Fraser of Allander Economic Commentary for Q4 2019 published today

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General election provides moment of clarity amongst recent uncertainty – but debate over Scotland’s economic future likely to intensify in 2020

The Conservative majority means that the UK will leave the EU at the end of January 2020. But SNP gains in Scotland raise prospect of renewed debate on second independence referendum.

Read our latest economic commentary here.

The outcome of the UK General Election has resolved one element of uncertainty in the UK economic policy landscape – the UK will now leave the European Union on the 31st January.

However, any hope of a swift resolution to the recent period of uncertainty is likely to be dashed according to the latest Economic Commentary by the Fraser of Allander Institute at the University of Strathclyde, which is produced in partnership with Deloitte.

The nature of the UK’s future economic relationship with the EU has still to be resolved within just 12 months, whilst the divergence in election results between Scotland and the rest of the UK has fuelled calls in some quarters for a second independence referendum.

All of this comes at a time of ongoing weak economic performance.

The latest analysis by the Institute shows that the UK economy stagnated over the three months to October, with business investment remaining a key drag on growth.

New Scottish economic data is published tomorrow – covering the slightly earlier three month period to September – and it is likely to show that, whilst the Scottish economy has returned to growth (thus avoiding a technical recession), performance over the year as a whole has remained fragile and well below trend.

Professor Graeme Roy – Director of the Institute – said “2020 promises to be a year of further debate over the future of the Scottish economy.

“The outcome of last week’s election is only likely to intensify the debate over the prospects for a second independence referendum. For some, Brexit represents a ‘material change in circumstance’. For others, ‘once in generation’ still holds.

“As we look forward to next year, there are likely to be two parallel debates. One on the process surrounding whether or not a second referendum should take place. And the second, about the prospects for Scotland under different constitutional settlements.

“Many of the economic debates will be similar to those in 2014. Those in favour will make the case that Scotland is comparable to many other successful independent countries with independence providing an opportunity to do things differently. Those against, will counter by arguing that Holyrood already has substantial financial powers whilst benefitting from the pooling of resources across the UK.

“But there are likely to be important differences.

“Firstly, back in 2014 there was a clear choice between a relatively stable ‘status quo’ – albeit with the promise of more devolved powers – and independence. But with Brexit, the debate will be set against the backdrop of economic change and uncertainty whatever the people of Scotland decide.

“Secondly, Brexit has thrown into sharp focus the challenges of major structural economic change. Voters will also want to be much more mindful about what both sides can credibly say about their so-called Plan B than was the case in either 2014 or the EU Referendum in 2016.

“Thirdly, the wider economic context has undoubtedly changed. Some aspects – such as the sharp fall in oil prices and weakening of Scotland’s relative fiscal position – pose a challenge to those arguing in favour of independence. Against that, Brexit throws up economic challenges for those in favour of the Union. Scotland may face a stark choice between aligning to the EU trading bloc or the UK bloc, with implications for trade and migration.

“Finally, and perhaps most significantly, many of those on the ‘yes’ side in 2014 argued that there would be a degree of continuity between the then status quo and independence. The plan was to retain Sterling, share financial regulation and keep an open border. But if the case for a 2nd referendum is now framed around Scotland pro-actively taking a different path to the UK, then it necessarily follows that the economic proposition for independence will need to be more radical on issues such as currency, customs and fiscal policy than in 2014.

John Macintosh, Senior Partner at Deloitte said, “While the result of last week’s General Election has provided clarity on the UK’s political outlook, questions on Scotland’s constitutional future remain.

“Many businesses have begun planning for the UK’s exit on 31 January, having partially implemented restructuring, stockpiling and logistics plans, however there’s still thousands who have done virtually nothing.

“There can be no further delay. Businesses must get ready, while wider attention can now turn to the hugely important question of Britain’s future trading relationship with the EU.
“What this election has done is shine a light on the many other challenges the UK faces, from infrastructure funding to healthcare and education. In Scotland, we will have to address the potential challenges posed by the end of freedom of movement and the prospect of a second independence referendum. However, we can take some comfort in the commitments to increase public spending and the Scottish economy’s historic resilience.”
Away from the election, the Commentary also discusses the outlook for the Scottish Budget which will take place in early 2020 (including a discussion of the new Social Security powers Holyrood will take on financial responsibility for in April next year).

Mairi Spowage, the Institute’s Deputy Director, said “One of the unintended consequences of the UK General Election was that the UK’s Autumn Budget has been delayed.

This poses a real challenge for the Scottish Government who – quite legitimately – have decided to wait until they have clarity of the both the Block Grant they receive from Westminster and the outlook for UK tax policy and UK tax revenues.

However, this means that the timescales for publishing and scrutinising the Scottish Budget have been slashed dramatically. There are real questions about whether or not Parliament – and the wider public – have sufficient time to do an effective job at reviewing and debating the government’s plans. This is an extremely unsatisfactory position to be in.

The Institute’s latest forecasts are 1.3% for 2020 and 1.4% for 2021 and 2022. However, these forecasts assume a comprehensive trade deal with the EU can be agreed by the end of 2020, and therefore are subject to significant uncertainty.

Read our latest economic commentary here.

December 17, 2019