Understanding the Scottish Economy

28th of November 2017

Today

Aim of today is to give you an introduction to the Scottish economy, its make-up,
key facts and where you can find more information if required

Part 1: focus on core economic concepts and definitions (will explain some of the
jargon!)

Part 2: some of the big ‘economic issues’ facing Scotland

Part 1: Measuring our Economy
Some basics
Microeconomics

• How individual households and firms make decisions and how they interact
with one another

Macroeconomics

• Macroeconomics is the study of the economy as a whole

• And how people interact with the natural environment

• We’ll see why and how governments intervene in an economy

Introduction

Up until the 1700s, the world was a pretty rotten place to live!

The industrial revolution was associated with the emergence of a new

economic system in which markets play a major role

Under this new way of organizing the economy, advances in technology and
specialization raised the amount that could be produced in a day’s work

But whilst wealth improved, it has been accompanied by growing threats to our
natural environment, and by unprecedented global economic inequalities
Our economy – in one simple diagram

MARKETS FOR GOODS

Revenue AND SERVICES Spending
• Firms sell
Goods Goods and
and services • Households buy services
sold bought

FIRMS HOUSEHOLDS
• Buy and consume goods and services
• Produce and sell goods and services
• Hire and use factors • Own and sell factors of production

Factors of MARKETS FOR FACTORS Labor, land,

production OF PRODUCTION and capital
• Households sell
Wages, rent, • Firms buy Income
and profit
What is this sum of economic activity?

One way to measure is this is to calculate something called gross domestic

product (GDP).

This is the value of all goods and services produced within a country in a given
period of time:

• from nails to tractors, haircuts, consultancy, street cleaning, yoga teaching,

plates, books, and millions of other services and products in the economy.

Adding all this up requires a measure of how much a yoga class is worth
compared to a toothbrush! The easiest way to do this is to use their prices.
Gross Domestic Product

GDP is often used as a measure of ‘economic success’

Why?

• Because if a country can produce more than another country then it could
be richer

• Within a country, producing more goods and services is likely to mean that
the economy is growing and this could make people better off

GDP remains – despite its critics – the key metric used to evaluate economic
performance
How the world has progressed….
…..and become more unequal (£)
What is not included in GDP?

The amount of free time we have to relax or spend time with friends/family

The quality of our social and physical environment

The value of almost all activity that takes place outside of markets, such as
value of time parents spend with their children & value of volunteer work

How much debt/borrowing has been used

Is GDP perfect? No!

GDP is not a measure of happiness or quality of life

Or of level of equality

And it might not even capture how much income is retained in a country

The gap between what we mean by wellbeing, and what GDP measures, means we
should be cautious about just using GDP to measure how well off people are.

But we are yet to agree on a robust alternative

How does Scotland do internationally?
Scotland’s GDP Per Capita

2015 GDP per head ($PPP) Rank

Luxembourg* 102,131 1
Ireland* 68,481 2
Switzerland 62,500 3
Norway 62,025 4
United States 56,066 5
Netherlands 49,570 6
Austria 49,440 7
Denmark 48,994 8
Germany 47,999 9
Sweden 47,823 10
Scotland (geo. share of oil) 42,372
UK 41,779 16
Scotland (pop. share of oil) 40,001

* NB: Lux/Ire statistics can differ from actual income given very
small size of economies and international inflows
Scotland compared to rUK
200
Outside of London and
180 the South East – even
excluding oil and gas –
160
Scotland is one of the
140
richest parts of the UK

120 Only London, the South

East – and now marginally
UK = 100

the East of England –

100

80 have higher GDP per

head than Scotland
60

40
This chart also shows the
high levels of inequality
20 across the UK
0
N East N West York & E Midlands W Midlands E England London SE SW Wales Scotland N. Ire
Humber
Calculating economic growth

If the level of GDP per capita in the year 2000 is $21,046, as it was in the UK,
and $21,567 in 2001, then we can calculate the growth rate:
Real vs. nominal growth

The size of GDP can increase for one of two reasons –

• We’re producing more of a good or a better quality good

• The price of that good as gone up

Both are important, but when we’re talking about growth we’re typically talking about
‘real GDP’ – that is, we eliminate any impact of price increases/decreases
So how has Scotland been doing?

Prior to the financial crisis, economic growth (in real terms) in Scotland
averaged around 2.1 to 2.3% each year.

Not spectacular but healthy for an advanced economy.

Other countries did grow faster however, some of you may remember the ‘arc
of prosperity’. But sometimes growing too fast can be a problem…..
What about oil?

Scotland has a very large offshore

economy – see map

UK created something called ‘extra-regio’

All economic activity not taking place ‘in

UK’

Includes embassies etc. but also activity on

the UK Continental Shelf….so oil and gas
activities typically didn’t enter Scotland’s
economic accounts
Declining – but still important – role
for oil and gas in Scotland’s economy
20%

18% For decades, oil and gas

16%
extraction has been
Scotland’s largest
Share of otal GDP from oil and gas

14% industrial sector

12%
However, increasingly oil
10% and gas resources are
concentrated in smaller
8%
Extra-regio GDP pockets and challenging
6% parts of the North Sea

4%
Production is actually
2% increasing, but investment
and other activity has fallen
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
sharply
Oil and Gas revenues
35,000

30,000
Over the years, the
Exchequer has raised
25,000
substantial revenues from
oil and gas – on the basis
that it is a ‘natural
20,000
£ million (15/16 prices)

resource’ for the country as

a whole
15,000

But as production has

10,000
fallen, so have tax
revenues
5,000

Unlike most other countries

0
with oil and gas reserves
the UK did not create a
(5,000)
‘savings fund’
Understanding the composition of our
economy through GDP – part 1
GDP is also useful in helping us to understand what ‘makes up’ our economy
on a daily basis

Consumption (C): The spending by households on goods and services.

Investment (I): The spending on capital equipment, inventories, and structures,

including new housing.

Government Spending (G): The spending on goods and services by local,

devolved and UK governments. NB: Does not include transfer payments.
Understanding the composition of our
economy through GDP – part 1
Finally there are net exports (NX):
– Exports - what we sell to other countries
– Imports – what we import from other countries

Our net trade balance is in surplus if we are exporting more than we are
importing. It is in deficit if we are importing more than we are exporting.

Our ‘current account’ includes income we receive/pay from/to overseas

What’s the largest expenditure element of our economy?

The components of our economy
180,000

160,000
This is Scottish GDP in
140,000 Private 2016
Consumption
120,000
Government The largest component is
100,000 private consumption – this
Investment
80,000
is primarily spending by
households
£ milllion

60,000 Net Exports

40,000 Government also has an

important role to play
20,000

- Investment is smaller, but it

arguably has a bigger
(20,000)
impact on long-term growth
(40,000) than the rest put together.
Scottish GDP
Understanding the composition of our
economy through GDP – part 2
By sector:

Size of economy =

• Services

• Production

• Construction

• Agriculture
Quiz?

Rank these sectors by size:

• Agriculture
• Manufacturing
• Construction
• Distribution hotels and catering
• Transport & communication
• Government
• Business & financial services
Our economy (1974 and 2017)
40%

The Scottish economy has

35% changed markedly over the
1974 2017
last 40 years…..
30%

…..we are now largely a

25% serviced based economy

20% Around 75% of economic

output in Scotland is from
15%
services

10%

5%

0%
Agriculture, Manufacturing Construction Distribution, Transport & Government Business & Other
foresty & hotels & Communication Financial
fishing catering Serivces
Growth sectors
Growth Sectors - Employment in Scotland, 2014 and 2015 Growth sectors are key
250,000 areas of the economy that
policymakers and industry
200,000
leaders believe that
Scotland has a
2014 2015
comparative advantage
150,000
Employment

‘Picking winners’ can be

controversial, particularly
100,000
given past experiences in
Scotland with electronics
50,000 etc…….

0
Food and Drink Financial and Life Sciences Energy (including Sustainable Creative Industries …but it is thought to have
Business Services Renewables) Tourism (Tourism (including Digital)
related Industries) a role in an ‘industrial
strategy’
The types of firms in our economy
Share of Enterprises, Employment and Turnover by Size of Enterprise 2016 Alongside different sectors,
100%
our economy is also made
90% up of different types of
80% Enterprises firms
70%
Employment
Turnover The challenges and
60%
opportunities facing firms
Proportion

50% of different sizes can be

40%
quite different
30%
Small firms make up the
20% bulk of ‘Scottish
10% businesses’……..
0%
0-49 employees 50-249 employees 250 and over employees ……but most employment
and turnover is generated
by large firms
Questions

What types of companies do you

work with on a daily basis?

What sectors do they operate in?

Are they more about supporting

consumption, exports or
investment?

What ‘economic’ issues do these

different firms experience?
Part 2: How does the economy grow?
How does our economy grow?
In the long-run, there are only three key ways that your economy can grow:

• By increasing the amount of land it has (unlikely!)

• By increasing the number of people producing things – by increasing your

overall working population, getting people to work harder or boosting the
number of people in work

• By becoming more efficient in what you produce (quality or speed)

Scotland’s population
5,500,000
Traditionally Scotland has
5,400,000
often been a ‘net exporter’
of people…..
5,300,000
….young people in
particular often looked for
Scotland's Population

5,200,000 opportunities elsewhere (in

London or overseas)
5,100,000

But in recent years,

5,000,000
Scotland’s population has
been growing - largely
driven by migration from
4,900,000
rUK and EU

4,800,000
1981 1991 2001 2011 2016
Scotland’s population - projections
130%
But Scotland’s population
is also ageing
120%
And that means that our
Population Level (2014 = 100%)

working-age population is
110%
forecast to decline

100% This poses a challenge for

an economy – not least in
terms of the potential to
90% raise revenues to support
Scotland total population RUK total population public services (which tend
80%
to be in higher demand for
Scotland 20-65 population RUK 20-65 population older people)

70%
2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064
Scotland’s labour market

For a given population, the key way in which ‘people’ contribute to economic
growth is through being involved in the labour market

This can either be working as an employee for a company (or the public
sector) or by starting their own business (and being self-employed)

Over recent years, the nature of our labour market has changed significantly
Labour market – some concepts

labor force participation rate

• the fraction of the population that ‘participates’ in the labor force

employment rate
• percentage of the 16-64 population in work

unemployment rate
• percentage of the economically active but unemployed (16+)

economic inactivity rate

• percentage of people not looking for work or in employment
The Scottish labour market

76 10
Despite the challenges of a
slow growing economy,
75 Scotland’s labour market
has held up remarkably well

Unemployment Rate (16+)

Employment Rate (16-64)

74 8

73 Employment is close to a
record high…..
72 6

71
….whilst unemployment is
close to a record low
70 4
Employment Rate (16-64)
69
Unemployment Rate (16+)
68 2
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Labour market outcomes
78

76 Scotland’s current
employment rate =
74
75.2%......
72
Employment rate (16-64)

70 ….slightly lower than rate for

England of 75.5% but ahead
68
of Wales and Northern
66 Ireland
64

62

60

58
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Scotland Wales Northern Ireland England Source: ONS Labour Force Survey, Nov 2017
An ageing workforce
170
A key feature of the labour
160 market in recent years has
been the substantial rise in
Changes in Employment Rates by Age

150
16-24 25-34 35-49
the number of older
140 workers in the economy
50-64 65+
130
Participation becoming
120
much more flexible
110
Also the type of work that
100
people are undertaking is
90 also changing significantly
– automation and
80
technology rapidly
changing jobs and career
paths
Rising self-employment
2,700 340 Another key feature of has been
the rise in self-employment – up
330
2,600 around 20% over the last
320 decade
2,500 310

Self Employed
Some of this reflects new ways
Employees

300
2,400 of working…..
290

2,300 280 …but some of it may also be

270 leading to less secure work and
2,200 people trying to supplement
260
falling earnings by setting up
2,100 250 small-scale businesses
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Total Employment (LH Axis) Employees (LH Axis) Self-Employed (RH Axis)
Regional labour market inequalities
9.0
There remains significant
8.0 differences between parts of
7.0
Scotland with regard to labour
market outcomes…..
6.0
Unemployment Rate

5.0
……some of this reflects unique
economic, social and
4.0 geographical
3.0
challenges/strengths in some
areas……
2.0

1.0
…..and it also reflects legacy
issues from industrial decline
0.0
How do we become more productive?

For a country like Scotland, with high rates of participation and limited scope
for population growth……key source of growth and improvement in living
standards will be improvements in productivity

Ultimately, productivity largely comes through technological change – greatest

driver of growth in the long run

You will have heard a lot in recent times about the UK’s weak productivity
performance
Productivity– the example of light
For most of human history technological progress in lighting was slow - our
distant ancestors had nothing brighter than a campfire

• 40,000 years ago - use of lamps from animal/vegetable oils……

• ….candles were 9 times more efficient and they were subsequently

replaced by gas and kerosene lamps….

• ….then fluorescent bulbs

• Nowadays, the lights we use are around 500,000 more efficient than
campfires
What drives productivity?

Innovation

Skills and education

Infrastructure

Business enterprise – ‘creative destruction’

International productivity performance
Source: Scottish Government Scotland Performs, Nov 2017

160 Scotland in 2nd quartile of

OECD countries
140

120
2015 GDP per hour worked
Target to be in top quartile
100
USA = 100

80 In 2007 = 18th; 2012 – 2014

60 = 19th; 2015 = 16th
40
In 2007, Scottish productivity
20
was around 80% of Ireland
0 (bottom of top quartile)

Slovak Republic

Turkey
Ireland

Belgium

France

Austria

New Zealand

Greece

Poland
Norway

United States

Iceland
Finland

Italy

Estonia
Sweden
Switzerland

Canada

Hungary

Chile
Netherlands

Australia

Slovenia
Denmark

Czech Republic
Scotland

Portugal
Spain
United Kingdom

Japan

Korea

Latvia
Germany
Luxembourg

Israel
In 2015, around 80% of
Germany (bottom of top
Top Quartile Second Quartile Third Quartile Bottom Quartile quartile)
What about wider drivers? R&D
3.0

Despite high levels of R&D in our

2.5
Universities, we lag behind Europe in terms
of total R&D spend as share of our economy
Busines R&D as % of GDP

2.0

1.5

2.00
1.0

1.80

0.5
1.60

1.40
0.0

Percentage of GDP
London
North East

South East

Scotland
UK

East

West Midlands

Wales

N Ireland
North West

East Midlands

South West
Yorks & Humber

1.20

1.00

0.80
Key reason is lower levels of business R&D. 0.60

Number of hypotheses for this – e.g. loss of 0.40

headquarters, move to services/back-office 0.20

functions and challenges in turning academic 0.00

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
research into commercial opportunities Scotland EU 28
What is inclusive growth?

In recent years, greater focus not just on pace of growth….but also type of
growth

Recognition that inequality and lack of economic opportunity can actually

‘hold-back’ growth rates

Led to rise in demand for ‘inclusive growth’ with policies around – living wage,
workforce innovation, 50:50 gender split on boards, active policy to improve
opportunities amongst groups traditionally suffering economic disadvantage
Inequality
160

Scotland ranked 19th in OECD

140
palma ratio – ratio of top 10% to
Ratio of income (Top 10% vs. bottom 40%)

bottom 40%
120

UK ranked 33rd (5th from bottom)

100

80 Scotland’s gini coefficient has

Palma Ratio been relatively stable at between
60
0.30 and 0.35 over the last few
years
40

20

Source: Scottish Government Scotland Performs, Nov 2017

0
Poverty in Scotland
25 1,200

Number of households 60% below UK median income ('000)

% of households 60% below UK median income

People are said to be in

1,000
20 relative poverty if they are
living in households whose
800 equivalised income is below
15
60% of median income
600

10
17% of people in Scotland
400
were in relative poverty
5 before housing costs in
200
2015/16 – approx. 880,000
0 0
2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 After housing costs, it is 20%
Relative poverty (before housing) (LHS)
- or approx. 1.05 million
Relative poverty (after housing) (LHS)
Number in relative poverty (before housing) (RHS) Source: Scottish Government Poverty Statistics, July 2017
Number in relative poverty (after housing) (RHS)
Living Wage

Proportion of employees (18+) paid the Living Wage or more, 2017

In recent years, there has
Earning below LW Earning LW or above
been a drive to improve the
Scotland 18.4 81.6
number of people being paid
Wales 24.7 75.3
Northern Ireland 27.7 72.3 the Living Wage
England 22.0 78.0
- South East 18.1 81.9
- London 19.2 80.8
In 2017, Scotland has the
- East 21.8 78.2 highest proportion of
- South West 22.2 77.8 employees earning the
- North East 24.2 75.8 Living Wage of any part of
- North West 23.8 76.2 the UK
- West Midlands 25.2 74.8
- Yorkshire & The Humber 25.2 74.8
- East Midlands 25.6 74.4
UK 22.0 78.0
Source: Annual Survey of Hours and Earnings, ONS
Discussion

What do you see as being the

biggest technological improvement
in your area of work?

What does inclusive growth mean

for your organisation?

Have you seen any changes toward

inclusive growth? What are the
challenges?
Part 3: The role of the public sector
The economic cycle

Growth is not always steady

• Recessions: Slowdowns in economic growth

• Depressions: Severe recessions

• Expansions: Periods of rapid economic growth

UK Economic Growth since 1949
8.0

Despite policymakers often

6.0
being fond of thinking they
have solved ‘boom and bust’
or have a ‘strong and stable
4.0 economy’……
% change over year

2.0 ….the reality is different!

0.0 Our economy is constantly

subject to unexpected and
uncertain events
-2.0

Some of these can lead to

-4.0 sharp slowdowns

-6.0
Why do recessions happen?

Economy subject to constant ‘shocks’ – both positive and negative

• Uncertainty
• Financial crisis
• Oil crisis
• Housing bubbles

A recession is “two consecutive negative quarters of falling GDP”

Of course, this is a rather specific condition….so sometimes you can

enter recession but for the decline to be small. Other times you can
have sharp falls in GDP but if two don’t come back-to-back you are
not in recession!
Economic Policy

3 types of economic policy

1 Monetary Policy

2 Fiscal Policy

3 Economic regulations – including controls on imports

Monetary Policy
Government has a unique role in controlling the money supply of an economy

They can increase the supply – i.e. to stimulate demand – or cut it back to
dampen demand.

In most economies, the way they do this is via interest rates

Although you’ll have heard of other things like Quantitative Easing!

Monetary Policy
In most countries, monetary policy is now controlled by an
independent central bank – tasked by government to keep inflation at
a low and stable rate

How do they do that?

• by increasing interest rates this increases the cost of borrowing and

dampens demand. It also increases the relative cost of
‘holding’/spending money so more likely to save it
Quantitative Easing
This is a ‘new’ technique that central banks have been using

When there is no more scope to cut interest rates – what can you do?

Central banks can artificially create money and use that to buy-up assets from
the private sector?

• By doing so you increase the money supply

• You also lower private sector interest rates even further

Hopefully growth returns……but there are risks!

Fiscal Policy
1. Public goods: In a free market, some goods might not be produced because
there is an incentive to ‘free ride’. Can you think of any?

2. Merit goods: Sometimes – as a society – we believe that certain goods should

be provided (even though charging is possible). Can you think of any?

3. Externalities: Sometimes the economy can provide ‘spill-over’ effects that

harm others. Can you think of any?
Fiscal Policy
4. Monopoly power. Sometimes, a firm may gain a monopoly – which they can
then use to abuse their power. Can you think of any?

5. Imperfect information: Sometimes the economy can fail to provide a market

even though people would be willing to pay for it. Can you think of any?

6. To promote growth? Sometimes a government might intervene to support an

industry or area subject to regional unemployment.
Regulations
Alongside monetary and fiscal policy, the other lever that the government has
to use is through regulation

This can include things like –

• Conditions on who can become a financial adviser
• Environmental standards
• Planning laws

For many businesses meeting these regulations can be a key part of their day-
to-day work
Discussion

In your area, what role does

government play in your activities?

What might be the – unintended –

implications?
Part 4: Current issues
Current hot topics

Economic Strategy

Recent economic performance

Rising interest rates

Brexit

The Scottish Budget

Government Economic Strategy
UK Industrial Strategy

Aim to support areas of potential industrial strength for the UK

5 ‘grand challenges’:

1. people and skills;

2. ideas and innovation;

3. physical & digital infrastructure;

4. business environment, including access to finance and sector deals;

5. the need to spread growth around the UK.

Discussion

Thinking back to the drivers of

growth:
• Land
• Population
• Participation
• Productivity

How do you think the industrial

strategy and Government
Economic Strategy help to promote
these?
A story of fragile growth
3.5%

Over the last 18 months or

3.0%
so, the Scottish economy
has grown relatively slowly
2.5%

2.0% Annual growth is currently

around 1/3 that of the UK
% change

1.5%

1.0%
At 0.5%, this is around ¼ of
Scotland’s long-term growth
0.5% average

0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

-0.5% 2013 2014 2015 2016 2017

Quarterly Growth Annual Change (on same quarter 12 months ago)
Which is part of longer trend....
4%
Like many countries,
1999 to 2006 average: 2.3%
economic growth is slower
3%
than it was prior to the
financial crisis
2%
% change in GDP per head (annual)

1%
2010 to 2016 average: 0.8%
Some of this could be
unique challenges having
0% impact on Scotland – e.g. oil
and gas downturn
-1%

But also consistent with

-2%
wider global debate if pace
of growth will slow in the
-3%
future……
-4% Source: Scottish Government GDP Series, Oct 2017
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Scotland vs. UK economic growth
Source: Scottish Government GDP Series, Oct 2017
115 Between 2007 Q1 and 2017 Q2, Scottish GDP per head
has grown 1.7% (UK 3.5%) - compares to 20% growth
110
between 1999 Q1 and 2006 Q4 (19.3% for UK)
NB: Starting in 2008 Q1, Scottish GDP per head has
105 grown 2.2% vs. 1.9% for UK
2007 Q1 = 100

106

100
Scotland GDP 104

UK GDP
102
95 UK (excl. oil and gas) GDP
100

2007 Q1 = 100
90
98

96
85
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
94
Gap with UK has widened through 2016 and early 2017
92
Scotland GDP per head UK GDP per head
Scottish growth has been relatively flat over the last 18 90
months - since 2015 Q1, Scottish growth has totalled
1.1% (vs. 3.9% for UK) 88
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Scotland’s productivity performance
100
Earlier we spoke about
productivity as being key to
98
long-term growth
96
Two measures to measure
94 this – output per hour; or
UK = 100

output per job

92

NB: Not perfect!

90

88
In recent years, Scotland
has caught up with UK
86
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
Output per hour Output per job Source: Scottish Government Productivity Statistics, Nov 2017
 % change in employment June 2013 relative to Sept 2008
LAs RECESSION HIT IN 2008 & BUT LAs NOT ADVERSELY AFFECTED
RELATIVELY RESILIENT RELATIVE TO 2008
Employment lower in 2013 than in 2008, but higher than Employment higher than in 2008, in both
2008 in latest data. 2013 and 2016
10 Performance across Scotland
has varied since the financial
Glasgow North crisis
Edinburgh
Lanarkshire
East Lothian 5
Midlothian
East
Renfrewshire
Aberdeen
Some parts of the country –
East
Stirling Perth and… Dunbartonshire such as North Lanarkshire and
Orkney Islands
% change in
Shetland … Renfrewshire
SCOTLAND 0 Aberdeenshire
employment
East Dunbartonshire have been
-15 -10 -5 Lothian
West
Clackmannanshi Falkirk
0
South
5 10
June 2017 resilient
re Angus Lanarkshire relative to
Sept 2008
Highland
Inverclyde Fife
Argyll and Bute Dundee
South Ayrshire
-5 Others – like Glasgow and
Eilean Siar West Dunbartonshire Edinburgh – have bounced back
Dumfries and Moray
Galloway East Ayrshire
-10
Scottish Borders But the majority are still worse
North Ayrshire
off compared to where they were
prior to downturn
-15
LAs RECESSION HIT IN 2008 & LAs NO RECESSION IN 2008 & Source: ONS Annual Population
LACKING RESILIENCE LACKING RESILIENCE SINCE Survey, Nov 2017
Employment lower in 2013 than in 2008, Employment higher in 2013 than in 2008,
and still lower than 2008 in latest data. but lower than 2008 in latest data.
Discussion

What are economic conditions like

in your sector?

Where are the risks and

opportunities?
Interest rates…

18 BoE interest rate increase this

16 month, BoE have (government
Official Bank Interest Rate

decided) target of 2% inflation

14
12 Reverses the cut in interest
10 rates put in place after the
Brexit vote
8
6 Debate over whether this
4 increase in the rate is
appropriate, even within the
2
MPC (7-2 vote)
0
Key issue is their assessment
of the health of the economy.

Source: Bank of England, Nov 2017

OBR Interest Rate forecast…

7
Official Bank Interest Rate

0
2007 2009 2011 2013 2015 2017 2019 2021 2023
March forecast November forecast
Source: OBR, Nov 2017
Discussion

How might the increase in the

interest rate impact on your
organization?

Does you day-to-day experience

suggest that the BoE are right
about the extent of slack in the
economy?
Short-term considerations of Brexit

Economic uncertainty – immediate reaction is usually to postpone major decisions

Policy uncertainty – lack of clarity around ‘end-game’ for policy

Financial volatility – e.g. risk premium on borrowing

Sharp depreciation in Sterling – good for exporters but challenging for importers

Overall, the short-run dynamics are complex and uncertain

Long-term considerations of Brexit

Trading relationships – with EU and non-EU countries

International investment – access to EU capital markets & international investment

Population & Labour Market – future migration trends & regulation

Fiscal Contributions – gross & net contributions

In balance, most independent economists concluded that leaving the EU will – in the
long-run – lead to a less favourable economic environment
Some Stats

Scotland ranked 2nd in UK for international investment

180,000 EU nationals living in Scotland

EU firms employ around 115,000 people in Scotland

Around 40% of Scottish international exports are to the EU

• More than N. America, Asia, S. America, Middle East and Australasia

combined But remember…..over 60% of TOTAL exports are to rUK
Some Stats

Scotland ranked 2nd in UK for international investment

180,000 EU nationals living in Scotland

EU firms employ around 115,000 people in Scotland

Around 40% of Scottish international exports are to the EU

• More than N. America, Asia, S. America, Middle East and Australasia

combined But remember…..over 60% of TOTAL exports are to rUK
The importance of the EU
14,000
The biggest concern within the
business community is what
12,000
trading conditions might be like
with our largest trading partner
Scottish international exports (2015), £ million

10,000

Tariffs are taxes on the importing

8,000
of goods – if the EU imposes
tariffs on the UK our exports will
6,000 be more expensive

4,000
Non-tariff barriers are things like
regulations
2,000

0
European Rest of Europe North America Central and Middle East Asia Africa Australasia
Union South America
Discussion

How might Brexit impact on your

organization?

Through what channels of your

activity do you think that Brexit
might have a positive or negative
impact?
Scotland’s new budget framework

Scotland’s resource budget now depends upon three key elements–

• The Westminster block grant as determined by the ‘Barnett

Formula’;

• Tax policy choices of the Scottish Government; and,

• The growth of Scottish devolved tax revenues relative to the

equivalent tax revenues in rUK
The new devolved taxes

Tax Date Revenues Arrangement

(2016/17, £m)
Land and Buildings 2015/16 £466 Fully devolved
Transactions Tax
Landfill Tax 2015/16 £149 Fully devolved

NSND Income Tax 2017/18 £11,313 Vary rates and bands

Air Passenger Duty 2018/19 £264 Fully devolved

Aggregates Levy tbc £59 Fully devolved

VAT 2019/20 £5,097 Partial assignment

The new budget process

Adjustment to Revenues
Barnett-
reflect rUK raised from Scottish
determined
revenues devolved tax in budget
block grant
foregone (BGA) Scotland

Block Grant Adjustment: counterfactual estimate of tax revenues foregone by

UK Government

What is this counterfactual? Growth in devolved taxes per head in rUK.

So, if Scottish revenues are higher than BGA, Scottish budget is better off than
without tax devolution……..and vice versa
Outlook for resource block grant

26,800 Resource block grant

down 1.4% (£375m)
26,600 16/17-19/20.
Block grant,£m (2017/18 prices)

26,400 Outlook improved by

£200m per year
26,200 compared to March 2016
Budget
26,000 March Budget 2016

Autumn Statement Nov 2016

25,800
March Budget 2017
25,600
November Budget 2017
25,400
2016-17 2017-18 2018-19 2019-20
Boosting budget through tax choices?

£27,000 Budget also depends on

tax policy choices and
£26,800 strength of growth of tax
£26,600
base

£26,400 In ‘principle’ possible to

offset grant declines via tax
£26,200 policy
£26,000
But need to consider
£25,800 economy……

£25,600 ……budget loses £120m

2016-17 2017-18 2018-19 2019-20 for each year that income
Block grant only HR freeze tax revenues grow 1%
Income tax approach 1 Income tax approach 2 slower than rUK
Resource block grant context

30,000 Recent changes in outlook

modest in longer-term context
25,000
Resource block grant 1.5%
£m, 2017/18 prices

20,000 lower in 17/18 than decade

earlier
15,000
And population 250k higher
March Budget 2016
10,000
Autumn Statement Nov 2016

5,000 March Budget 2017

November Budget 2017
0

2017/18
2018/19
2019/20
2009-10
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
Unprotected portfolios 16/17 – 19/20?
Block grant Income tax Income tax Commitments made to
only HR freeze approach 1 approach 2
£0 0% protect or increase
spending on health,
-£200 -2% police, childcare,
elements of education
-£400
-4%
Implies remaining
-£600
-6%
40% of budget faces
-£800 substantial
-8%
consolidation
-£1,000

-£1,200 -10%

-£1,400 -12%
£m Percentage
Changes to distribution of spending

15% Health spending is

10% being protected
5%
whilst overall
budget is declining
0%
-5% Implies substantial
-10% changes to
-15% distribution of
public spending
-20%
-25%
Resource Resource Health Health Non-health Non-health
spending spending spending spending spending spending
per capita per capita per capita
2010/11-2017/18 2010/11 - 2020/21
Pressure to increase health spending?
£9,000
Population is growing
£8,000 and getting older
Average health cost per person

£7,000
£6,000
Scot Gov commitment
on NHS (to increase
£5,000
spending by 3% 2017-
£4,000 20) only just enough to
£3,000 keep up with
£2,000 demographics
£1,000
And treatment costs are
£0
increasing
0-1
2-4
5-9

30-34

85-89
10-14
15-19
20-24
25-29

35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80-84

90+
Male Female
Outlook for capital spending

4,500 Capital budget on course

to surpass 2010 peak by
4,000
2018
£ million, 2017/18 prices

3,500
3,000
Borrowing powers can
support further
2,500 infrastructure investment
March Budget 2016
2,000
Autumn Statement Nov 2016
1,500 March Budget 2017
1,000 November Budget 2017
500 With max annual borrowing

0
What can the Scottish Government do?

Reduce pressures on spending?

• Efficiency savings? Smarter delivery? More means testing? Reducing public sector
intervention in particular areas?

Raise tax rates?

• How to balance revenue raising, distributional objectives and growth objectives?

‘Grow the economy’ and hence the tax base.

• Brilliant idea. But how? And how long before government policy translates into
increased revenues
Discussion

What key areas of Scottish

Government policy have an impact
on your organization?

What do you think the key policy

opportunities and risks are for
Scotland?
Opportunities

1. Global economic resilience

2. Growth of new markets

3. Opportunities in new technologies

4. Turning problems into opportunities (and addressing problems that come with
opportunities)

5. Get better at knowing what works….difficult decisions

Discussion

Looking ahead, what do you see as

being the main opportunities for
Scotland?

Are you optimistic or concerned

about the outlook?
Understanding the Scottish Economy
28th of November 2017