Economy Q&A: What needs to be done to help offset the effects of Brexit in Scotland?

Written by Staff reporter on 25 January 2018 in Inside Politics

Holyrood asked five economists for their views about key questions on the Scottish economy

Professor Charles Nolan, Professor Julia Darby, Professor Ronald MacDonald, Professor Jeremy Peat, Professor Catia Montagna - Image credit: Holyrood

What needs to be done to help offset the effects of Brexit in Scotland?

Professor Charles Nolan, Bonar McFie Chair of Economics, University of Glasgow: The premise of the question might, to some, seem loaded. There are aspects of Brexit that could bring benefits to Scotland, such as more policy autonomy with respect to fishing and agriculture, and other industry-specific support policies. And free trade deals may in the future be negotiated that bring benefits to Scotland.

It is impossible to know at present how important any such benefits are likely to be. Most economists believe that in the short term (and the short term may last some time), that the further the UK extracts itself from the single market and the common external tariff, the more costly is Brexit likely to be. The levers that the Scottish Government can pull to ameliorate the negative effects of that extraction seem limited, although the Irish border issue may yet throw up possibilities.  

That said, as Scotland’s most important trading partner, the rest of the United Kingdom (rUK) is central to Scotland’s economic prospects. Aligning Scotland with the EU at the expense of rUK may be counterproductive in economic terms – although that judgement depends on many issues, some short term, others long term, and most of them political.

Professor Julia Darby, Head of Department of Economics and Fraser of Allander Institute, Strathclyde Business School: Brexit is such a fundamental shift in the underlying fabric of the economy that it is unrealistic to believe that there are specific policy responses that can offset the fallout. Much will depend upon the nature of the deal that is negotiated between the UK and the EU. The more that existing trade relationships can be protected, the less damaging Brexit will be.

A hard Brexit would be a major economic shock, with disastrous consequences for many businesses and sectors.  Alongside trade, it is also vital that Scotland is able to attract new migrants. Even with current levels of migration, Scotland’s working age population is on track to decline over the next few years. This will act as a significant drag on growth and add to the pressures on public services.

However, like it or not, we’re told Brexit will happen by 2019. It is therefore vital that businesses and policymakers are as prepared as they can be for leaving the EU. For businesses, this is about ensuring that they have adequate processes in place to cope with any changes to their export or import markets, their supply chains or their supply of workers. For government, there is an urgent need for clarity on what powers will be transferred to Holyrood post-Brexit and which EU powers will be transferred to Westminster.

Professor Catia Montagna, Chair in Economics, University of Aberdeen: Participation in international markets requires overcoming costs that increase with distance. These are not confined to transport costs due to geographical distance, but also costs due to policy barriers and other softer factors associated with overcoming cultural, institutional and political differences. Brexit is likely to increase these costs. This is particularly challenging for SMEs which make up the bulk of the Scottish business base.

Brexit is also likely to exacerbate skill shortages in both the private and public sectors.

To overcome these challenges, the focus ought to be on addressing poor productivity performance and maintaining inward migration to Scotland.

To some extent these issues are intertwined. Increasing ‘distance’ to international markets after Brexit may make it more difficult for Scotland to deter outward migration and attract skilled population, undermining productivity growth and firm creation. Hence the country’s attractiveness to workers and firms needs to increase. Key to this are the conditions discussed earlier that support clusters and virtuous circles of high aggregate demand, investment and growth. Incidentally, by increasing stickiness, agglomeration economies reduce the sensitivity of mobile factors to tax differential between regions.

Professor Ronald MacDonald, Research Professor of Macroeconomics and International Finance, University of Glasgow: That we remain competitive with respect to our biggest internal trading market, namely the rest of the UK.

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