Brexit haze: Austerity and uncertainty dominate economy
Tired but persevering, the Scottish economy has suffered through two different Brexit deadlines, prepared twice for a no deal, lived through continued austerity, and then there’s the political tug of war between Westminster and Holyrood.
Less than two months out from the latest deadline – the aptly chosen ‘All Hallows Eve’ EU exit date – Scotland’s economy has swung in the right direction: unemployment is lower than the UK and gross domestic product (GDP) is up, while the UK economy is shrinking.
But, as Finance Secretary Derek Mackay put it, Scotland’s progress is “all at risk from Brexit”.
In July this year, the UK Government sharpened its swords and blamed the Scottish Government for a £941m shortfall in Scottish tax revenues from lower economic growth and a tax system that “isn’t working”.
Former chief secretary to the Treasury Liz Truss wrote in the Scottish Daily Mail: “Unfortunately the Scottish Government hasn’t been pulling its weight” saying the Scottish economy “grew more slowly than the rest of the UK in 2017/18” which had “hit tax receipts” and left the Scottish Government with £941m less than expected. “The SNP has damaged the economy by choking growth with red tape and allowing the education system to crumble,” she wrote.
Truss said the UK fiscal framework “cushions the blow when growth is down in Scotland” and claimed Treasury would “give £737 million additional cash through the block grant to the Scottish Government”.
Truss’ comments were later found to be incorrect by the UK Statistics Authority, who said the reason for the £737 block grant adjustment was “an initial overestimate of the Scottish tax base and faster growth of tax receipts than expected in the rest of the UK”, and the UK Government was correcting its forecasting mistake. Mackay labelled Truss’ statements as “a wilful misrepresentation of the truth” and questioned the timing of her remarks, made during the Tory leadership contest.
In June, the Scottish Fiscal Commission (SFC) warned the Scottish Budget could be reduced by £229m in 2020-21 and £608m the following year, as UK Treasury funding in the budget would be adjusted to reflect actual income tax collected.
The SFC said the Scottish Government would need to manage volatility in its budget, and may need to adjust spending plans, as income-tax reconciliations and major social security powers that will begin in April 2020 could “introduce substantial risks”.
Mackay admitted to MSPs he might “have to” look at public spending cuts, as the Treasury prepared to reduce the Scottish block grant over the next three financial years.
Scottish income tax revenues grew by 1.8 per cent in 2017-18, which Mackay said showed his tax plans were “helping to create a more progressive tax system”. He stuck by his tax scheme and pushed for more powers, saying Scotland should have “full control” of its income tax system.
Scotland’s economy grew more than first estimated in the first three months of 2019, with revised figures putting GDP 0.5 per cent ahead of the UK.
Second quarter economic statistics showed the UK’s economy was shrinking for the first time since 2012, after GDP contracted by 0.2 per cent between April and June 2019.
The Scottish Chambers of Commerce said the UK results were a “warning sign” and urged the UK Government to “act to shore up the confidence of business” by firming up Brexit trade details.
As of August 2019, Scottish unemployment had been lower than the UK for 11 months in a row, at 3.6 per cent to the UK’s 3.9 per cent.
As the Scottish Government’s budget was passed through parliament in January, Mackay announced an extra £90m of funding for councils and committed to reforming council tax after 2021. New income tax thresholds, which increased the number of higher and additional rate taxpayers in Scotland, passed parliament 61 votes to 52.
Scottish Labour accused the SNP of having “failed to stand up to Tory austerity”, after SPICe figures in July revealed councils had their budgets cut by 7.5 per cent between 2013-14 and 2018-19, while the Scottish Government revenue budget was reduced by 2.8 per cent.
In recent months, job losses have rippled across Scotland. The Scottish Government swooped in to rescue the jobs of 350 workers at Ferguson Marine in mid-August, with Mackay announcing the shipyard would be transferred into public ownership.
Following the Ferguson news, Labour MP Paul Sweeney questioned why Mackay did not look at “renationalisation of the Caley Railway Works in Springburn” after 200 jobs were lost there. The 160-year-old railway depot and workshop was shut down at the end of July, after owners Gemini announced the St Rollox works would be closed and work shifted to England.
A few days after Caley closed, 250 Havelock International workers lost their jobs when the Kirkcaldy furniture manufacturer went into administration and GMB Scotland questioned “how the company was allowed to get to this point without the workforce being warned or consulted”.
Workplace deaths have surged by 70 per cent in the past year, rising from 17 deaths in 2017-18 to 29 in 2018-19. The dramatic rise led to calls for better health and safety regulation, and questions over the status of Scottish Labour’s culpable homicide bill, after a consultation closed in April 2019.
Many of Mackay’s frustrations during the year came from a lack of full control over Scotland’s finances. Following the 2019 spring statement, where former chancellor of the exchequer Philip Hammond announced plans to hold a spending review if a deal on Brexit was secured, Mackay said: “It is clear that the views and interests of the devolved administrations are not a primary consideration in the UK Government’s management of public finances or in its management of Brexit.”
This has since morphed into a one-year spending review for 2020-21, under new chancellor Sajid Javid, to set departmental budgets for next year and “clear the ground ahead of Brexit”.
Scotland could lose billions in funding from the EU after Brexit, and Mackay said he “cannot yet qualify” levels of future funding and how it will impact the budget. He has pleaded with Westminster not to reduce post-Brexit funding levels for Scotland, “nor should these funds be centralised in London”.
Austerity and Brexit have become something of an albatross for Scotland’s economic woes.
In May, Mackay told the Scottish Parliament “independent forecasters of our economy have said that were it not for continued Brexit uncertainty, they would be forecasting faster economic growth, not slower”.
“There is now no doubt that Brexit is hurting Scotland before it has even happened. The decision to pursue a path of austerity by successive chancellors means that over £12 billion less has been invested in Scottish public services over the last nine years,” he said.
“Let me be clear, austerity is a choice – and not one of Scotland’s making.”