UK productivity has risen for four consecutive quarters now and Scotland is closing the gap on the UK average.
But let’s not be blind to the realities of our economic performance. Scottish productivity still lags behind the UK average despite this improvement. The good news masks the impact this could have on Scotland’s spending budget as a whole. There are serious economic concerns much closer at hand than you might imagine.
The Fraser of Allander Institute shot a stark warning across our bows about the future economic health of Scotland just prior to the recent Budget: with increased autonomy over domestic tax-raising powers comes greater fiscal risk.
Why? The Barnett Formula now comes with (negative) adjustments to take account of taxes being transferred to the Scottish Government. And those adjustments are closely linked to how the UK as a whole performs economically.
The new deal is quite simple: if annual growth in our tax revenues matches the growth of comparable revenues in the rest of the UK, Scotland will be no better or worse off financially than its UK partners.
Any additional taxes raised here are ours to keep – and tax revenues are closely linked to economic performance. But here’s the rub: if Scotland underperforms versus the rest of the UK, our budget will effectively fall. It is not hard to envisage getting caught in a vicious cycle of underperformance leading to underinvestment, and so on.
The time has come to engage Scottish business in a nationwide conversation about protecting our economy and ensuring growth in this context.
Our business leaders can no longer accept the adage that Scottish economic growth tends to lag behind the UK average, pointing to the special circumstances of North Sea oil in particular.
The CBI lifted the lid on the main drivers of regional differences in productivity levels in December last year. The most significant factor was educational attainment and skills development amongst young people. In other words, the difference between Scottish economic growth and the UK average is not going to change significantly unless we take a long term view and focus on people leaving school with the right skills.
Governments do not cause economic growth on their own. They provide the mood music by setting priorities, articulating opportunities and committing to innovation.
We should see the new scope and responsibilities of the Scottish Government as a huge opportunity: no two parts of the UK are the same and a tailored approach must surely work best. So Scotland is in theory already at an advantage over the major metropolitan areas of England, who don’t have the autonomy they want (yet).
Whatever your politics, we all have economic and productivity growth in common – and more so now than ever before. We will do well to grow our devolved tax revenues in line with those in the rest of the UK, and we need the mood music to match the challenge.
Fighting for Scotland is not just about our relationship with the EU – it’s about being seen as a flourishing economic hotbed. Now is the time to push domestic economic growth up the agenda. Scottish business is a strong community of like-minded people and we will gladly rally to this cause.
Our block grant is only going to decrease as more tax-raising powers arrive at Holyrood. By 2019, everything from income tax to Land and Buildings Transactions Tax, Landfill Tax, Non-Savings, Non-Dividend income tax, Air Passenger Duty and some receipts from VAT raised in Scotland will be assigned to the Scottish budget.
If our per capita tax revenues don’t match those raised in the rest of the UK in future, it could well be because we took our eyes off everyone else at precisely the time we needed to watch them like hawks.