Scottish Fiscal Commission warns on weak productivity growth

15 Mar 18

Scotland’s economic future depends on the factors underlying its weak productivity growth, according to the independent economic forecaster.

The Scottish Fiscal Commission, the body responsible for producing the nation’s economic and fiscal forecasts, has issued subdued predictions for growth in the Scottish economy over the next five years. It cited slow productivity growth, uncertainty over Brexit and demographic challenges.  

In its first set of official projections in December, it said the Scottish economy would grow by less than 1% a year until 2022, with GDP growth at 0.7% this year rising to 0.9% in 2021.

But, explaining its predictions at an event in Edinburgh this week, the commission said it was weak productivity that was at the heart of its pessimism.

The commission has its own methodology for measuring productivity, alongside estimates produced by the Scottish Government.

“But in both counts, productivity has been declining over the last couple of years, and is lower now than it was in 2015, and that’s a real concern for us,” said David Stone, the commission’s head of economy and income tax forecasting.

“The big uncertainty [is] what’s going to happen to productivity in the economy,” he said.

Productivity growth started to slow down in 2004, after decades of near constant growth of 2%. However, it was not clear whether this was an ongoing, but temporary, effect of the problems that had been building up in the economy before the financial crisis, or a permanent new feature of the economy.

If it were the former, productivity rates may start to return to close to their former levels, said Stone. “But the longer we see slow growth in productivity, the more we believe this is a longer term, more established part of the economy,” he said.

However, he stressed that the apparent recent stability in productivity growth had to be seen in the context of historical data that showed productivity waxing and waning as waves of innovation moved through the economy.

“We are living in an age where technology is expanding very quickly, but compared to the invention of the combustion engine or when computers were first introduced to the office, is Snapchat really going to have as much of an effect on the economy as those things?” Stone asked.

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