JEREMY PEAT

Telling a sensible story about the economic prospects for Scotland – or indeed the UK – is becoming more and more difficult. The degree of difficulty is growing along with the extent of uncertainty and the number of possible (I hesitate to say plausible) scenarios for the next two or three years.

Goodness knows what it must be like for a business of any scale, especially for businesses which export or compete with international imports – or indeed rely upon inputs of goods, services or labour from beyond these shores. Further, all the evidence points to the uncertainties and related risks growing in the months ahead rather than declining.

Great sympathy and empathy is merited for the Office for Budget Responsibility and the Scottish Fiscal Commission, as they make their economic and financial forecasts in advance of pending Budgets; and indeed for the Chancellor of the Exchequer and the Monetary Policy Committee at the Bank of England as they prepare, respectively, for an annual Budget (as soon as October 29) and another difficult decision as to whether or not to hike interest rates once more.

Policy decisions require the development of a limited range of plausible scenarios, as the backcloth against which sound decisions can be founded. Preparation of scenarios and backcloth requires reasonably reliable economic and financial forecasts; and making such forecasts requires a relatively secure context upon which key assumptions for models can be founded.

That reasonably secure context simply does not exist at present. Leaving on one side the massive global risks, as President Trump engages in trade warfare with the other world superpower of China, just consider some of the domestic uncertainties.

Will this government be able to come up with a Brexit plan acceptable to our EU ‘friends’? Would such a plan be acceptable to key elements of the Conservative Party let alone achieve majority support in Parliament? If not will we have a General Election and if so what would be the key relevant policies if Labour were to be elected? Who would lead a Tory party into (and out of) such an election and would this party then reflect the views of the Brexit fanatics or the pragmatists? Would we then have another Brexit referendum? Would ‘remain’ be on that ballot paper? Would a referendum on Scottish independence precede or follow such a General Election and/or second Brexit vote?

These are clearly political questions, but necessary to debate if seeking guidance on the likely context for our economy in 2020 and beyond; that context which is critical for making sound economic and financial policy decisions and also sound business decisions. The welfare of all of us across the UK is contingent upon political decisions which will not prove to be unduly harmful to the economy; thereby permitting decisions by policy makers and business which enhance the prospects of growth in employment and incomes alongside the minimum necessary degree of financial austerity.

There are growing signs that major businesses, not least in the financial services sector, are planning to move large chunks of their activities out of the UK. This is entirely understandable as many such businesses would find it far more difficult and expensive to operate post either hard Brexit or ‘no deal’ UK departure if they did not make such changes in location. Delaying the implementation of such plans will be increasingly problematic for boards of directors as Brexit day looms larger and the prospect of an organised Brexit taking account of business and economic welfare interests diminishes. Why continue to suffer the costs of uncertainty related to Plan A (staying put) if a relatively low cost and largely risk free Plan B is ready to be implemented?

In the first half of 2018, both UK and Scottish economies have managed to grow, albeit sluggishly and well below established trends. But all the key forecasts suggest that growth will slow further into next year and beyond. As the Fraser of Allander Institute has stated in its recent commentary, “a challenging trading [and I would add pre-Brexit] environment will require businesses to be resilient and to focus upon the long-term drivers of productivity …. such as investing in new plant and machinery …”.

Sadly there are no signs of such progress in Scotland. Business investment fell by another 10% in 2017. When taking account of inflation, business investment is now 25% - one quarter – lower than was the case two decades back in 1998. Despite all the grand stories of Scottish success in Higher Education R&D what really matters to economic success is business investment. Decline in business Investment of one quarter in two decades is nigh on disastrous for long-term prospects.

Small wonder that productivity fell again last year. We should be expecting output per hour worked to be rising at about 2% per year. That was what we once took as trend. Over the past two years output per hour has fallen by 3%.

Sorry to be so depressing. Maybe when the political uncertainties recede we can focus on investing in physical capital, skills, innovation and sound management and hence achieve a rebound in productivity and growth; and an environment within which noble aspirations of enhanced welfare for all can be achieved. Let there be light at the end of this gloomy tunnel.

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