JEREMY PEAT

We certainly continue to live in interesting times. A decision is due any day now as to whether the Brexit talks may progress to cover trade matters. The outcome is uncertain but, come what may, the odds on more economic pain ahead for Scotland and the UK as a whole continue to strengthen.

Meantime we have just experienced one Budget (at the UK level) and now await, on tenterhooks, the Scottish version on Thursday week. It is clear that the UK Budget, and in particular the economic and fiscal forecast contained therein, will cast a huge shadow over its Scottish counterpart – as will continuing Brexit worries. The key concern is likely to be how to cope with the impact of low productivity and hence low growth and tight public finances for an extended period.

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For year after year both the Office for Budget Responsibility (OBR) and economists at the Bank of England had noted how weak productivity growth has been since the early years of this century, but almost blithely assumed that all would be better soon. Their economic growth forecasts were founded upon an assumption of a steady pick up to past norms.

That lack of realism could not continue indefinitely. Being wrong for so long was proving embarrassing! Hence the Bank cut its expectation last month and now the OBR has followed suit. The latter in their forecast for the UK Budget assumed productivity growth over the next few years at below 1% per annum. Ouch! But even that assumption factors in some improvement on the status quo; and in the period when the Brexit debacle is being worked through that seemingly pessimistic view may prove unduly optimistic!

This change in such a key assumption impacted upon the expectations for the public finances and limited the increases in public expenditure which the UK Chancellor could justify. That in turn will limit the increase in the block grant available to the Scottish Government for its Budget. In addition the Holyrood Government will rely upon the Scottish Fiscal Commission (SFC) for other elements of the forecast (including those on devolved tax revenues) in determining the scope available for fiscal manoeuvring.

One can but assume that expectations of productivity growth will also have to be marked down for the Scottish economy. Our productivity performance has for a decade or more closely matched that at the UK level. There seems no good reason at this stage to base economic forecasts on a divergence in these trends in Scotland’s favour.

In sum this will be a tough Budget to develop and deliver. Funds will be severely constrained and then there will be inevitable tensions as to how to balance scarce resources between short and longer term priorities.

For the short term it is still the case that average earnings growth remains stubbornly low, with no signs of early change, and a continuing squeeze on the lower paid. Then there is the major issue of inter-generational inequities, as well as a wide variation in economic performance and social welfare across Scotland. How might specific, devolved, Scottish policies (including income tax) be adjusted to help a move towards a more equitable society?

In the longer term, if Scottish economic performance is to be enhanced with potential benefits for all, then efforts have to be made to address the key issues which are seen as constraining productivity.

The UK Government followed its Budget with the announcement of (yet another) brand spanking new UK Industrial Strategy. This covers the inevitable areas – more ideas and innovation; more and more relevant skills; a ‘major upgrade’ to infrastructure; improving the environment for business; and spreading prosperity across all communities.

There is little to disagree with in this ‘new’ strategy; and clearly a good deal of the basic thinking can be seen as applying to Scotland. The Scottish Government should at the least take some of the UK ideas, as displayed in this Strategy, and consider how they might be deployed in Scotland. Just one example is the planned focus on technical education and a new ‘National Retraining Scheme’. Unless specific steps on immigration are agreed, Scotland will suffer more from labour market shortages post Brexit than most other parts of the UK. Starting at next week’s Budget can we work towards a more appropriate balance in education and training here in Scotland? That should be a key priority.

But the same applies elsewhere. We need a major focus on all aspects of infrastructure. We need more encouragement of innovation and company growth. A risk is that the Scottish Government may see the creation of a Scottish National Investment Bank as the universal panacea – the salvation for all economic ills and the way forward to higher productivity, innovation and growth.

As, along with colleagues from the Royal Society of Edinburgh, I have argued in a response to the Government’s consultation, a great deal more thought is required before rushing down this path. I still have hopes that Andrew Wilson’s long awaited report may be bursting with good ideas. Let us hope that the new Scottish Budget reveals that creative thinking is underway on the optimum path to higher productivity in the years ahead.

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