Global economy, Labour Market, Scottish Economy, UK Economy

Weekly update: Building a new Scotland, the labour market and interest rates

Welcome to the first in a new series of weekly articles providing observations and analysis of key economic policy announcements and data releases.

This week we consider the Scottish government’s latest paper setting out the case for independence, the latest labour market statistics, and the Bank of England’s interest rate decision.

Kicking off the indyref2 campaign – does the government’s first paper fall short?

The big news of the week was undoubtedly the launch of the Scottish government’s Indyref2 campaign. The key announcement this week was the government’s aspiration to hold an independence referendum in October 2023.

Alongside this announcement the government published the first in what is expected to be a series of papers that will ‘answer key questions about the transition to independence and the infrastructure that will be required for the effective governance of an independent country’.

The paper launched this week compared the UK’s economic performance with ten smaller European countries. Indicators included economic size (GDP), inequality and poverty, productivity, and business investment.

The purpose of the analysis was to demonstrate that, as part of the UK, Scotland is not fulfilling its potential.

It would not be difficult to pick holes in the paper. There is a significant element of cherry-picking, both in relation to the countries chosen and the selection of indicators.

More importantly, there is no discussion of what type of policies or institutions an independent Scotland would need to emulate aspects of the success of say Ireland or Denmark, nor what the implications of those policies might be. Nor does the paper engage with any of the practical challenges and contradictions that independence might entail. The paper recognises that there is nothing about independence itself that guarantees success, and that the outcomes will depend on the decisions of governments post-independence.

But this was clearly not intended as a detailed paper. Its role, at least in the government’s eyes, is to set out the motivation for independence, to provide a positive case as to why the pursuit of independence is worthwhile, and to give examples of some of the ways that an independent Scotland could do things differently. In this context, its not unreasonable to begin a new series of analysis with a high level analysis that articulates a vision, or set of potential ‘rewards’ in somewhat aspirational terms. Most strategy development starts this way.

The question now is how the government follows up what we might call its motivating document in its subsequent analysis. We understand there may be as many as 20 or more papers planned for publication, covering more specific issues from the state pension to currency.

These papers will need to build on this week’s motivating document to get into the nitty gritty – how can an independent Scotland emulate the success of comparator countries, and what are the costs, risks, challenges and trade-offs involved? If instead the subsequent papers adopt a similar level of analysis as this week’s paper, and simply set out how great things could be, that will fall a long way short of what is required.

So in terms of a paper to kick-off an independence debate, whilst this week’s paper was a high-level and very partial analysis, its not unreasonable as a high-level motivating document if the papers that come next follow a more rigorous analysis.

Labour market update – unemployment low but real wages falling

The latest labour market statistics were also published on Tuesday, covering the three months from February to April.

The labour market continues to send mixed messages. Headline labour market indicators paint a story of a very tight labour market, with an unemployment rate at 3.2% in Scotland and an employment rate of over 75%, roughly where it was pre-pandemic.

Vacancy rates remain at record levels for all sectors, and there continues to be more vacancies than unemployed people to fill them. The accommodation and food services industry continues to be the sector with the highest vacancy rate

The evidence is that this is feeding through to nominal wage growth in the economy. But despite this, the rise in inflation means that real earnings (after adjusting for inflation) are falling. The public sector in particular is demonstrating very poor real earnings growth: setting the scene for friction and potentially disruption in some sectors as workers’ expectations for wage increases rub up against the reality of departmental spending limits set last autumn.

Balancing the bank rate

The Bank of England announced a further quarter point rise in inflation on Thursday, from 1% to 1.25%. This means that interest rates have increased by over one percentage point since last November, making a real difference to the repayment schedules of those with tracker mortgages or loans.

But the real impact of the interest rate rise will be through its effects on expectations, with the Bank hoping that the rise – alongside subsequent rises that it has indicated are likely – will do enough to ensure that the rise in inflation caused by global commodity prices does not become embedded into domestic inflation, without tipping the economy into recession.

The debate as to whether it has got this balance right will continue.


David is Senior Knowledge Exchange Fellow at the Fraser of Allander Institute



Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.