The State of Britain

An improvement in Scotland’s finances but the deficit still 7% of GDP and 1970s style interventions on the Clyde

Reading Time: 4 minutes

Growth in Scotland was 1.4% in the year to June 2019, which ranked the country sixth (out of twelve UK ‘regions’) according to estimates from ESCoE. The slight drop from the previous quarter’s growth of 1.5% suggests the economy is contracting. London had the best performance nationally at 2.3% with Northern Ireland at 1% the worst. The national growth rate for the same period was 1.5%. With the UK economy contracting by 0.2% in the quarter, falling growth in Scotland reflects this and is similar to other regional economies which have also shrunk.

Unemployment in Scotland increased by 12,000 to 102,000 between April and June, an uplift of 0.4% to 3.6%. The South West had the lowest unemployment rate at 2.7%, the North East had the highest at 5.3%, with the UK rate at 3.9%. The South West also had the highest employment rate at 80.5%, which compared with Scotland’s at 75.4%; the UK rate at 76.1% is the joint highest since comparative records began in 1971.

In June, Scotland’s average earnings increased from £586 to £601 per week. London had the highest average earnings of £831; the North East had the lowest at £537. In the UK average earnings grew by 3.7% or by 1.8% after inflation.

Scotland’s average property price increased during the month, the 0.7% rise to £151,891 meant annually prices increased by 1.3%. In comparison, UK prices grew by 0.7% to £230,292 during June which left the annual growth rate unchanged at 0.9%.

Scotland’s public spending deficit has fallen by a further £1.2bn over the past year, according to Scottish government statistics. The Government Expenditure and Revenue Scotland (‘Gers’) estimated the country spent £12.6bn more on public services than it raised in taxes. This is lower than the £13.8bn deficit estimated for the previous year, and is equivalent to 7% of Scotland’s GDP. The UK as a whole has a deficit of £23.5bn – or 1.1% of its GDP.

FirstGroup and Italian firm Trenitalia, are to take over the running of the West Coast Mainline (‘WCM’) train route, connecting Scotland to London, from December, replacing Virgin Trains, which was barred from bidding. The new contract will operate in two phases. The first will run from 8 December to March 2026, when First Trenitalia will operate the existing InterCity West Coast services. The second phase will run from March 2026 to March 2031, when it will operate the HS2 high-speed rail service. Given the HS2 project has been put under review, this may have to be changed even before First Trenitalia starts operating the trains. The firm said its £117m investment would mean 56 Pendolino trains refurbished, more reliable free Wi-Fi, better catering, and more than 260 extra services each week by 2022. FirstGroup also operates the South Western Railway and TransPennine Express. TransPennine Express is Virgin’s only competitor on most of the northern part of the West Coast mainline. Virgin’s WCM partner, Stagecoach – which refused to take on pensions risk – has won the right to a judicial review of the decision to block it from bidding. Unlike other franchises, Virgin is consistently rated highly by Scots travellers. In the latest National Rail Passenger Survey, of the 25 operators in the country, it was ranked second.

The Scottish Government’s fondness for 1970s style interventions has continued. The Ferguson shipyard in Port Glasgow – which employs 300 people – has been nationalised and Ministers will now operate the yard under a management agreement with administrators Deloitte. The status of two taxpayer loans to Ferguson Marine, totalling £45m, is unclear, as are the EU state aid implications of a Government building ships with public funds. Bought by industrialist Jim McColl in 2014 just prior to the independence vote, the yard’s demise has been largely caused by a £97m deal for two CalMac ferries which are behind schedule and about £40m over budget.

An earlier intervention into the renewable energy sector has continued to unravel. The Scottish government loaned BiFab £19m then converted this into shares as losses mounted. Audit Scotland has ruled this equity stake is now only worth £6m. BiFab, an engineering firm, builds large-scale equipment for the offshore oil and gas industry, as well as platforms for offshore wind turbines and tidal generators. Since 2013, Scottish Ministers have also been in the airports business. Taxpayers are unlikely to recover any of the £38.4m they have shelled out to keep Prestwick airport afloat.

A report by an All-Party Parliamentary Group (‘APPG’) of MPs which looks at Post-Brexit Funding for the nations and regions has found that the UK would receive additional EU funding in the 2021-27 spending round. Three additional sub-regions, Lincolnshire, South Yorkshire and Tees Valley & Durham are likely to slip below the threshold of 75% EU average GDP per head that would qualify them for ‘less developed region’ status, but no part of Scotland has yet fallen below this level.

Additionally, the EU has proposed that ‘transition region’ status should be extended to cover all regions with a GDP per head between 75-100 per cent of the EU average, compared to 75-90 per cent at present. Seven additional sub-regions are likely to slip below the threshold of 100% EU average GDP per head, qualifying them for ‘transition region’ status. South Western Scotland falls into this category, as well as East Wales, East Anglia, Greater Manchester, Leicestershire, Rutland & Northamptonshire, Outer London South and North Yorkshire. It is not clear how much extra funding these areas would have received from the EU, but €50 per head over the next EU spending round would equate to £560m.

The UK government has promised to replace EU funding to the regions with a new UK Shared Prosperity Fund. If the new sub regions are added, the APPG calculates this amounts to c£1.8bn pa, on top of the c£2.2bn pa already committed as part of Local Growth Funds (in England). Integrating the Local Growth Fund into the UK Shared Prosperity Fund could be problematic. The Local Growth Fund allocates funding to LEPs via competitive bidding whereas the allocation of EU funds uses a fixed formula. How the Shared Prosperity Fund will be allocated to Scotland and the other devolved nations, and mesh with other pots like the City Deals is yet to be determined.

Go to businessman Lord Smith of Kelvin has been appointed chairman of Scotland’s main economic development agency, Scottish Enterprise. Lord Smith is one of Scotland’s most experienced boardroom bosses, with previous roles as chairman of Weir Group and SSE. He also led the Smith Commission into further devolution of more powers from Westminster to Holyrood, which culminated in the Scotland Act 2016. The agency has around 1,100 staff based in 14 offices across the UK and a further 33 overseas offices, and a c£250m budget.