Growth Mindset: Increasing the size of the Scottish economy will be no easy feat

As the country sluggishly returned to work following the festive break, John Swinney was already on the front foot, delivering what had been billed as a “major speech” ahead of MSPs arriving back at Holyrood. His message was clear – help us pass the budget, or there will be hell to pay. The first minister not only invoked the nightmare scenario of NHS operations being cancelled and medicines rationed in the event of no deal, but also the growing threat of Elon Musk, whose increasingly extreme views now loom large over UK politics.

The early days of the new year, normally a quiet time politically, had been dominated by messages posted on the social media platform formerly known as Twitter by Musk, the site’s owner and the world’s richest man, who accused Prime Minister Keir Starmer and safeguarding minister Jess Phillips of failing to address child sexual abuse perpetrated by so-called grooming gangs. 

Even at this early stage, one of the depressing features of 2025 looks set to be the influence Musk has over political debate both here and in the US, where he is set to have a role in Donald Trump’s new administration after the new president is sworn in next week. After Swinney’s 6 January speech on the budget, most of the questions from the press were about Musk. The first minister said failure to pass his government’s tax and spending plans would hit voters hard and “play into the hands” of populists like the tech billionaire.

Yet despite Swinney’s dire warnings, the government’s budget was always likely to pass with the tacit support of either the Greens or the Lib Dems (possibly both) even before Scottish Labour confirmed it would not vote against. It’s once the legislation is passed that work begins in earnest to deliver the economic growth the first minister has pledged to make a priority of his government in the run-up to next year’s Holyrood election. 

“We must be in no doubt,” Swinney told his audience in Edinburgh last week. “Growth remains too low and quality of life and living standards are not good enough for far too many people.”

Wisely, Swinney has linked economic growth with another of his government’s top priorities – tackling child poverty. And yet despite the importance of a successful economy to driving up living standards, it’s the sort of rhetoric which was largely absent under his predecessor, Humza Yousaf, who only belatedly – and disastrously – terminated the Bute House Agreement with the Scottish Greens, a party whose economic prospectus appears to be predicated on “eat the rich” class struggle. 

Firing economic growth will be no easy feat. Growth in the UK as a whole has slowed to a crawl in the years since the pandemic, having already been at historically low levels since the 2008 financial crash. According to the independent Office for Budget Responsibility (OBR), GDP is set to grow by two per cent in 2025 before falling back for the remaining years of this decade. Despite promises by the Starmer government to accelerate growth, the OBR predicts the size of the UK economy is likely to be “largely unchanged in five years”.

The situation is further complicated by the UK Government’s borrowing costs, which last week rose to their highest level since the 2008 financial crash, with Britain’s £2.8tn of public debt already around 100 per cent of GDP. The deteriorating fiscal position has led to suggetions the chancellor may be forced to announce tax rises or fresh spending cuts.

In Scotland, researchers at the Fraser of Allander Institute have forecast growth of 1.1 per cent in 2025 and 1.2 per cent in 2026. Setting out her budget in December, finance secretary Shona Robison pledged more support for business and extra measures to increase inward investment. These include £200m for the Scottish National Investment Bank and £320m for enterprise agencies to attract companies and support expansion.

And yet while the investment was welcomed, no one was under any illusions that it would drive the sort of growth needed to revitalise the economy. 

“Ultimately, the only way to improve public services and raise living standards is to help firms thrive and deliver growth,” said Tracy Black of the CBI. “That’s why we need business and government to work together to co-create policy that protects Scotland’s competitiveness and avoids short-changing our long-term growth ambitions.”

The Institute for Fiscal Studies (IFS) called the budget a “missed opportunity” for delivering growth, accusing the government of having a less than coherent strategy on tax, including council tax and business rates. It welcomed the clarity given to taxpayers on the decision not to increase the top rate but said ruling out any increase in income tax would “severely limit” the government’s options. Indeed, extra money will need to be found from somewhere if the Scottish Government is to offset the impact of the two-child benefit cap, an unwelcome leftover of Tory austerity which the Scottish Fiscal Commission has said will cost around £200m a year to scrap. 

On income tax, Scotland’s growing divergence from England has been the subject of much debate in recent years. Last year the government introduced a new ‘advanced’ rate of 45 per cent on incomes between £75,000 and £125,140 and increased the top rate to 48 per cent. The SNP says the tax regime is “progressive” and many Scots are no doubt happy to pay a little more for improved public services. But organisations such as the IFS have warned that the higher tax rates could encourage the biggest earners to leave the country or at least discourage those who might have moved from elsewhere in the UK.

While the government has previously said there has been no overall impact to net migration, concerns about further tax rises have been aired by none other than the deputy first minister. Speaking last year before the budget was delivered, Kate Forbes said the government had to do everything it could to “guarantee income”. “It’s very easy to move. It just is, very easy to move. So we have to take into account the behavioural impact also,” Forbes told delegates at the SNP conference. 

While the service sector makes up the biggest part of the overall economy, revenues from North Sea oil and gas continue to be important. Although its value to the economy fluctuates, oil and gas has accounted for around 10 per cent of Scotland’s GDP in recent years. Despite the future of the offshore industry becoming a flash point between the SNP and Labour in the run-up to last year’s election, there is a general acceptance that Scotland – and the UK as a whole – must move beyond oil and gas if commitments to net zero are to be met. 

Former prime minister Rishi Sunak granted hundreds of new drilling licences in 2023, a move criticised by then first minister Humza Yousaf. The Labour government has pledged not to issue any new licences but has also said it won’t revoke those already granted. Shortly after coming to power in the summer, the new government confirmed it would not contest a legal challenge brought by campaigners against consent being given to drill in the untapped Rosebank and Jackdaw fields. 

However, the debate over the North Sea’s future has recently been reignited by Trump, who called the UK’s energy policy a “very big mistake”. “The UK is making a very big mistake. Open up the North Sea. Get rid of windmills!” Trump said in a post on his social media platform Truth Social. The owner of an Aberdeenshire golf course, Trump has tilted at windmills before, famously telling a Holyrood committee, “I am the evidence”, when he appeared before MSPs to speak out against offshore wind. 

Last week President Joe Biden, in one of his final acts in the White House, announced a ban on new oil and gas exploration off most of the US coastline. The decision is seen as largely symbolic and it will not impact exploration already underway off the coast of the world’s largest producer of oil and gas. The president-elect, who will be inaugurated next week, has already said he will reverse many of Biden’s environmental measures. 

One major hit to the Scottish economy due to take place later this year is the closure of the Grangemouth oil refinery. Owner Petroineos announced last year that it will close the refinery with the loss of 400 jobs by this summer. The company said the decision would “safeguard fuel supply for Scotland” by converting the site into a terminal able to import petrol, diesel, aviation fuel and kerosene but would require a workforce of fewer than 100 employees. The plant, which accounts for about 14 per cent of the UK’s overall refining capacity and supplies almost two-thirds of demand for refined oil products in Scotland, is estimated to provide around £400m in gross value added (GVA). 

The year ahead looks fraught with challenges, both political and economic, with growing disenchantment from those who for too long have seen their earnings fail to keep pace with the cost of living. Much of Scotland’s growth will be predicated on whether the UK can finally emerge from its economic slump. Just don’t hold your breath.