FM’s economy announcement – some comments

Today the First Minister announced welcome measures to try to stimulate the Scottish economy in the aftermath of the Brexit vote.

The major element announced today is a package of £100m to be spent on capital projects this financial year – as we called for in our Special Issue Fraser Economic Commentary published two weeks ago.

There is also wider support to Scottish business to help deal with the increase in uncertainty post-referendum.

Forty percent of respondents to our post-Brexit survey of Scottish businesses reported that the referendum result was likely to have a negative impact on their own investment plans. Today’s announcement of additional public investment will help counteract this, albeit at the margin.

There are three ways that this could have a positive impact on the economy in the short-run.

Firstly, to the extent that this initiative is ‘new’ funding rather than a re-profiling of planned expenditure for this year – either through drawing down on earlier underspends or shifting actual budget from future years to this financial year – this will provide an immediate stimulus to the economy over and above already planned investments.

Secondly, if this initiative includes a re-shaping of multi-year investments to be targeted toward those specific projects that have the greatest immediate impact on jobs and domestic supply chains this will have its own short-term positive impact relative to previous plans.

Thirdly, aside from the direct impact of such spend, any positive boost to economic confidence from today’s announcement will yield further benefits.

However, there are also reasons to be cautious.

Firstly, the scale of the investment is relatively modest in the overall context of a shock such as Brexit. Given the current financial settlement the onus on providing a more significant fiscal stimulus – beyond the current financial year – rests with the UK Government.

Secondly, planning to spend money and actual delivery of ‘shovel-ready’ projects can be notoriously difficult. The Government will need to set out quickly what actual projects can be delivered over such a short time horizon.

Thirdly, we have yet to see firm details of the source of this funding and the extent to which it is genuine ‘new’ investment. For example, ‘accelerated’ implies a reduction in capital spending in future years. The one project that we know is to be funded is the £5m investment in the Golden Jubilee Hospital in Clydebank. This was planned to take place in 2018-19. In our latest forecast, 2017 and 2018 are likely to be even more challenging than this year.

Fourthly, there is always a balance between projects that can have an immediate stimulus and those that may take longer to deliver but provide a bigger boost to productivity and growth in the long-run.

Finally, it is imperative that everyone from across the political spectrum – including the Scottish Government – revisit their wider approach to economic growth, trade, productivity and investment for a post-Brexit world.

That being said, on balance, today’s announcement is a welcome step by the Scottish Government and shows a willingness to be flexible to the changing economic environment.