Economy Q&A: Why is growth in Scotland lagging behind the rest of the UK, and what can the Scottish Government do to increase it?
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
Professor Charles Nolan, Bonar McFie Chair of Economics, University of Glasgow:
Year to year, growth rates diverge and this is not very important. What is important is the long run growth of the economy and that depends on rising productivity. So the issue is: what can governments do to boost productivity? That is a very difficult question to answer, unfortunately.
Clearly, Scotland and the UK are not alone in suffering slowing productivity growth, although it may recently be worse in the UK compared with other advanced economies. Many have pet theories about the UK’s relatively poor performance over the years: low educational outturns, poor on-the-job training, a weak climate for private sector investment, too high corporate and other taxes, sub-standard infrastructure (investment), poor quality management, financing constraints (especially on SMEs), stop-go macroeconomic policies, and others besides. But none of these appear able to explain the changing productivity profile since the financial crisis. Perhaps they can, but I’ve seen no evidence so far.
Professor Julia Darby, Head of Department of Economics and Fraser of Allander Institute, Strathclyde Business School:
The downturn in the oil and gas sector remains the key reason why Scotland is lagging behind the rest of the UK. With oil prices determined by global factors and the North Sea now in its mature stage of development, there is little direct action that the Scottish Government can take to counteract this. Instead, the focus should be on helping the sector diversify into new areas, for example, renewables, decommissioning and in other activities that can readily put the skills of those in the oil and gas industry to use.
However, alongside this, there are other factors that contribute to Scotland lagging behind the rest of the UK. Overall, the Scottish economy seems to be stuck in a cycle of weak growth. Construction activity has fallen by nearly 10 per cent in two years whilst growth in services has been weak. Business investment has been particularly fragile; levels of investment having barely moved over a period of almost 10 years.
Many of the tools the Scottish Government has at its disposal to boost growth are likely to have an impact over the long-term (e.g. 5+ years), rather than immediately. But it is still important that the government targets its resources at where they will have the greatest impact. While the government currently spends over £2bn each year supporting enterprise and skills, it is not clear that they get value for money for such investment. The creation of the new Enterprise and Skills Strategic Board provides an opportunity to undertake a fuller assessment of ‘what works’.
Professor Jeremy Peat, Visiting Professor, University of Strathclyde International Public Policy Institute:
The differences between the UK and Scotland are perhaps less important than the evident fact that the two economies have disappointed in recent years – as compared to both previous experience and the performance of our peer group globally. Some reasons for this disappointment apply across the UK. But there are some causes which apply especially in Scotland.
One such explanation of lower Scottish GDP growth is our lower rate of population growth. The gap in growth per head, between Scotland and the UK, is less marked than in total GDP growth. As a measure of affluence, trends per head may be seen as more relevant than trends in GDP overall. But a gap remains, even on the per head measure, and there is no sign of the gap narrowing, despite the weak performance of the UK economy, post the 2008 debacle.
Another reason for Scottish underperformance is the heavier dependence, directly and indirectly, upon oil and gas related activity, a sector which has suffered from lower oil prices in recent years.
But the cause of lower growth which matters most applies across the UK, albeit perhaps slightly more than the norm in Scotland. That is lower investment, by business and the public sector, and a dramatically disappointing performance so far as productivity is concerned.
Professor Catia Montagna, Chair in Economics, University of Aberdeen:
A key factor is productivity, which has fallen for seven consecutive quarters and continues to lag behind that of the UK, despite our higher expenditure per-head on enterprise and economic development.
Among the proximate causes of poor aggregate productivity are low and falling business investment and R&D expenditure (much below the already low, by OECD standards, UK levels), but also low wages. Low productivity constrains wage growth, depressing consumption and firms’ expectations; but low wages incentivise companies to hire cheap labour rather than seek productivity improvements via investment and the adoption of new technologies: a vicious circle clearly reflected in the increase in underemployment (low-paid, part-time jobs) hidden behind Scotland’s good job creation rate since the recession.
Identifying and addressing the ultimate causes of productivity is more complex and requires an evidence based approach. Research shows the importance of firm level factors (from size to management practices) and, with value creation no longer confined within individual factories, of the number and quality of the suppliers and customers a firm interacts with. A company’s success depends on the entire economic and institutional environment that surrounds it. This is why many countries try to encourage the emergence of clusters: supported by good public services and network infrastructure, they can sustain pools of skills and knowledge and trigger virtuous circles of firm creation and innovation.
My recommendation would be to set up a productivity commission for Scotland, bringing together government, academics, firms and unions.
Professor Ronald MacDonald, Research Professor of Macroeconomics and International Finance, University of Glasgow:
The oil price shock has had a very large and prolonged impact on the Scottish economy and as with any resource dependent economy we need to diversify away from the oil sector in order to improve our economic growth prospects. Traditionally, Scotland has had a lower spend on R&D than the rest of the UK and this must be turned around along with a number of other productivity enhancing measures. Overall creating a business friendly environment with competitive business taxes and income taxes is going to be central to the success of the Scottish economy going forward.
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