Scottish growth forecasts downgraded as Trump tariffs and National Insurance hikes bite

Scotland's economy will not achieve forecast growth this year, according to new analysis.

Trump's tariffs and the rise to employers' National Insurance contributions (NICs) are amongst the factors behind the declining optimism for both Scotland and the UK, it is said.

Professor Mairi Spowage, director of the independent Fraser of Allander Institute (FAI), said the signs point to a "dampening" on spending and investment.

In its latest quarterly Economic Commentary, the unit has downgraded its forecasts for Scottish economic growth to 0.8 per cent this year and one per cent next year.

The projections come despite more optimistic forecasts from the Scottish Fiscal Commission and the Office for Budget Responsibility.

Those organisations have upgraded their expectations for 2026.

Lower growth in Scotland during the first quarter saw a 0.4 per cent increased in real GDP compared with 0.7 per cent for the UK as a whole. 

That trend has continued, FAI said, "leading to a weaker recovery from the pandemic than the UK generally".

The NICs raise has been a challenge to businesses, according to the report, as have "uncertain expectations of international trade" due to issues like import tariffs levied by US President Donald Trump.

The result is "fewer sales, less turnover and less export activity and capital investment in the first quarter of this year compared to the previous quarter".

Pay growth and employee numbers are said to be down, while inflation has increased to 3.4 per cent.

Spowage said: "After a strong start to the year, the Scottish economy has faltered in March and April and is essentially the same size in real terms as it was six months ago.

"Unfortunately the wider business environment and global events are still taking a toll on businesses and consumers, which is having a dampening effect on spending and business investment."

The publication follows the publication of the Scottish Government's delayed Medium-Term Fiscal Strategy.

Finance secretary Shona Robison signalled public sector cuts to come as the government pursues savings by reducing the workforce for five successive years. It is hoped that the reductions can be achieved through "natural attrition and recruitment controls".

The news also follows a major climbdown by the UK Government over its welfare reforms. Aimed at savings of £5bn per year, the measures would have restricted Personal Independence Payments and Universal Credit but Labour MPs threatened to rebel, forcing the administration into a U-turn.

Deputy director Dr Joao Sousa added: "The fiscal announcements by both governments suggest that there are significant challenges in the years and months to come for the UK and Scottish governments.

"Particularly from 2027-28 onwards, the choices of government look to become more difficult. Of course, this is the role of the government in power - but the difficulties of the UK Government this week show that events can quickly derail its plans."