The State of Britain

Scottish growth surpasses most parts of the UK, the lack of accurate data hampers the deployment of devolved powers and zombie firms causing economic drag

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Growth in Scotland increased by 0.3% to 2.0% in the year to March 2019 according to estimates from ESCoE. At 2.7% and 0.7% London and Northern Ireland had the highest and lowest growth rates in the country respectively. The East of England was the most improved region of the UK with growth accelerating from 0.9% to 1.9%. The UK growth rate for the same period was 1.5%.

Unemployment in Scotland fell by 7,000 to 89,000 between January and March, a drop of 0.2% to 3.2%. At 2.4% and 5.4% the SW of England and the North East had the lowest and highest unemployment rates in the country respectively. The UK unemployment rate stands at 3.8%.

In March, average earnings in Scotland fell to £586 per week. London had the highest average earnings of £762 whereas Northern Ireland had the lowest of £513. In the UK average earnings grew by 3.3% or by 1.5% after inflation.

Scottish average property prices increased by 1.9% to £149,461 during the month which meant annually prices grew by 3.3%. In comparison UK prices dropped by 0.2% to £226,798 during March which cut the annual growth rate to 1.4% although transactions were up by 1.4%.

In its estimate of regional public spending and regional tax revenues in 2018, the ONS concluded that Scotland had a deficit of £13.3bn. This compares with London which had the highest surplus of £34.3bn. On a per person basis the Scottish deficit was £2,452, whereas London had the highest surplus of £3,905 per person and Northern Ireland had the biggest deficit at £4,939. The only areas of the UK to run surpluses were London, the South East and the East of England. At a national level, the UK had a deficit of £636 per person which split into deficits of £106, £2,452, £4,395 and £4,939 for England, Scotland, Wales and Northern Ireland.

The figures above show the importance of accurate data in the Scottish independence debate as Unionists question how Scotland’s deficit of £13.3bn – which increases to £14.6bn on a population rather than geographical basis – would be funded. The importance of obtaining the correct data is highlighted by the Scottish government’s likely decision to delay plans for its budget to include a 50% share of Scottish VAT revenues. It has been estimated that c£6bn of VAT revenues could have been assigned under the Scotland Act (with a corresponding cut in the Westminster block grant), and would reflect an uplift in revenues to the Scottish budget if Scotland’s economy performed well. But because businesses are not required to report separate VAT returns for sales made in Scotland, and the potential cost and burden of making them do so would be significant, accurate data is not available.

Also on devolved powers, Scottish ministers’ plans to set up a devolved air departure tax (ADT) which would immediately cut the levy by 50% have been scrapped. The Scottish Parliament was given powers to charge tax on passengers leaving Scottish airports under the Scotland Act, which came into force in 2017. The Scottish government had wanted to reduce air departure tax by 50% before eventual abolition, but after the First Minister hailed a climate emergency at last month’s SNP conference the policy became untenable. A report by Edinburgh airport predicted that halving the departure tax would create almost 4,000 jobs and add £1bn to the Scottish economy. The report claimed that failing to cut the tax could see Scotland lose out on nearly a million passengers every year. APD raises c£300m in Scotland and £3bn across the UK every year.

Accountancy firm KPMG has found that 9% of Scotland’s companies are zombie firms, suffering from static or falling turnover, low profitability, squeezed margins, high debt levels and a limited ability to invest. In Scotland, it found the highest concentration of zombie firms were in the education sector (29%), followed by mining and extraction (26%), real estate (22%) and automotive (21%). Historically low interest rates allow such firms to survive and cause drag on the economy, preventing economic resources being deployed to more productive firms which can contribute growth. According to KPMG, Scotland had more zombie firms than other parts of the UK.

If zombie firms will not invest then hopes that consumers will keep spending were buoyed by retail sales in Scotland, which increased by 4.4% compared with a year ago – when the run-up to Easter fell in March. This year’s Easter weekend helped to lift food sales by 8.6%, while non-food sales rose year-on-year by 0.8%. Despite this a record number of Scottish shops folded in the first three months of the year. A total of 28 retailers were made insolvent over the period, compared with 68 recorded for the whole of 2018 according to analysis by business advisers French Duncan.

In a vote of confidence in the Scottish economy, Alexander Dennis, the world’s largest producer of double-decker buses, and one of the country’s biggest manufacturers, has been sold to a Canadian firm for £320m. The firm employs c1,000 workers near Falkirk. In a £80m order, Stagecoach will buy 351 greener buses of which more than 300 will be built by the Falkirk firm and its subsidiary Plaxton.

The next phase in Cumbrian nuclear reprocessing plant Sellafield’s 100 year decommissioning programme was announced with the award of a £770m contract to Aberdeen-based engineering services firm Wood Group. The Group will act as design and engineering partner for the Cumbrian site over the next 20 years.

Lloyds Banking Group has announced plans to create 500 high-skilled jobs at a new digital tech hub in Edinburgh. The bank has started recruiting software engineers and data scientists for the hub, which will be based at its Scottish Widows’ headquarters. The new roles will be phased in over the next 18 months.

A veterinary services provider, CVS Group, will invest in a veterinary referrals hospital, small animal practice and specialist pathology laboratory in West Lothian, creating up to 110 jobs. The 30,000 sq ft facility will be adjacent to Livingston Trade Park. CVS owns more than 500 veterinary surgeries in the UK, Ireland and the Netherlands, including 17 branches in Scotland.

Edinburgh-based Tesco Bank said 20 of its staff may be affected by the decision to close its mortgage business. A further 140 staff in Glasgow employed by outsourcing firm Capita may also be affected. In Selkirk, RP Adam, which has operated in the region for nearly 130 years and was bought by US-based Ecolab in 2017, has decided to shut the Borders plant, with the loss of 48 jobs. In Dalkeith, IT firm Hutchinson Networks Ltd has gone into administration with the loss of 94 jobs.

On interventions, the Scottish Government has granted £1m to contact centre firm VeriCall to create 209 jobs in Kirkcaldy. In Inverness, work to transform Inverness Castle into a tourist attraction has got underway with the appointed of a project director and architects. The project is part of the joint UK/Scottish Government £315m Inverness and Highland City-Region Deal.