Positive outlook doesn't eliminate need for difficult political decisions

With the economy bound to be one of the key election battlegrounds, Holyrood asks a number of economists to sum up Scotland’s economic outlook for the year ahead. 

The outlook for the Scottish economy in 2015 appears to be positive. 

There are no formal Scottish Government projections for Scottish growth, but the latest forecasts by both the Fraser of Allander and the E&Y Item Club suggest growth for 2015 to be around 2 per cent to 2.2 per cent, then falling back marginally in 2016 to between 1.8 per cent and 2.1 per cent. 

So, forecasters are expecting the Scottish economy to keep growing at or around 2 per cent per annum. Whilst good, a note of caution is still warranted as such growth is not strong compared to last year’s performance, when the Scottish economy is estimated to have grown by 2.7 per cent, or given the depths of the recent recession. 

As with all projections, these growth rates are open to change (both up and down) depending on the outcome of key underpinning assumptions. 

For example, if sterling weakens further against the euro and the dollar, this would assist Scottish exporters. In doing so it would also help broaden the factors that drive Scotland’s growth, making it more sustainable. Sterling’s most recent peak occurred in the first quarter of 2008. Since then it has depreciated by over 25 per cent against the dollar and by a more modest 5 per cent against the euro. Further depreciation in 2015 may occur if, for example, UK interest rates remain relatively low or if the UK’s trade balance continues to deteriorate.

Low oil prices are proving to be problematic for Scotland’s oil and gas sector, but they are helping to keep a lid on inflation, boosting household and business consumption. If more business investment is delivered this would further widen the drivers of Scotland’s economic growth. 

Whilst these factors could improve Scotland’s prospects further in 2015, they may also deliver negative effects. 

Low oil prices are helping to dampen inflation, but low and falling inflation could also be viewed as negative if it means consumers delay spending decisions, anticipating the cost of goods being cheaper in the future. Such deflationary pressures remain a concern, and are adding to the uncertainty on growth prospects worldwide. 

Sterling’s weakness may help Scotland’s exporters but it could also mean higher import prices for consumers. 

The key to achieving sustainable growth, and growth that will deliver a boost to real earnings, ultimately lies with Scotland (and indeed the UK) achieving increases in productivity and not relying on further sterling depreciation. Productivity growth has been a missing factor in recent years and achieving it is as important for Scotland’s public sector as it is for the private sector. 

This year’s UK General Election will no doubt offer up differing visions of how to improve the prospects of the UK and Scottish economies. Indeed, depending on the composition of the next UK government, the date when the UK public sector deficit needs to be eliminated could be delayed, freeing up some additional public spending (most likely for capital investment). However, unless substantial tax increases form part of any election offering, day to day spending on public services will remain constrained. Delivering more for less (i.e. increasing public sector productivity) will therefore continue to be an essential part of any public and third sector spending plans. 

It is possible to look positively on Scotland’s 2015 economic prospects. But even a positive outlook does not eliminate the need for difficult political decisions, driven by increasingly scarce public spending and rising demand for services. Delaying such decisions until after the UK and Scottish Parliament elections this year and next seems increasingly untenable.

Jo Armstrong, Executive Director, Fiscal Affairs Scotland