JEREMY PEAT

Two quotes to kick start this article. The first comes from the First Minister in her speech to the David Hume Institute in Edinburgh last week. The FM declared that she expected Brexit to have a ‘profound, long-lasting and damaging’ impact on the Scottish economy. I agree, but a continuing difficulty is that that impact is as yet difficult to identify let alone quantify.

My second quotation is from a paper on the ‘Scottish Approach to Evidence’ produced by the Carnegie UK Trust and the Alliance for Useful Evidence. They note that ‘developments in evidence production and use still need to catch up with the Scottish approach to policy’. I discovered this clear and crisp statement just as I was about to give evidence for the Royal Society of Edinburgh to the Scottish Affairs Committee at Westminster; and somehow it encapsulated the key thrust of many points that I wished to make in that session. We very much need to re-visit economic policies in Scotland, but must do so taking full and proper account of carefully prepared and analysed evidence.

Returning to the post-Brexit referendum theme, the latest data suggest that UK GDP grew slightly more rapidly in the final quarter of last year than previous estimates had suggested. Overall growth in 2016 was very much in line with trends – no sign of any marked post exit vote deceleration.

But there are three comments to make, three caveats to enter. First, this rate of growth owes a great deal to the early and vigorous intervention by the Bank of England (cutting interest rates and boosting monetary expansion – and making clear more would follow if needed) and indeed to the early effects of sterling’s sharp post vote depreciation.

My second caveat is that the growth we have is essentially down to the consumer. Detailed data from the Office for National Statistics show that retail and wholesale trades, which account for only 10% of the UK economy, are accounting for nearly one quarter of our growth. Other sectors continue to disappoint. Given the recent and projected rise in retail inflation, as the impact of sterling’s depreciation works its way through our economy, and the likelihood that real earnings growth will grind to a halt in the next couple of years, we cannot expect this consumer-driven growth path to be sustained. Real disposable incomes could fall for a few quarters and consumer credit growth cannot continue unchecked for much longer.

Consequently, growth of GDP is most likely to be markedly slower in 2017 and 2018 than last year – and this is all before we know the outcome of the Brexit negotiations. Please remember Brexit has not happened. All we are seeing now is the impact of expectations of Brexit, and best guesstimates of what this is likely to mean. This is, if you like, the phony war, the lull before the Brexit storm. The ‘profound, long-lasting and damaging’ effects lie ahead.

On now to my third caveat; Scotland is markedly under-performing the rest of the UK. According to my (reliable!) friends at the Fraser of Allander Institute, in the year to September 2016 – the latest period for which Scottish data are available – Scotland’s GDP growth rate was just one third that of the UK. That is deeply disturbing, and cannot all be put down to the impact of problems in the oil and gas sector. The consumer in Scotland is nowhere near as buoyant or confident as his and her counterpart down south.

The effect of this under-performance is inevitably working its way through to the labour market. In the last quarter of last year Scotland had a lower percentage of the labour force in employment than the UK average; a higher percentage unemployed; and also a higher percentage inactive.

Further, as we all should know now, the budget available to the Scottish Government is increasingly tied to Scotland’s economic performance relative to the UK. This relative performance will be more important in many ways than what Chancellor Hammond says in next Wednesday’s final Spring Budget. To quote the Fraser Institute ‘catching up with the UK must be a key priority for Government’.

That takes me back to my second quotation at the start of this piece. We need a huge focus now on how to stimulate faster growth, to generate higher employment and lower employment, improved public finances going forward and the opportunity for welfare gains. The Scottish Government is paying great attention to how to bring together the enterprise and skills agencies. Fine, we need them and their activities to be better co-ordinated. But above all we need clarity as to the approach to enhancing innovation and productivity that should underlie our efforts to achieve higher growth and hence be at the foundation of all the policies and programmes that our enterprise and skills agencies are charged with implementing. This should all be based upon ‘enhanced evidence production and use’.

Jeremy Peat is visiting professor at the University of Strathclyde International public Policy Institute