxes are kept low in order to attract investors and skilled staff.

It should also stop blaming Brexit which affects the whole of the UK, not just Scotland.

It should temper its obsession with social policies and equality (which require higher taxes) and encourage greater and higher value business activity which will stimulate jobs and more tax income. There is a tradition of creating companies of scale and then to sell them, denying Scotland the opportunity to benefit in the longer term.

This is not necessarily a bad thing when it creates new wealth that is re-invested in the economy. There is more evidence of this in recent years as opposed to the practice of earlier generations of entrepreneurs who sold up and retired overseas.

This change is a result of new entrepreneurs wanting to stay in Scotland, and that must have something to do with confidence. If the Scottish government wants to play a useful role in stimulating the economy it should ensure its policies are designed to create a feelgood factor and persuade more of them to invest their wealth and talent in Scotland.

 

 

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