THIS month's column comes in two parts.
First an examination of where we are amidst the swings and roundabouts of our economy; and then consideration of some Scottish economic and financial governance issues, against the backdrop of recent debates on the Scotland Act 2012 and the continuing evolution of the referendum discussion.
There must be at least one cheer for the latest UK GDP data. In the first quarter of 2013 the dreaded triple-dip was avoided and positive growth achieved. Likewise we should welcome, albeit in a guarded manner, the Scottish GDP data for the final quarter of 2012, showing 0.5% growth within those three months. Both sets of data were better than they might have been; but it remains far too early to celebrate with cartwheels. We still have a long way to go before entering clear blue water signalling sustained and balanced economic recovery.
A major remaining disappointment is the performance of exports and manufacturing, in both Scotland and UK as a whole. Their lacklustre display looks to be still related to the problems in the eurozone, with any redirection of exports to the more rapidly growing market remaining limited in scale and scope. We continue to rely upon services.
Meanwhile, investment intentions remain subdued and the availability of credit has not improved – according to Bank of England agents – for most small firms. Andrew Bailey, Deputy Governor of the Bank, explained at a dinner in Edinburgh last week that the Funding for Lending Scheme has been revisited with the intention of reaching further towards the smaller end of the business market. Banks will be incentivised to lend to SMEs. But I remain uncertain how much of the constraint on investment activity – and a marked pick up is essential if productivity and hence competitiveness is to be maintained let alone enhanced – is down to problems on the supply side of credit and how much due to limited demand for credit.
Further, the household sector continues to face problems. We are now hearing about mortgage issues for some, but a far more substantive issue is the fact that real wages have been declining for five years. No wonder household demand is constrained. Unemployment may not have risen as anticipated, but it looks clear that this is in part explained by the existence of significant, hidden, underemployment. The considerable number of micro-businesses being created is in many (most?) instances not an exciting example of increased entrepreneurialism, but rather little more than part-time income-earning endeavours adopted perforce while waiting for full-time, preferred, employment opportunities to emerge.
The forward-looking surveys for Scotland point to something close to stagnation continuing. The last Bank of Scotland Business Monitor showed a balance of companies with decreasing turnover. The Scottish Chambers of Commerce quarterly survey suggests the economy is "bumping along the bottom", with a majority of respondents expecting no improvement for 12 months.
The latest PMI showed the lowest growth rate in activity for four months. Growth in Scotland and the UK this year of around 1% may be a realistic expectation. But the key question then is whether we can realistically expect to improve upon that performance in 2014 and beyond. The Office for Budget Responsibility (OBR) and Chancellor so expect; they may yet be disappointed – again.
This reference to the OBR provides a link to the second part of this piece. Having given evidence a week earlier to the Finance Committee at Holyrood on Scotland Act 2012 (and listened to the head of the OBR similarly giving evidence the week before that) I was delighted to hear that last week John Swinney agreed with that committee that there was a need to establish an independent body in Scotland akin to the OBR. This body would provide forecasts for Government and Parliament.
His proposition was in the context of the need to forecast tax revenues and more if the fiscal devolution incorporated into the Scotland Act is to be achieved with minimum risks and uncertainties. Agreed, but more is required. In my view the Scottish OBR (SOBR to create an acronym) should be forecasting elements of economic activity in Scotland and also related elements of the public finances. These forecasts should then be used post Scotland Act implementation (whatever the outcome of the referendum) as the basis from which the Government's plans for the public finances take off.
In addition I remain of the view that there is a need, as devolution and the extent of complex and crucial choices to be made in Scotland expands, for a small but high quality Treasury function within Government. This would assess, on an objective and consistent basis, proposals from parts of Government and hence advise ministers. Their advice might also be made available to Parliament or committees thereof. These committees will be important elements of good governance and will need the professional support for and development of members that will make them well placed to undertake constructive and effective scrutiny.
We also need more external analysis – of the type that the Institute for Fiscal Studies provides so influentially at UK level. No body in Scotland at present has the skill base and resource to fulfil this function. Perhaps the economics departments of our splendid universities could come together to share resources, and focus on analysis of Scottish economic and policy issues; and could then work to share in accessible form the results of such activity with interested parties across Scotland.
In the light of ever increasing complexity, devolution and risks we need this combination of informed and independent input into Government; scrutiny via a Treasury function and parliamentary committees; and constructive, objective and evidence-based external input readily available to all with interests. The promised Scottish OBR will be one small step in the right direction.
Jeremy Peat is director of The David Hume Institute.
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