Last week a majority of MSPs voted in favour of the Scottish Government’s budget plans at the first stage of their formal parliamentary scrutiny. These tax and spending plans were underpinned by the forecasts we made in the Scottish Fiscal Commission, and which were published alongside the budget.

Our report described a challenging outlook for the Scottish economy as high inflation dampens growth, erodes profit margins, and weakens the spending power of government.

Forecasting in “normal” times is difficult, but it is even more challenging just now.

During a meeting of the finance committee in December where we gave evidence, convenor Kenneth Gibson remarked upon how many times the word “uncertainty” appeared in our report. It may have been delivered in a light-hearted manner, but he was making a serious point that policymakers need to recognise.

During times like these it is essential to build resilience into how governments and public bodies manage their budgets and strengthen their ability to respond to abrupt changes in the outlook. At the fiscal commission we produce a “central” estimate in our forecasts, but that is not to detract from risks on both the upside and downside.

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Just last week for example, the Bank of England revised its forecasts for the UK outlook. It now predicts a shorter and shallower recession than it did in November. But it also expects it will be two to three years before the economy returns to pre-pandemic levels of activity.

Unfortunately, too many economists and commentators fall into the trap of focussing upon headlines such as “when” we enter recession, “how long it will last” and whether it will be “deeper or longer” than our competitors. The flaws with this are obvious, with too much weight given to marginal changes in high level macroeconomic estimates that do not translate into meaningful real-world economic differences.

At the same time our economic statistics are, quite properly, revised as we gather more data. A fixation on what the very latest release of data is apparently telling us about the current health of the economy can soon become quite dated.

Ten years ago, for example, the Scottish Government’s official estimate of the scale of the banking crisis was a 5.6 per cent decline in Scottish GDP. Now that estimate is just 4.1%, with the start and end-date of recession also revised.

What is important is that the overall story of the financial crisis – the loss of jobs, the hit to productivity, rising government debt, and the start of unconventional monetary policies – hasn’t changed.

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So what are the key elements to focus upon in the current economic outlook?

Firstly, the effects of inflation will have a significant impact on living standards. Even as inflation falls back, the cost of living will be higher for us all. Our December forecast showed a substantial fall in living standards in Scotland this year and next.

Secondly, interest rates may have peaked, but the days of exceptionally low interest rates are over. The cost of borrowing, including mortgages, car finance and credit cards, will be more expensive.

Thirdly, the spending power of government is being squeezed. By our calculations, the Scottish budget is on track to grow by around £1.7 billion next year. But after inflation, this is less than £300 million. With rising NHS waiting times, pressure for higher public sector pay awards and councils struggling to balance their budgets, policymakers face challenges in aligning funding and spending plans.

Finally, the Scottish economy is, on the balance of current probabilities, likely to enter a downturn in activity. If a recession is confirmed it is likely to be shallow – and smaller than either the financial crisis or Covid-19 – but a weak period of growth is likely for the next couple of years.

This might seem pessimistic, but Scotland is not unique in facing these challenges. It’s also important to remember that our economy is resilient.

Yes, the short-term outlook is challenging, but the factors that have made the Scottish economy successful over decades remain. Harnessing that potential over the long-term must be the key focus of policymakers.

Graeme Roy is professor of economics at the University of Glasgow’s Adam Smith Business School