GROWTH in Scotland has begun to “diverge quite markedly” from overall UK expansion as low oil prices weigh, and the Chancellor must reconsider swingeing cuts in tax credits, a leading economic think-tank has warned.

Strathclyde University’s Fraser of Allander Institute concluded, as it published its latest commentary, that the Scottish economy had slowed both in absolute terms and relative to the UK. The divergence with the UK, it noted, had occurred even though expansion in the UK as a whole was slowing significantly.

Fraser of Allander highlights a drag on Scottish growth arising from “lower for longer” oil prices. It flags the knock-on impact of weak crude prices on Scotland’s business services sector.

And it notes that Scotland has recently lagged the UK as a whole in terms of growth even though it has been boosted by public investment in major infrastructure projects such as the Forth Replacement Crossing.

Fraser of Allander has cut its 2015 growth forecast for Scotland significantly, from 2.5 per cent in its June commentary to 1.9 per cent.

The mean independent forecast is that the UK as a whole will grow by 2.5 per cent this year, below its long-term annual average rate put at around 2.75 per cent by Bank of England Governor Mark Carney.

Fraser of Allander has reduced its prediction of Scottish expansion in 2016 from 2.3 per cent to 2.2 per cent. The mean independent forecast is that UK growth will slow to 2.3 per cent next year.

Further UK Government austerity measures and high household debt are highlighted by Fraser of Allander as key threats to Scottish growth.

Brian Ashcroft, economics editor of the Fraser of Allander commentary, called on the Bank of England to continue to hold UK base rates at a record low of 0.5 per cent, and urged Chancellor George Osborne to think again about his planned £4.4 billion per annum of cuts in tax credits.

Mr Ashcroft, emeritus professor of economics at the University of Strathclyde, highlighted the negative impact of Mr Osborne’s planned £12bn of further cuts in annual welfare spending, which include the proposed reductions in tax credits, on domestic demand and UK economic growth.

These cuts will hit low-income households.

Mr Ashcroft said: “The overall plan is to take £12 billion out of the economy, which is quite large. Tax credits are quite a large component of that. You are taking money away from individuals who would spend that money, whereas other people with more money would save more of it.

“There is a direct impact on spending that is going to affect demand in the economy.”

Mr Ashcroft added: ““With growth slowing right across the UK and especially in Scotland, now is the time for the Chancellor to rethink his cuts to tax credits and for the Bank of England to continue to hold rates.”

In a blow to Mr Osborne last week, the House of Lords, by a majority of 30, backed a motion put down by crossbench peer Baroness Meacher to delay the tax credit cuts until the Government responded to analysis of their impact by the Institute for Fiscal Studies, and considered “mitigating action”.

Peers also voted by 289 to 272 for a motion by former Labour minister Baroness Hollis to delay the cuts until the Government came forward with “full transitional protection” for those affected for at least three years.

Fraser of Allander has raised its forecast of Scottish growth in 2017 from 2.3 per cent to 2.5 per cent.

Commenting on the current Scottish economic situation, it emphasises the impact of weak crude prices is not confined to oil and gas extraction activity.

Fraser of Allander says: “Construction provides the main impetus in Scotland, with public spending on infrastructure underpinning growth. Conversely, the service sector has been weakened by the onshore impacts of lower for longer oil prices, hitting business services in particular.

“This picture is reversed in the UK: the service sector is the main driver with construction weakening.”

Paul Brewer, partner at Fraser of Allander commentary sponsor PricewaterhouseCoopers, highlighted the fact that the construction sector had been growing much faster in Scotland than in the UK as a whole on the back of the major public sector infrastructure projects.

Mr Brewer added: “I suppose it does create a vulnerability to that sector slowing down a bit again as the big projects come through the pipeline.”

He flagged worries that Scotland would become increasingly exposed to service sector “shortfalls” unless the focus on infrastructure investment continued over a long time period.