Scottish First Minister Humza Yousaf set out his plan to reduce poverty, support small businesses and use all his government’s power to mitigate the effects of what he called the UK’s failed economic model.
(Bloomberg) — Scottish First Minister Humza Yousaf set out his plan to reduce poverty, support small businesses and use all his government’s power to mitigate the effects of what he called the UK’s failed economic model.
In a speech to the Scottish Parliament on Tuesday outlining his “fresh start,” Yousaf promised to “seize the opportunities of net zero to build a green wellbeing economy.” The big challenge for Yousaf, though, is to overcome Scotland’s metrics as political opponents round on his party for prioritizing the push for independence over the immediate economic hurdles.
The Scottish National Party, which has run the semi-autonomous administration in Edinburgh since 2007, has long harbored ambitions to make an independent Scotland as prosperous as some of its small Northern European neighbors. Underpinning that is the pursuit of that “wellbeing economy,” where health and happiness matter as much as growth.
Yet Scotland’s growth has underperformed the rest of the UK in recent decades. On life expectancy, Scots live years less than other people in the UK. And on happiness and life satisfaction, Scotland also lags the other nations. Ipsos polling shows voters are dissatisfied with the SNP’s running of the National Health Service and the economy.
But getting growth going again could prove tricky, according to interviews with top economists in Scotland. They praise the “wellbeing” approach, but still see boosting gross domestic product as key to living standards and prosperity.
“The importance of GDP growth is, with all its defects in terms of its measurements, still a driver of what resources you have to be able to invest in the wellbeing economy,” said Anton Muscatelli, principal at the University of Glasgow and an economic adviser to the Scottish government. “It’s not something you can ignore.”
In the 25 years since the UK devolved power over areas such as health, transportation and education, Scotland has trailed the rest of the UK. GDP has risen 38% since 1998 versus 48% for the UK as a whole. Scottish GDP per capita rose 11.5% between 2010 and 2019, compared with 14.7% in England, 13.8% in Northern Ireland and 18.3% in Wales.
That excludes the North Sea oil industry, which the pro-independence campaign during the 2014 referendum championed as the linchpin of the Scottish economy. (Scots voted 55% to 45% to remain in the UK.)
Including oil output, GDP per head is roughly in line with the average for the 38 countries in the Organisation for Economic Cooperation and Development when including the North Sea, according to 2019 data from the Fraser of Allander Institute in Glasgow.
Yousaf, 38, has had a baptism of fire since assuming office three weeks ago after a fractious contest that exposed the division within the SNP.
His party is the subject of a police investigation into its finances that saw its former chief executive — the husband of Yousaf’s predecessor, Nicola Sturgeon — arrested and later released without charge.
There’s also a scandal over island ferry contracts, longer waiting times in the health service, falling education standards and a gender recognition bill blocked by the UK government to contend with.
The independence debate is not going away anytime soon, though, even as the odds of another referendum look increasingly remote. And Yousaf will need to rebuild the economic case for leaving the three-centuries-old UK.
Low GDP growth means economists struggle to square the circle of how an independent Scotland could pay for large budget shortfalls without big spending cuts or tax increases. That’s perhaps the biggest economic question the nationalists face. The income tax rate for wealthier earners is already two percentage points higher than in the rest of the UK.
“An independent Scotland would need faster growth both to fill in for the fiscal transfers, overcome the initial trade values increase and to offset the loss of revenues from the decline of oil and gas,” said David Phillips, associate director at the Institute for Fiscal Studies.
While Scotland suffers from the same productivity woes afflicting the whole of the UK, it also has idiosyncratic economic challenges. A population aging more quickly, a large oil and gas industry facing the net zero transition and higher taxes on earnings are added headwinds.
Scotland voted against leaving the European Union in 2016, which added impetus initially to the pro-independence movement. Part of the government’s opposition to leaving the single market was because of Scotland’s reliance on immigration to keep the labor market stocked.
“The UK and Scotland actually have very similar problems with respect to GDP growth: it’s a problem around productivity growth,” said Muscatelli. “Scotland also has an additional challenge around demographics, the inability to grow its population with the exception of the period immediately prior to Brexit.”
Scotland is reliant on large fiscal transfers from the rest of the UK to help fund policies only available north of the border such as free personal care and free university tuition fees. Official estimates show that Scotland’s notional deficit was 12.3% of GDP in 2021-22, even when including North Sea revenue, compared to 6.1% in the UK as a whole.
“There’s a big structural deficit in Scotland so even if we had all the fiscal levers, we’d still be issuing debt hand over fist,” said Charles Nolan, president of the Scottish Economic Society and a former Bank of England economist. “We still have to fix this at some point. Like the UK, the Scottish Government is still not facing up to things.”
–With assistance from Andrew Atkinson and Alastair Reed.
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