Scottish Economy

Thousands of Scottish firms already frozen out as winter looms

The Chancellor of the Exchequer had the unenviable job last month of striking the balance of signalling stability to markets while supporting households and businesses through the current economic crisis.

However, it appears the pandemic, Brexit, and the ongoing cost of doing business crisis have already had a significant impact on the number of Scottish firms and their activity.

The latest ‘Businesses in Scotland’ data for 2022 were published last week which showed that the number of registered firms in Scotland declined for the second consecutive year.

This year, there were 175,000 registered businesses in Scotland (defined as firms that have a base or headquarters in Scotland), down more than 4,000 since 2020.

Sole traders and small-to-medium enterprises (0-249 employees) make up the lion’s share of Scotland’s business base, with just 1% of Scottish firms considered to be large (250+ employees).

Despite this, large firms make up half of Scottish employment and 60% of business turnover.

Interestingly, the share of Scottish business turnover generated by large firms in Scotland increased in 2022 despite the overall levels of turnover falling compared to 2021.

Unsurprisingly, the reason behind this is that Scottish SMEs have taken a bigger hit to their turnovers than large firms.

Over the past year, SME turnover in Scotland has declined by 9% while the overall turnover of large firms has fallen by 7.5%.

It is important to note that these latest estimates relate to a snapshot of the business base as of March 2022, and a lot has happened since then, including two new prime ministers and three new chancellors of the exchequer.

The economy is now in a recession after a year of high inflation.

In our latest business survey for Q3 2022, published last month, we asked Scottish firms for their opinions on current economic conditions.

The Fraser of Allander Scottish Business Monitor, in partnership with Addleshaw Goddard, is a quarterly survey of around 500 Scottish businesses. It has been running since 1998 and allows us to gauge business sentiment ahead of official measures of the Scottish economy.

So, how are businesses currently coping?

Our survey results show that business sentiment is now negative for the first time since the end of 2020, with just under half of Scottish firms surveyed now expecting to reduce their operations this year due to higher energy bills.

However, over 3/5 of firms reported that the ongoing energy crisis had increased their focus on adopting energy-efficient processes.

In terms of overall business costs, 9 in 10 firms in Scotland surveyed have experienced higher business costs over the past year, with 1 in 10 hospitality firms experiencing their costs more than double in a year.

Our latest results indicate that businesses will continue to pass these increased costs on to consumers. However, the share of Scottish firms experiencing supply chain issues continues to fall, which may ease some inflationary pressures.

In the latest quarter, half of the businesses surveyed had vacancies to hire new staff members, with 90% of these firms struggling to hire the staff they need – predominantly due to a lack of skills, applications, and, increasingly, wage expectations.

In our latest survey, we also asked Scottish firms what they wanted to see in the UK Government’s Autumn Statement, announced last month, and the Scottish Government’s upcoming budget, due on the 15th of December.

More than a quarter of firms that responded mentioned VAT and/or other tax cuts. Stability was also mentioned by 7% of responding firms, with 6% mentioning business rates.

So, what was there in the UK Government’s announcements for businesses?

The secondary threshold for employer contributions to National Insurance will be fixed at the current threshold of £9,100 from April 2023 until April 2028. This measure raises over £25bn in government revenue from 2023/24 – 2027/28. This is by far the most significant measure announced in terms of business taxes.

The longstanding freeze on the £85,000 VAT registration threshold will now be maintained at current levels until 31 March 2026 – raising £1.5bn from 2024/25 – 2027/28. This has obvious implications for SMEs, particularly given the ongoing inflationary pressures that would push a number of small businesses past this threshold.

Business rate powers are devolved to the Scottish Government however, it is worth noting the significant changes announced in last month’s Autumn Statement as the Scottish Government may feel pressure to provide similar support for Scottish businesses, particularly on the retail, hospitality, and leisure relief and the rate freeze.

Finally, there is no sign of the Energy Bill Relief Scheme (EBRS), which provides energy support for businesses between 1 October 2022 – 31 March 2023, being extended beyond 2022/23. This support is estimated to cost the UK Government £18.4bn in 2022/23.

The Treasury is expected to lead a review of the EBRS to determine the level of non-domestic energy support required beyond 31 March 2023. Notably, though, funding  for this has not been included in the Treasury’s Autumn Statement.

It is important to note that it is not just businesses that are supported through this scheme, charities also rely on this funding.

A recent survey by the Diffley Partnership found that 40% of people in Scotland have reduced their donations to charity due to the cost of living crisis.

With rising energy bills, lower incomes, and a lack of government support, this winter will be a tough one for the third sector.

We will be watching closely as the Scottish Government announces its support for households, businesses, and charities in their Scottish Budget due later this month.

This article was published in The Herald on 1st December 2022


Adam is an Economist Fellow at the FAI who works closely with FAI partners and specialises in business analysis. Adam's research typically involves an assessment of business strategies and policies on economic, societal and environmental impacts. Adam also leads the FAI's quarterly Scottish Business Monitor.

Find out more about Adam.