By Jeremy Peat

In these most uncertain of times, even we old dogs have to learn the odd new trick. It was fascinating to be part of a Fraser of Allander Institute podcast – both because the FAI are playing such an important role in analysis of the Scottish economic scene midst the pandemic and because this week there are plenty of interesting ideas and new information floating around.

One positive item in the financial news was that both the Governor of the US Federal Reserve and our own Governor of the Bank of England effectively told us at the Jackson Hole gathering of central bankers that they will keep monetary policy loose for an extended period – come what may on inflation. Interest rates are set to remain exceptionally low through the 12 months ahead and beyond.

This was particularly welcome at a time when reliable sources report that the UK fiscal deficit in 2020/21 will be around a massive 16 per cent of gross domestic product, and still as high as 7% in 2021/22. (For reference that follows a deficit of 2.6% in 2019/20.)

Our most up-to-date relative data for Scotland come from the Government Expenditure and Revenue Scotland (GERS) report for 2019/20, hot off the press, which suggests that Scotland’s fiscal deficit that year was around £15.1 billion or 8.6% of GDP. It is unlikely that the differential with the UK will improve in this year of Covid, so Scotland’s deficit in 2020/21 is likely to be substantially in excess of 20% of GDP – a staggering 22% if the differential remains unchanged.

It was against this background that speculation has started mounting as to what the UK Government might do in the months ahead. Will they raise taxes and if so which, by how much and when? There is a clear expectation for some such moves, given the perceived necessity to stop debt mounting and start edging the deficit back towards more normal levels.

The latest report from the Scottish Fiscal Commission (another new entry on the economists’ charts this past week) indicated that the Scottish Government has already allocated all bar £93 million of its maximum permitted limit of £750 million resource borrowing for the year; and the (wholly impartial) Commission also notes that this allocation could only be increased if there were a ‘Scotland-specific’ economic shock. That is not expected this time around, as the pandemic is hitting economic output in most parts of the UK to roughly the same extent. Therefore fiscal stabilisation in Scotland in 2021/22 will have to kick off by following the UK Government lead, but with a necessity to tighten a little more to allow for past over-estimation of income and other tax revenues which have to be clawed back.

That leads on to the basic conundrum facing both the UK and Scottish governments in the coming months. To what extent do they encourage the reopening of elements of our economy, in an attempt to limit the damage so far as unemployment and household incomes are concerned, but at the risk of further Covid spikes? Moving too fast could lead to a return to the worst days and calls for a further lockdown –which would be close to unaffordable in public finance terms and extend the period of recession and high unemployment. Moving too slowly would risk really high levels of unemployment, skewed towards the lower income groups and specific sectors and regions, and further demands for increased public support, delaying the date when sorting out those public finances can commence. The policy "porridge" needs to be just right, not too fast and not too slow, in the midst of economic pain for many and great heaps of uncertainties.

The FAI is correct to point out, in one of their recent pieces, how the extent and speed of recovery is already varying dramatically by sector, region and income group. Hence their suggestion of a K-shaped recovery; i.e. some sectors continuing to cope well but others having really suffered and continuing to do so. Government support is not required for most in the first group (including many financial and business service companies) but most certainly is for the latter (e.g. hospitality and tourism, especially elements targeted at overseas visitors). A K-shaped recovery points to K-shaped support. But policy selectivity is always problematic in principle and practice!

There is just scope to squeeze in reference to two more reports issued in the past few days. One comes for the nascent Scottish National Investment Bank, with an indication that the SNIB will initially focus on three "Grand Challenges". These challenges and associated missions are all vital to a healthy future for Scotland. But for the next couple of years SNIB must work closely with the British Business Bank, the Scottish enterprise and skills agencies and private investors to help businesses, large and small, through this dire crisis. By all means keep a weather eye on key equity and environmental objectives, but the initial key to "Building Back Better" lies in building back and preventing mass business extinction.

The other report is by Mark Logan (Skyscanner, etc.) reviewing the Scottish Technology Ecosystem. This is not my area of expertise but there is every indication that a successful Scotland in the future will be contingent, as he emphasises and expands upon, upon this ecosystem being supported by education and skill development, key infrastructure and the appropriate blend of financial support. This would lead to the right types of business investment and continuing productivity growth.