Scotland’s economy is getting smaller at the same time as the UK economy as a whole is growing at a healthy rate.
That is the snapshot from the Scottish Government’s calculations of Gross Domestic Product (GDP).
It would be wrong to read too much from one quarter’s set of figures and it is perhaps too soon to speculate about a Scottish recession, but the contrast between the performance of the fortunes of the Scottish and UK economies throughout the past two years is a major cause for concern that requires to be addressed by urgent government action.
With the additional powers that the Scottish Parliament has gained, the capacity exists for Scotland’s politicians to deliver even more reasons to do business in Scotland, rather than anywhere else in the UK.
Unfortunately, in its most recent Budget, the Scottish Parliament has decided upon a path of higher taxation. The business rates tax in Scotland for medium and larger businesses is 49.2 per cent, compared to a maximum of 47.9 per cent in England.
Higher rate income tax payers in Scotland will from this week be paying up to £400 per year more than those earning the same salary anywhere else in the UK, and this additional burden could potentially rise to as much as £1400 per year if current policies are maintained.
These kinds of policies send out all the wrong messages about building up a successful business in Scotland and retaining vital skills in our economy.
During 2013 and 2014, both the Scottish and UK economies enjoyed healthy and consistent levels of growth, with Scotland recording an average quarterly GDP growth during that period of just under 0.6 per cent and the UK at just over 0.7 per cent.
However, after outperforming the UK in the first quarter of 2015, the Scottish economy took a notable downturn, averaging growth of just over 0.1 per cent per quarter in 2015 and 2016, compared to a healthy 0.5 per cent for the UK as a whole.
Indeed, the figures released yesterday show that Scotland’s economy has dipped into negative territory twice during that period – in the third quarter of 2015 as well as the fourth quarter of 2016.
Why has this happened? Well, the point of divergence between Scottish and UK performance in 2015 matches with the point at which the fall in the price of oil became sustained and when oil and gas businesses began to downsize their operations, not just in the north east of Scotland but across the country.
With half of the UK’s oil and gas jobs based in Scotland, the effect of the downturn was magnified in Scotland, where the sector forms a larger part of our economy than for the wider UK. This may explain the origin of the divergence at least, but it is more concerning in terms of what has been happening over the past year.
In that time, we have begun to see some recovery in oil prices from the low point in January 2016 and there is consistent evidence to suggest that the problems besetting the UK oil and gas sector may be bottoming out, if not yet showing consistent signs of recovery. Yet throughout 2016, the Scottish economy has flatlined, recording no year-on-year growth at all between the end of 2015 and the end of 2016. During this time, the UK economy managed to return growth of 1.9 per cent – a solid, if not by any means stellar, performance.
This underperformance matters because if we are failing to produce additional value in our economy, then businesses will find it very difficult to sustain jobs and invest for the future. It is all the more concerning because growth is being experienced in the rest of the UK, making it a more attractive destination for investment.
This is another reason why it is more important than ever to ensure that Scotland is seen to be a competitive place in which to do business and to invest.
Scotland has much to recommend it as a business location.
We have a great environment, some very talented people, rapidly improving connectivity and some of the world’s best colleges and universities.
These are all factors that play a major part in enabling the success of our domestic businesses and in attracting new investment from overseas.
However, we also need a supportive fiscal environment that encourages businesses to invest and grow.
Businesses can understand why the Scottish Government seeks greater resources to invest in securing the future of essential public services, such as health and education, and in developing our national infrastructure and connectivity.
The best way to achieve that growth in resources is to use its powers to support businesses and grow our economy, thus ensuring greater future revenues: more businesses, creating more jobs and generating more returns through the tax system. Unfortunately it is not yet clear that all politicians are in tune with that ambition.
The Scottish Government’s policy on business rates is a case in point.
The contribution of business rates to Scottish Government revenues has risen from £1.8 billion in 2007-8 to over £2.6 billion in the current year.
Not only is this an increase of almost 45 per cent, but the burden now falls upon only around half of business premises – the rest receiving relief through the Small Business Bonus Scheme.
Imposing a heavier tax burden on the businesses and the people we already have is not the answer, and will only hinder, rather than help, economic growth.
Instead, government has a vital role to play in supporting businesses, fostering the creation of new enterprises and new jobs, so that more businesses and individuals are paying into the pot.
That is the only way in which we will free up businesses to innovate, invest and recruit, enabling the sustainable growth in the wealth of Scotland and the revenues for government.
If more proof were needed, the Scottish Government only needs to look at the experience of the Land and Buildings Transaction tax, where the decision to raise the burden on more expensive properties has not resulted in the scale of returns that were expected.
These recent tax increases are only part of the story.
The UK Government has also added to the burden with its Apprenticeship Levy, the National Living Wage and new workplace pension arrangements.
All of these measures may be well intentioned, but the cumulative effect can be challenging for some businesses to deal with, so need to be handled sensitively.
The contraction in Scotland’s economy happened in the period from October to December last year – in other words before most of the latest tax increases had come into effect.
Combined with the uncertainties around Brexit and Scotland’s constitutional future, it therefore looks likely that there may be further turbulence ahead for Scottish businesses.
It is important though to focus on the positives and the opportunities to help get the Scottish economy back on track for convergence with the UK.
We have an independent review of Scotland’s business rates due to report this summer and the Scottish Government will again have an opportunity to reform this tax in order to reduce businesses’ fixed costs and free up resources for investment and jobs.
It also needs to rethink its position on personal taxation, which could otherwise have a growing impact on Scotland’s ability to attract and retain the skills our economy needs.
Many other positive things are happening.
For example, the Scottish Government is making progress with its enterprise and skills review and this presents an important opportunity to reinvigorate the way in which Scotland’s public and private sectors can work together.
Chambers of Commerce are also working with the Scottish Government to build international business to business contact to help generate gains in terms of Scotland’s exports.
This week’s growth figures must signal a wake-up call to politicians across Scotland and the UK with an interest in Scotland’s economic wellbeing.
Whatever other challenges our parliaments and governments may face – and there are many right now – it is clear that the task of getting our economy back on track must be their most urgent priority.
Scotland’s businesses are ready to grasp the opportunities and, with the right support, we can deliver the successes.
First published in Scottish Daily Mail