Demographic ‘time bomb a huge threat to the economy’

The latest EY Scottish ITEM Club forecast puts Gross Domestic Product (GDP) growth north of the Border equal with the UK figure in 2018. It represents a significant improvement on this year.

Household spending – as a result of rising incomes and easing inflation – is expected to be a key driver behind the stronger performance.

But the report warns that income tax rises currently being considered by the Scottish Government could also hit economic growth by curbing consumer spending.

Mark Harvey, EY senior partner for Scotland, said: “The decrease in the number of people of working-age combined with a decline in migrants creates a more challenging environment for generating faster-paced economic growth.

“It places renewed importance on nurturing and attracting talent to Scotland for highly-skilled, highly-qualified roles.

“Next week, the Scottish Finance Secretary is expected to announce a further rise in the income tax paid by wealthier taxpayers in Scotland compared with the rest of the UK, but will such a move be good for business, entrepreneurs and inward investment?

“Ideally, government should look to support more start-ups and scale-ups, and help businesses grow by attracting and retaining top talent.

“This would, in turn, generate a much more dynamic and growing tax base to deliver an increase in tax revenues.”

According to the report, net inward migration into Scotland is is set to fall from 14,000 this year to just 6,000 annually by 2022.

Over the same period, Scotland’s working age population is set to fall by 62,000 or 0.4 per cent a year, which is which is double the rate of the rest of the UK.

The overall population is set to grow by 58,000 over the same period with net migration making up 81per cent of the rise – twice the rate of the rest of the UK.

The number of people living in Scotland had dipped to 5.06 million in 2000, but growth since then means the total reached 5,404,700 by the end of last year, which is the largest number ever and a rise of 31,700 over the year.

Net migration from overseas helped to swell the population by 22,900, while 8,800 more people came to live in Scotland from the rest of the UK than the total who moved south of the Border.

Without immigration, the population would have remained unchanged, with the latest National Records of Scotland figures showing there were 800 more deaths than births in the last 12 months.

The report states: “Here the decline in inward migration is of greater significance since migrants tend to be of working age and hence improve the economy’s supply potential by raising skills availability.

“A decline in the working age population will tend to have a downward impact on Scottish GDP growth.”

The report also projects a weakening of employment growth in Scotland next year, slowing to 0.4per cent and stagnating the following year, following a strong performance in 2017.

Looking further into the future, the report forecasts an annual average Scottish economic growth rate of 1.7per cent a year to 2022, below a projection of two per cent a year for the UK over the same period. EY chief economist Mark Gregory addded: “Improved growth in the Scottish economy is to be welcomed, particularly as it is expected to match that of the UK as a whole in 2018.

“The longer-term, five-year growth projections act as a reminder that the pace of growth comparable to the rest of the UK can be difficult to maintain and an enduring focus on how to grow Scotland’s economy must be a priority.”

He cited Brexit as the “biggest unknown”, adding: “If uncertainty around this issue eases and government can provide greater clarity for business, we can hope to see an increase in business confidence.”

ANALYSIS: Our future prosperity is dependent on our ability to attract foreign workers

By Robert Wright, Professor of Economics at Strathclyde University

LIKE many high-income countries, the number of deaths exceeds the number of births in Scotland, and the gap between the two is expected to widen considerably in the coming decades.

Fertility has been below replacement level for nearly 50 years. This means that the population of Scotland has failed to reproduce itself for nearly two generations. It is not a mystery that the only reason that the population has grown in recent decades is because of positive net-migration.

Net-migration is the difference between immigration and emigration. Put simply, the numbers coming to Scotland to live, work and stay has outnumbered those leaving Scotland to live, work and stay elsewhere.

If the population is to grow in the future, with the widening gap between births and deaths, higher and higher levels of net-migration are required.

While population growth is a worry, it is not the key concern.

The former first minister Jack Lord McConnell was fond of reminding us when he was first minister: “We need to grow the population to grow the economy”.

However, he was only partially correct: “We need to grow the population to grow the labour force to grow the economy”.

No economist or businessman or businesswomen would disagree that a growing labour force with the appropriate mix of skills is a requirement for economic growth. Economic growth is the main driver behind rising living standards. Without a growing labour force, a decline in living standards is to be expected.

More than 90 per cent of employment is concentrated in the age range of 20 to 59.

Migration is a young person’s game, with the majority of immigrants being of labour force age (most are in fact younger than 35). Given that net-migration is the key determinant of population growth, it is not surprising that it is also the key determinant of labour force growth.

Without high and increasing future levels of net-migration, the labour force will shrink resulting in lower economic growth and declining living standards. Whether we like it or not, our future prosperity is dependent on our ability to attract foreign-born workers to substitute for the native-born workers who were never born. Many believe that after the UK leaves the EU in March, 2019, net-migration will fall dramatically and may even turn negative. After this date the UK will no longer be obliged to allow the free movement of people from any of the 27 remaining EU member states.

Anti-immigration sentiment was perhaps the main reason the majority of those in the referendum voted to leave the EU. Therefore, it seems unlikely that the UK Government will allow the historically high net-migration levels needed in Scotland, when they take total control of immigration to the UK.

To many this is economic suicide. However, there will also be considerable collateral damage. As mentioned above, the majority of immigrants are young and many bring with them children. The number of children and young people in Scotland is declining. In fact, the number of children and young people with Scottish-born parents is in freefall. Put bluntly, it is the children of immigrants that are propping up the Scottish school system and are the only reason many schools have not been closed.

Without these children many more schools would need to be closed and more and more children would need to bused back and forth to school. If you are a parent with young children, the next time you queue up at the checkout at your local supermarket, you should thank the young immigrant at the till for their help in keeping your local school open.

Robert Wright is Professor of Economics at Strathclyde University.