Yesterday saw the First Minster of Scotland fire the starting gun for a second vote on independence from the UK for Scotland as the pace of possible change ratchets up yet another notch. With it came am intriguing view of how long a lifetime is these days! Although I am also reminded of the saying that “a week is a long time in politics”. However as ever I look to steer clear of the political melee and look at the economics. So how is the Scottish economy doing?
The Scottish government has published this data.
When rounded to one decimal place, at 2016 Q2 annual GDP growth in Scotland was 0.9 percentage points lower than in the UK. At 2016 Q3, annual GDP growth in Scotland was 1.2 percentage points lower than in the UK. Between 2016 Q2 and 2016 Q3, the gap between annual Scottish and UK GDP growth increased by 0.3 percentage points in favour of the UK (when rounded to one decimal place).
As you can see the recent performance has been around 1% per annum slower than the UK and may well be accelerating. With the UK economy overall having grown by 0.7% in the last quarter of 2016 that seems likely to have continued but of course there are always dangers in any extrapolation. If we look back we see that in the pre credit crunch period GDP growth was similar then Scotland did worse and then better as presumably the oil price boom benefited it ( although the oil sector itself is excluded). Then until the recent phase Scotland did mildly worse than the rest of the UK.
The Scottish government plans to improve this and with an eye on future policy has set a European Union based objective.
To match the GDP growth rate of the small independent EU countries by 2017.
How is that going so far?
The latest data show that over the year to 2016 Q3 GDP in Scotland grew by 0.7% whilst GDP growth in the Small EU was 3.5% (measured on a rolling four quarter on four quarter basis). When rounded to one decimal place, this resulted in a gap of 2.8 percentage points in favour of Small EU. This compares to an annual increase in GDP to 2016 Q2 of 1.0% in Scotland, and an increase of 4.2% in the Small EU – resulting in a 3.3 percentage point gap in favour of Small EU (when rounded to one decimal place).
As you can see the gap here is much wider and leaves Scotland with a lot of ground to recoup. If you look at the list that may well get harder.
The small independent EU countries are defined as: Austria, Denmark, Finland, Ireland, Portugal and Sweden. Luxembourg has been re-included in the newest update due to a change in availability of data.
Ireland is proving a hard act to follow.
Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.
It is an awkward fact that the 21% economic growth registered by Ireland in the first quarter of 2015 lifted the target away from Scotland and it continues to offer something hard to catch. Of course such large moves also challenge the credibility of the Irish data series.
What about employment?
Good but not as good as England currently.
Scotland’s employment rate of 73.6 per cent for Q4 2016, is the second highest across all UK countries, 1.3 percentage points below England. This indicates a worsening position compared with a year ago when Scotland had the highest employment rate across all UK countries, 0.2 percentage points above England (the second highest).
Crude Oil and Gas
Plainly Scot;and has considerable resources here although unless there are new discoveries these seem set to decline over time. There have also been big changes in the crude oil price as FullFact reported last October.
It is correct that crude oil prices are currently at around $50 a barrel. Back at the time of the first Scottish independence referendum in September 2014 oil was selling for just over US $90 a barrel.
Energy policy, and how oil revenue would be invested, was part of the Scottish government’s vision for an independent Scotland……….”With independence we can ensure that taxation revenues from oil and gas support Scottish public services, and that Scotland sets up an Energy Fund to ensure that future generations also benefit from our oil and gas reserves. “
I think that FullFact were being very fair here as there were forecasts from Alex Salmond that the oil price would rise towards US $130 per barrel if my memory serves me right. Whereas it is now US $51 or so in terms of Brent crude oil. So the oil sector has seen something of a recession affecting areas like Aberdeen although there would have been gains for other Scottish businesses and consumers from lower prices.
The Fiscal Position
This has been affected both by the lower oil price and also by the recent trend to lower economic growth than the rest of the UK. The former was highlighted by this from the 2015-16 data.
Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.
This led to these numbers being reported.
Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP).
Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).
For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).
This adds to an issue I reported on back in my Mindful Money days in November 2013.
So there is something of a shark in the water here. If we add in the fact that Scotland spends more per head than the rest of the UK then the IFS ( Institute for Fiscal Studies) considers that the fiscal position is more dangerous. Both the UK and Scotland spend more than they get in from tax but the Scottish position is more reliant on a fading source of tax revenue. This is what leads to the following conclusion.
As it turns out that source of revenue has ended at least for now and seems to be capped by the shale oil wildcatters for the next few years. All rather different to this.
But a current strength of the numbers is revenue from North Sea oil which was 18.6% of tax revenue in 2011-12 for Scotland.
Of course there would be quite a debate over the share of the UK national debt that would belong to Scotland but the fiscal position is presently poor.
This poses a few questions so let me repeat the issues with using the UK Pound.
1. The Bank of England will presumably set interest-rates to suit England (and Wales and Northern Ireland). This may or may not suit Scotland.
2. The value of the pound will mostly be determined by the much larger English economy in some respects similar to the way that Germany dominates the Euro. That has not worked out well for many of the Euro nations.
3. This is to say the least awkward, if further bank bailouts are required. Will the Bank of England be the “lender of last resort” in Scotland? How does this work when it has an independent treasury? Just as a guide, individual nations in the Euro area had their own central banks which survive to this day partly because of this issue.
4. There is also the issue of currency reserves and intervention which presumably also stay with the Bank of England.
5. What about the money supply of Scotland which will again presumably be controlled by the Bank of England and set for the rest of the UK?
6. Has anybody bothered to ask the citizens of the rest of the UK if they are willing to take the risk of having Scotland in a currency but not a political or fiscal union? This would take place just as the Euro is demonstrating many of the risks of such an arrangement. But added to it for the rest of the UK would be new oil or gas discoveries pushing up the value of the pound and thereby making their businesses and industry less competitive.
Scotland plainly has economic strengths with its natural resources and financial services industry. However since the last vote there has been a deterioration in economic circumstances as we have seem growth fall below that of the rest of the UK. This has led to a problem with the fiscal deficit and it is hard not to think of the criteria for joining the European Union.
New Member States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession.
We do not know what the national debt would be but the fiscal deficit is around treble the 3% of GDP target per annum in the Euro accession rules. Of course Euro members have often ignored it but they have been much stricter on prospective entrants. Quite a Euro area style austerity squeeze would seem likely and that has been associated with recessions and quite severe ones at that.
Charlotte Hogg’s Resignation
Back on the 1st of March I pointed out the lack of competence on monetary policy she displayed in front of the UK Treasury Select Committee. Today it was announced that she offered to resign last week but Mark Carney would not take it. Now he has.