The past month has seen plenty of action on the economic front, with policy making by the UK and Scottish governments both firmly in focus.
Official data showed the UK economy fell into recession in the final three months of last year, with a second consecutive quarterly decline in economic output. This had been seen as a distinct possibility but far from a foregone conclusion ahead of the gross domestic product figures from the Office for National Statistics on February 15.
In the end, the quarter-on-quarter tumble in UK GDP in the final three months was sharp, at 0.3%. This followed a 0.1% decline in economic output in the three months to September.
The poor economic performance, and the UK’s weak outlook, puts the spotlight on policy making by the UK Government ahead of the next general election. The International Monetary Fund forecasts the UK economy will this year record the second-weakest growth among the Group of Seven leading industrialised nations.
The UK is expected by the IMF to expand by just 0.6% in 2024, only marginally ahead of the 0.5% growth forecast for Germany. France is projected by the IMF to grow by 1% this year. The US is expected by the IMF to expand by 2.1% in 2024.
From a UK Government perspective, this outlook must surely make for grim reading. It is a dismal situation for households and businesses in Scotland and elsewhere in the UK, which have had to endure such tough times for so long.
The UK’s very specific Brexit woes have been to the fore in the latest month with heavyweight US investment bank Goldman Sachs analysing the cost of this folly. The report from Goldman Sachs economists James Moberly and Sven Jari Stehn concludes the UK’s economic output has fallen short of that of similar countries by about 5% since the 2016 Brexit referendum.
As noted in one of my columns in The Herald, this is a lot. This should go without saying but, given the continuing bizarre narrative from those Brexiters who keep on trying to paint the departure from the European Union as a success, it is probably well worth pointing out simply. In the research published on February 9, the Goldman economists observe: “The UK has significantly underperformed other advanced economies since the 2016 EU referendum, with lower growth and higher inflation.”
My column observed this is surely simple enough to understand, even for those wearing Brexiter goggles. It also noted Goldman Sachs is a big name when it comes to economics so anyone who has not yet tumbled to the full destructive force of Brexit would do well to reflect on the bank’s research.
Income tax north of the Border has also been very much in the headlines. Former cabinet secretary for finance and the economy Kate Forbes set the cat among the pigeons by questioning the Scottish Government’s policy on income tax. In its Budget in December, the Government announced rises in income tax for high earners which will widen further cross-border differentials.
READ MORE: Ian McConnell: The great Scottish income tax fantasy
Writing in a Highland newsletter, the Mail on Sunday reported, Ms Forbes declared: “Continually increasing taxes is ultimately counter-productive over the long term, even if you agree with it ideologically, because it ultimately reduces public revenue.
“The forecasts for what the Scottish Government will raise through its latest changes to the top tax bands is just over £80 million. That isn’t to be sniffed at. But the forecasts also suggest they’ll lose £118m they could have raised because of behavioural change – people leaving or reducing their hours or treating their income differently. That illustrates we need to invest in people, in job creation, and in better wages. That way the tax take will increase.”
The forecast of £118m comes from the Scottish Fiscal Commission and relates to the reduced yield it sees from behavioural change in 2024/25.
Ms Forbes argued, rather than taxing existing earners more, the best plan was to increase the number of people paying tax in the first place. She said: “I’m constantly going on about the tax base. What I am really talking about is people. Calling for a bigger population, through inward migration and retaining our people, is exactly the same thing as wanting to see the tax base increase.”
READ MORE: Scottish airport chief reveals new route talks, big 2024 goal
As observed in my column in The Herald on Ms Forbes’ intervention, her point about the importance of “a bigger population, through inward migration and retaining our people” to “see the tax base increase” is obviously very sensible indeed.
That is what will ultimately boost Scotland’s growth potential.
However, the big problem here is that the ruling Conservatives’ hard Brexit has hammered net migration from European Economic Area countries.
This is a miserable situation, and one over which the Scottish Government has no control, given powers over immigration lie at Westminster. Scotland’s electorate, obviously, voted by a big majority to remain in the EU but Brexiters prevailed across the UK.
READ MORE: Ian McConnell: Not even a single mention of the elephant in the room
Scotland’s particular demographic challenges – although it must be emphasised strong net immigration is important across the UK given the ageing population – mean its economy has been and will continue to be hit particularly hard by the Brexit foolishness.
Scotland had a fighting chance of increasing its income tax base very meaningfully when it was able to attract people from throughout the European Economic Area to come and work here.
That was, of course, before the Conservatives threw away this great advantage of free movement of people between the UK and EEA countries, and exacerbated greatly skills and labour shortages across myriad sectors of the economy.
Returning to Ms Forbes’ intervention, it seems almost certain Scotland’s income tax policy will remain in the spotlight, as will the Conservatives’ track record on the UK economy.
This article was first published in The Herald's Business HQ Monthly supplement
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