Levelling up blow

Higher taxes a likely factor in widening growth gap

Glasgow IFSD
Glasgow will be the fastest growing Scottish city, but only matching UK (pic: Terry Murden)

Britain’s economic inequalities are expected to widen further over the next three years as London and the south east outpace growth in other areas.

New forecasts from EY show Glasgow to be the fastest growing city in Scotland over the next three years (2024 – 2027) with an average GVA growth rate of 1.9%, thereby matching the UK average growth rate.

But it will be the only Scottish city to do so.

Edinburgh comes a close second at 1.8% while Aberdeen at 0.8% is forecast to have the slowest growth in the UK.

A strong labour market and the prospect of interest rate reductions lay the foundations for a return to more normal historical levels of growth, forecast.

London and the South East are forecast to achieve annual GVA growth of 2.1% and 2% respectively, while the South West is expected to see 1.9% growth. Every other region is forecast to fail to match the UK average, with the slowest rates of GVA growth forecast for the North East (1.6%), Wales (1.6%) and Scotland (1.5%).

While economic momentum and employment growth will gradually build throughout the UK over the next three years, Scotland’s labour market is expected to continue to see challenges and lag other regions.

The average employment growth rate in Scotland between 2024 and 2027 is expected to be 0.8%, lagging all other regions across the UK, with Northern Ireland and Wales sitting at a close second at 0.9%. All three are predicted to be behind the UK national average of 1.1%.

According to the report, Scotland’s employment prospects are dampened by weak demographic growth, a high rate of economic inactivity (19.6% for 2023), and tighter fiscal policy.

The Annual Population Survey (October 2022 to September 2023), published in the latest Scotland EY ITEM Club Forecast, shows that long-term sickness appears to be a considerable reason for economic inactivity in Scotland, accounting for almost 32% of inactivity, compared to 27% in the UK.

Early retirement also appears more significant at 14%, compared to 12.7% for the UK. Relatively high inactivity in Scotland is likely to be constraining employment growth and company recruitment activity. 

Over the longer-term, demographic trends play a key role in determining the scale of future jobs growth and, in turn, the country’s economic prosperity.

According to the latest Scotland EY ITEM Club Forecast, the population growth in Scotland is expected to be relatively weak, with migration only just offsetting the decline from natural change (births minus deaths). Tighter UK policy on immigration is also expected to impact the population outlook for Scotland, which is somewhat weaker than the UK average – largely as a result of lower net migration.

Income tax own pic
Higher income taxes in Scotland may exacerbate growth levels says EY (pic: Terry Murden)

The latest Scottish income tax increases for 2024-25 have the potential to exacerbate some of the trends in the Scottish labour market further. It has been estimated that a Scottish taxpayer earning £125,000 will pay £5,221 more in tax in Scotland in 2024–25 than they would if working elsewhere in the UK. This may change after the UK Government’s Budget in March, but currently amounts to a fiscal tightening for an estimated 154,000 higher earners in Scotland.

Furthermore, the forecast expects Scotland to have the lowest Total Personal Disposable Income growth rate across 2024 to 2027, sitting at an average rate of 1.3%, behind all other regions and the national average of 1.6%. Consumer spending is predicted to be lowest in Scotland at an average rate of 1.7% for the next three years, against the UK average of 2%.

Scotland also ranks last place against all other regions and the UK average on GVA growth. From 2024 to 2027, EY’s forecast predicts Scotland’s average GVA growth rate to be 1.5%, with the UK average GVA growth rate sitting at 1.9% over the same period.

Information and Communication (8.8%), Energy (8.51%) and Construction (6.84%) services are forecasted to be amongst Scotland’s fastest growing sectors in terms of GVA growth from 2024 to 2027.

Ally Scott, EY Scotland managing partner, said: “Although the economic outlook is expected to gradually improve over the next three years, Scotland lags the rest of the UK on many macroeconomic factors – namely, employment growth and personal disposable income growth, where it ranks lowest out of the whole of the UK.

“We have already noted a softening in investor and business sentiment, and now individuals living in Scotland are also likely to feel the effects of the constricted labour market and fiscal tightening more acutely.

“Barriers to growth, such as the widening income tax cross-border divide, may result in job seekers choosing to settle in other more lucrative locations across the UK. This is a concern for our high growth sectors looking to attract the talent that is required to reach their economic – and tax-take – potential.”

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