In December 2017, the Scottish Fiscal Commission published their five-year forecasts of the Scottish economy, tax receipts and social security expenditure.
This report also included an assessment of whether the Scottish Government’s projections of borrowing were reasonable.
What marks this publication out is that it is the first substantive independent report on forecasts of the Scottish Governments devolved taxes that now make up a significant proportion of overall Scottish Government revenues.
This report accompanied the publication of the Scottish Governments Draft Budget for 2018/19, which also marked the exercise of devolved tax powers in Scotland to create new tax rates and bands applied in Scotland.
This new tax policy aims to result in additional tax revenues for Scotland to help mitigate some impact from UK Government budget reductions, while at the same time attempting to create a fairer tax system reflecting the ability to pay.
The Commission is to publish its next substantive forecast today.
So what challenges will they face and how might these challenges get reflected in future forecasts?
While there are a wide range of factors considered in the December report, two key issues stood out for me in terms of risk and uncertainty.
These are the questions of productivity within the economy and the uncertainty over future relationships with the EU post Brexit.
The Commission itself acknowledges that productivity growth can have a profound impact on GDP and the Scottish Economy.
This growth will therefore impact future tax levels and the ability to resource public services.
The December report has an expectation that the slow growth of recent years in productivity levels is expected to continue.
However, the report does note that the underlying reasons for this slow growth are not yet fully understood and are in fact not unique to just Scotland.
Interestingly, figures published earlier this year show a grim picture in relation to productivity growth in Scotland.
The latest figures show that labour productivity – as measured by output per hour – fell by 0.7% during the three months Jul-Sept 2017.
This was also the 8th quarter in a row of falling productivity in Scotland.
This has to be balanced against more people in work which may have the effect of limiting the impact on tax revenues, unemployment has fallen from 6% at the start of 2015 to just 4% today.
The old challenge of raising productivity levels is still key for the Scottish Government alongside recognising and addressing the pending demographic challenges both for pressure on public services with an aging population and for access to workforce for Scottish employers and the economy.
These figures demonstrate that although people might be working more hours, but they are not generating increases in output for those hours worked and that might be a reflection of the type of work people are doing, i.e. more part-time in lower skilled employment.
Coupled with this is figures that show a 15% fall in business investment in Scotland (in current prices) over the last year. Business investment is a key element in efforts to improve productivity per hour worked.
I would have thought that in relation to Brexit, there might have been an expectation from the Commission that matters relating to the future relationship with the EU would have progressed further than they have.
Fortunately, the Commission has taken a prudent view of Brexit and followed a similar approach to the OBR regarding leaving on the EU in March 2019 and new trading arrangements slowing the pace of trade growth.
It is difficult to see any changes that can be made to those assumptions at this point, in fact the possibility of falling out of the EU on hard Brexit terms may pose the greatest increase in risk for the Commission’s forecasts.
Over the longer term, the position on EU migration needs to be clarified as Scotland’s demographic changes will require supplementing the working age population which is in fact expected to shrink from 2018 onwards
With the Commission looking at its next substantive publication on forecasts, it brings home just how difficult a task it is to plot a way through these challenges and risks.
The old challenge of raising productivity levels is still key for the Scottish Government alongside recognising and addressing the pending demographic challenges both for pressure on public services with an aging population and for access to workforce for Scottish employers and the economy.
