Jeremy Peat: 'No surprise then that we have no firm idea as to what happens next'

The latest survey evidence, from the RBS Business Monitor compiled by the Fraser of Allander Institute, provides a further hint as to how drastic an impact loss of that full access to the European market could have for Scottish business. At present nothing has changed. That access is retained, and in addition there is the benefit to exporters from a lower, and hence more competitive, sterling exchange rate. Nevertheless exports are continuing to fall, while costs are rising – presumably because of the higher sterling cost of imported goods.

Any actual constraints on access to the single market can only make matters worse. The UK Government appears to have no plans as to how to maintain access, and regular statements from our (up to now) European partners indicate no scope for such access without UK concessions on immigration from EU member states. The perversity is, of course, that Scotland and Scottish business would welcome both access to the market and continuing immigration; while the UK Government looks set to prioritise constraints on immigration over market access. (And Her Majesty’s loyal opposition – aka the Labour Party in England – does not seem to know its view on either!)

No surprise then that we have no firm idea as to what happens next. Nothing has changed yet, but it will in the fullness of time and in some as yet unpredictable manner. The result is heightened and troublesome uncertainty for businesses south and – particularly – north of the border.

At the least uncertainty leads to delays in business decision-making. Domestic investment will remain sluggish, and inward investment (so crucial to Scotland), has become a rare and threatened species until these uncertainties are removed or at least markedly reduced. It is unlikely that we will know more about the UK and the single market for a year or two; and the decision as to whether to hold another independence referendum looks set to be delayed into 2017 or beyond.

Meantime policy makers must do what they can to sustain activity, to encourage consumption and also investment, particularly in sectors which are relatively unaffected by the two big issues referred to above.

The Bank of England has played its part thus far. Rates have been cut, albeit at the margin and from an historically low level. More money has been pumped into the economy via Quantitative Easing (QE); and specific funds have been earmarked for the banks to support lending to businesses and consumers. There could be more to come – but do not hold your breath for negative interest rates. That has proved a step too far in other instances and the BoE will likely stick with QE as its key weapon if the economy becomes more sluggish. (I just note in passing that we have no idea how and when such QE will be unwound, nor with what consequences for the economy.)

Prime Minister Theresa May’s shining new Chancellor, Philip Hammond, has yet to show his hand. For that we must await the Autumn Statement on 23rd November. It looks highly likely that the ‘austerity-plus’ regime will be brought to an end and some fiscal loosening is anticipated. But how much and in what form remains to be seen – probably even the Chancellor has little or no idea at this stage.

After the UK Autumn Statement Scotland’s Finance Minister, Derek Mackay, will be better placed to form a view as to the budgetary funds likely to be at his disposal, and will commence the juggling act of allocating scarce resources across competing claims.

At the same time the Scottish Government and Parliament must face up to the fact that before too long the revenues available to Government here will be in part contingent upon relative economic performance as compared to the UK as a whole. This will come about when income tax receipts are devolved –before Scotland is permitted to vary specific rates of tax. If Scotland’s Gross Domestic Product expands more rapidly than the UK as a whole, then Scotland will be deemed to have generated a disproportionately high share of income tax receipts and revenues will rise. But if Scotland underperforms, as looks more likely at this stage, then our share of income tax receipts will fall below population share and the squeeze on our Budget will increase.

It has been a long, long time since Scotland’s relative economic performance has impinged upon the budgetary front; and it could prove a painful experience unless and until our GDP growth can be accelerated. That implies boosting investment and innovation, generating stronger productivity growth and encouraging ambition and a broad international perspective across the Scottish business community. All of this will be difficult to achieve while risks and uncertainties remain so stark. To learn what BREXIT means we must await (but try to influence) the UK Government’s negotiations; but delaying decisions on whether to hold a second independence referendum, and if so when, risks sluggish investment, limited innovation and a disappointing growth performance.

Jeremy Peat is visiting professor at the University of Strathclyde's International Public Policy Institute