Scottish Economy Watch

Are the new jobs as good as the old?

The latest labour market data for Scotland, which were the subject of yesterday's post allow us to examine the type of jobs that are on offer, or are being taken up, in current conditions.

The chart below shows where we are.

 

In general terms, what we see is a shift since the recession away from full-time, permanent, employees, towards, part-time, temporary, and self-employment.

By the middle of last year total employment was back to its pre-recession peak, yet the shift appears to be enduring. That is not wholly accurate, though, since it is clear that full-time employment is recovering. But we cannot be certain it will automatically move back to pre-recession levels.

The growth in temporary and self-employment is large in percentage terms but small in absolute numbers: an increase of 19,000 and 33,000 respectively since the start of the recession. While some might argue that the growth in self-employment is an indication of greater entrepreneurship in Scotland, I doubt it. Many of these self-employed jobs appear likely to be more 'needs must' for people who have lost full-time jobs. The growth of temporary jobs suggest high levels of certainty exist amongst employers but it may also be something of a reflection of a developing 'zero hours' culture.

So. all of this begs the question: are the new jobs as good as the old?

Jobs and unemployment in Scotland and the UK

Following the release yesterday (18 February) of the latest labour market statistics the Deputy First Minister and Cabinet Secretary for Finance, John Swinney, is reported as claiming that:

"Scotland is outperforming the UK on all three headline labour market indicators with employment continuing to increase and unemployment down …."

While this is true if you simply focus on recent levels and changes in employment and unemployment, it is not true for the Scottish labour market if one takes the period from the Great Recession in 2008 and subsequent recovery.

The latest labour market data published on Wednesday provide information up to the end of last year: October – December to be specific.

Chart 1 shows that by Oct-Dec Scottish jobs as reported in the LFS household surveys were 2.4% above the pre-recession peak, but UK jobs were 4.0% higher than the peak. So, despite the good recent performance of the labour market in Scotland overall jobs performance in the recovery continues to be worse than the UK and as noted below, there appears to be more 'slack' in the labour market in Scotland compared with the UK.

An indication that there is still a deficiency of demand in the Scottish labour market in relation to the situation before the recession is provided by data on the number of weekly hours worked. Chart 2 graphs this statistic from 2007 for the total weekly hours worked compared to the pre-recession peak for Scotland and the UK.

By the period October 2013 – September 2014, the number of total weekly hours worked in Scotland was still -1.0% below the pre-recession peak. So despite the number of jobs being higher than before the recession, the demand for labour as measured by hours worked is still lower.

Finally, not only is the demand for labour in Scotland still lower than pre-recession but demand - measured in terms of jobs - is still considerably deficient when compared to the supply of labour. Chart 3 shows the employment to population (aged 16 and over) ratio relative to pre-recession peak for Scotland and the UK to October - December 2014.

By October - December 2014, the ratio stood at -2.1% below the pre-recession peak, compared to -6.7% at the trough of the recession. In the UK as a whole, in contrast, the ratio is only +0.7% above its pre-recession peak.

All of this suggests that while the jobs market has recovered substantially, the recovery has been weaker in Scotland both in relation to the situation before the recession and in relation to the growth of labour supply. In the UK, in contrast, a strong jobs recovery is evident compared to the situation before the recession and the recovery has just managed to keep pace with the growth of the labour supply. We might venture to suggest from the data in Chart 3 that sustained pressures on wages to rise should be starting to occur in the UK, but not so in Scotland.

This conclusion is also echoed in the unemployment rate data as shown in Chart 4.

While the unemployment rate is currently lower in Scotland, at 5.4% compared to 5.7% in the UK, the UK rate is approaching its pre-recession rate of 5.4%, whereas there is still some 1.2% points to go before that situation is reached in Scotland.

So, let us cheer the good news that jobs are being created and unemployment is falling but let us not fall into the trap of ignoring the particular problems of rapid job loss, unemployment increase and a recovery biased towards part-time, adult employment that befell the Scottish labour market over the earlier period of recession and recovery.

Scotland’s Recovery in the Short and Long Run

On November 12^th, we published our latest Fraser of Allander Institute Economic Commentary, - sponsored by PWC. On the same day, the Scottish Government published its quarterly accounts for the second quarter under the Scottish National Accounts Project (SNAP). The Commentary, therefore, could only analyse the drivers of Scotland's economic recovery up to and including the first quarter of this year, drawing on the previous SNAP publication in August.

The latest SNAP data allow us to extend the analysis to the second quarter and take account of revisions to GDP and its spending components in previous quarters. We include below a chart that updates Figure 18 on page 20 of the latest Commentary.

In the Commentary we concluded that elements of a balanced recovery were starting to fall into place, investment was picking up, reinforcing the continuing growth of household spending, while the balance between exports and imports – net trade – continued to be a drag on the economy.

The latest data reinforce that conclusion.

In the second quarter, nominal GDP grew by 1.3%. The main driver of growth was Gross Capital Formation or more loosely investment, contributing 1.95% points to growth, followed by household spending, contributing 0.68% points, and general government spending, contributing 0.28% points. Superficially, if imports had been balanced by exports nominal GDP growth would have been the sum of those three components, or 2.91%. Unfortunately, net trade (exports minus imports) was strongly negative, contributing -1.64% to growth.

Looking back over the previous 4 quarters it is quite clear from the chart that investment has played a stronger role in driving growth than the earlier data implied. Some of this clearly reflects construction spending on major projects such as the second Forth road crossing and it remains to be seen whether companies right across the economy are raising their investment spending. The positive contribution to growth of household spending is evident for 4 of the 5 quarters, although the contribution to growth is a little less on the revised data.

None of this diminishes our warning in the latest Commentary that the economy needs more investment and that government should play a key role by undertaking major infrastructure projects funded if necessary by debt rather than cuts in public spending in other areas. The weakness of Scotland's international trade position in fact reinforces the case for more investment both in the short and long run.

In the short-run there is still the need for strong investment growth to boost demand. Firstly, to offset the drag on the economy as the growth of imports continues to run ahead of the growth of exports, and secondly, to offset the expected slowdown in the growth of household demand as household debt rises and household incomes stagnate with little or no growth in real wages.

However, it is in the long run that the need for strong investment in the economy is even more pressing to improve competitiveness and overcome our weak international trade position. There is little doubt that Scotland's net trade position – excluding North Sea oil – is weak. From the latest SNAP data we can chart net trade as a percentage of GDP going back to 1998 and this is presented in the chart below:

Over the period the trade deficit has averaged just over 7% of GDP. As part of the UK union Scotland has received compensating fiscal flows with the fiscal deficit roughly mirroring the trade deficit, although a proper accounting balance would require the inclusion of net income from abroad to complete the balance of payments picture. An independent Scotland, in contrast, would have oil sales added to its trade account and these probably roughly balance the non-oil fiscal deficit.

The problem for Scotland in the future is that oil sales and oil tax revenues are declining. An independent Scotland would find it unsustainable to borrow to meet the loss of oil revenues and so would either have to cut public spending significantly or find new sources of tax revenue. Probably, the best solution would be to seek ways to raise the rate of growth of the economy generating tax revenues in this way. However, given the openness of the Scottish economy probably the only sustainable way to do this is to boost export performance significantly. Boosting domestic consumption and demand would almost certainly lead to imports being sucked in that would stall the growth process replicating the traditional UK experience of "stop-go".

The problem does not, however, go away if Scotland continues as part of the UK union. Under the new devolution arrangements that are coming into place while Scotland will not be assigned oil revenues, the decline of oil will have indirect effects on Scottish incomes, which will lower income tax yields here. And as I have argued above, higher and sustainable future income tax revenues are probably best achieved through increased growth that is export led. Moreover, from a political standpoint given that the Barnett formula remains in place for the residual portion of Scottish government revenues that are not raised locally, the pressure from Westminster to abolish Barnett and encourage greater Scottish fiscal autonomy seems likely to increase as oil revenues diminish.

So Scotland needs to boost its export performance. The Scottish Government's Programme for Scotland 2014-15 One Scotland recognizes the need for the Scottish economy to internationalise in Para 113:

Encouraging a greater international focus among Scottish businesses is a fundamental part of rebalancing of the Scottish economy, and delivering sustainable economic growth over the longer term. With this in mind, the Scottish Government has set an ambitious target for export growth, to increase the value of international non- oil and gas exports by 50 per cent by 2017.

This is an ambitious target. One might go further and suggest that without a systematic strategy to rebuild Scotland's non-oil export base there is little if any likelihood of policy raising the real value of exports in ten years never mind in two and a half years by 2017.

There is little in One Scotland to suggest that the Scottish Government has such as strategy; a subject that I shall return to in later posts.

Fraser of Allander Economic Commentary – 12 November 2014

 

Overview

• In the latest Economic Commentary we note that in the first half of the year the Scottish economy delivered strong economic growth, increased job creation and falling unemployment.

• However, there are signs that growth may be beginning to slow. Growth in the wider global economy and the UK economy appears also to have begun to slow recently.

• There are fears that the global economy faces a situation of secular stagnation, a permanent deficiency of demand, which can’t be overcome even with near-zero interest rates.

• The recent indicators of slowing demand both at home and abroad, falling real wages, rising levels of household debt, the prospect of more substantial UK fiscal austerity to come, and the deeper concerns about secular stagnation raise several questions.

• Questions that can be posed but cannot be definitively answered, such as whether the Scottish and UK economies are now poised for a period of slower but sustainable growth, or whether growth will slow and then slip back into recession? Are we at a turning point or are we on a knife-edge?

Output

• The latest Scottish GDP data for Q2 2014 show that Scottish GDP rose by 0.9% in the quarter, much the same as in the UK.

• Over the year to the fourth quarter - four quarters on the previous four quarters - Scottish GDP grew at 2.4%, a growth rate that is above trend.

• In the second quarter, GDP in Scotland was +1.1% above its pre-recession peak. Because of changes to accounting practices in the UK, which have yet to be introduced in Scotland, we do not have comparable UK data to Scotland in the second quarter. So, up to the first quarter of the year UK GDP was still -0.6% below its pre-recession peak compared to +0.2% in Scotland.

• The overall strength of the recovery has, nevertheless, been stronger in the UK than in Scotland because the depth of the recession was greater in the UK. By 2014q2 Scottish GDP had grown by 6.9% since the trough of the recession compared to 7.3% in the UK to the earlier quarter 2014q1. Jobs and Unemployment

• With the signs that the growth of productive activity may be slowing, we note also the strong performance of the Scottish labour market in recent months, with 52,000 jobs created over the year and unemployment on the ILO measure falling to 151,000 or 5.5%.

• However, despite the strong recent ‘headline’ recovery in the labour market, we are still some way from the conditions that maintained prior to the start of the Great Recession.

• Much of the recovery in jobs has been driven by the growth of part-time and self-employment.

• However, there is still slack in the Scottish labour market:

• full-time employment remains considerably below its pre-recession peak, although there has been some pick up in recent quarters;

• the total number of average weekly hours worked is at the latest data point -2.4% below the pre-recession peak;

• and, the employment to adult population ratio in June-August 2014 stood at -1.5% below the pre-recession peak, compared to -5.7% at the trough of the recession.

Drivers of the recovery

• Elements of a balanced recovery are falling into place.

• Household spending is continuing to make a positive contribution to growth but its underling determinants remain weak.

• The net (international) trade position has been consistently negative in the last three quarters.

• With a weakening global market the prospects that external demand will serve to sustain growth appear unlikely. Hence the prospects for sustained investment spending would appear to depend on the growth of domestic demand and household spending in particular.

• Investment is recovering, but only slowly prompting the International Monetary Fund (IMF) to urge Governments to undertake increased public infrastructure investment. Such investment the IMF argued raises output in both the short and long term, particularly during periods of economic slack and when investment efficiency is high.

• So, in countries with infrastructure needs, it considered the time was right for an infrastructure push as borrowing costs are low and demand is weak. Debt-financed projects could have large output effects without increasing the debt-to-GDP ratio, if clearly identified infrastructure needs are met through efficient investment.

• The IMF notes that the estimated quality of UK infrastructure overall has been improving in recent years but still remains below that of the major advanced countries - Germany, France, Japan and Canada.

• The UK Government appears to agree since at the time of writing it is unveiling plans for £15bn of new infrastructure projects this week to make it “easier than ever” to invest in the UK. Such public investment is to be welcomed.

• However, we contend that in the light of slowing growth, the risks of secular stagnation, the need to boost competitiveness, net trade and inward foreign investment, that there is strong case that Government, and the UK Government in particular, should borrow to invest more in infrastructure in and for Scotland.

• For example, more needs to be done to improve the infrastructure of road and rail, especially, between Scotland and the UK. Raising the borrowing levels available to the Scottish Government would also help to support and encourage its own plans for infrastructure investment within Scotland.

• An expanded programme of public investment would appear to be essential when the real volume of private investment continues to be below pre-recession peak levels in both Scotland and UK, even though private investment has picked up in recent quarters. And the investment should be funded by debt not by cutting current spending or other capital spending.

Forecasts

• We are now forecasting GDP growth in Scotland of 2.7% in 2014, 2.2% in 2015, and 2.1% in 2016.

• We have therefore revised up our forecast for 2014 from 2.5% to 2.7% due to the strong growth in the first half of the year. We have held our forecast for 2015 at 2.2% but have revised down our forecast for 2016 from 2.4% to 2.1% in the light of concerns about secular stagnation and a persistent weakness of aggregate demand.

• Production and manufacturing continue to be the major sectors exhibiting the fastest growth in 2014, 2015 and 2016.

• Our forecasts for employee job creation and unemployment are similar to June 2014, with some revisions. On the central forecast, we are now forecasting that net jobs will increase by 46,560 in 2014, 41,600 in 2015 and 48,900 in 2016.

• Our projection for unemployment on the ILO measure at the end of 2014 falls to 124,700 (5.3%). In 2015, unemployment is now forecast to fall slightly to 5.2% but to increase in terms of numbers to 141,019 as the workforce increases. Falling again, to 135,537 (5.0%) by the end of 2016.

 

Scottish Jobs and the World Economy

In an earlier post I sought to establish the number of jobs that could be said to depend on economic links with the rest of the UK (rUK). That work suggested that almost 1 million jobs – 962,000 – were linked to the UK through rUK owned firms operating establishments in Scotland, exports to rUK, and through the jobs linked to the UK public sector, UK grant support and UK government purchasing contracts.

In this post I seek to establish the jobs in Scotland due to the Scottish economy's integration with the world economy, including integration with rUK: the globalisation effect if you like.

Method

In seeking to achieve this I ignore links via the public sector and focus largely on the private sector, with the exception of education, which has to be included because of its significant export activities. I again use the Scottish Government's input-output tables for 2009 but use 2014 workforce data for export jobs and 2013 data for jobs in rUK and foreign owned firms. As with the earlier post, I make an adjustment to remover the overlap between non-Scottish owned activities that are also exporters. Finally, I estimate secondary effects differently. In the present work I include only the domestic jobs that are the consequence of the indirect domestic supply links to the non-Scottish owned and exporting firms. (Technically, the Type 1 multiplier relation). I therefore ignore the potential further boost of the secondary spending in the Scottish economy due to the additional incomes generated by the non-Scottish links. But, in so doing I also ignore the favourable competitive price effect of the price and wage adjustments that would see domestic activity increase to some extent as non-Scottish activity reduced. The scale of these last two effects is much less certain, while the indirect supply link is more robust. The estimates are therefore slightly more conservative – lower - than in my previous post.

Estimates

Table 1 Scottish Jobs and Globalisation

Type of Job	Direct	Indirect	Total
rUK owned firms	313,000	138,000	451,000
rOW owned firms	286,000	114,000	400,000
Exports to rUK	283,000	125,000	408,000
Exports to rOW	100,000	40,000	140,000
Total	982,000	417,00	1,399,000

The estimates for each category are included in Table 1 above. So, about 1 million jobs are directly linked to the global economy outside Scotland and a further 400,000 are generated through supply links as local firms supply the exporters and the non-Scottish owned firms based in Scotland.

Total Scottish employment minus the public sector (Administration and Health but including education) is 2,113,000, hence the percentage of total 'private' sector employment in Scotland due to globalization, or external links, is 66% or two-thirds. Interestingly, about 40% or 859,000 jobs are dependent on trade and ownership links to the UK, while the remaining 26% are linked to the wider world economy.

In conclusion, the Scottish economy is significantly linked into the world economy with around two-thirds of jobs dependent on such links. Moreover, it is trade and ownership links to the rest of the United Kingdom that dominate these global links with the number of dependent jobs more than one and a half times greater than those linked to the rest of the world.

Scottish GDP Growth in the first quarter 2014

The strong growth demonstrated in the latest GDP figures for Scotland is clearly to be welcomed. Welcome too is the attainment of the pre-recession peak, finally, after six years.

However, what has pulled me out from under the olive trees and the hot Tuscan sun to write this blog is the reporting of the latest data by the UK and Scottish media. I have no desire to talk the Scottish economy down, but a lot of the comment by politicians in the media reports is not supported by the evidence.

The key point is the data do not show that the Scottish economy is growing faster than the UK economy as a whole. Yes, Scottish GDP growth was 1% while UK GDP growth was 0.8% in the first quarter, but the stronger Scottish performance was very much due to the Grangemouth effect as the plant came back on stream in the first quarter after being shut down for a period due to the well-reported dispute in October of last year. In the fourth quarter, UK growth was 0.6% while Scottish growth was only 0.2%, again the difference in favour of the UK was largely due to the effect of Grangemouth.

If we compare Scottish and UK growth since the third quarter of last year we see Scottish growth averaging 0.59% per quarter over the two quarters while UK growth is faster at 0.73% per quarter.

Nor is it reasonable to crow, as John Swinney is quoted as doing, that Scotland has attained its pre-recession peak one quarter earlier than the UK. This may be correct but it says nothing about the relative Scottish recovery from recession because it fails to take into account that the depth of the recession was much greater in the UK than in Scotland. UK GDP fell by -7.4% in the Great Recession while Scottish GDP fell by -5.6%. In the light of these figures the UK recovery has still been faster than the Scottish recovery.

The moral is: don't just listen to politicians look at the data!

No sign of growth in new business, or is there?

 

The latest Scottish new business statistics published by the Committee of Scottish Bankers (CSCB) today continues to show little sign of a pick up in new businesses in Scotland. I have graphed the latest data in the following chart:

Despite the recovery, the number of new businesses continues to fall. This should clearly give us food for thought. However, as I noted here, the CSCB data appear to conflict with the VAT registrations data, which are a trqditional proxy for new firms. Unfortunately, the VAT data are available only on an annual basis to 2012. A comparison of the two series is shown in the next chart:

The VAT data show a slight upward trend since the trough of the recession in 2009, whereas the CSCB shows a downward trend. In addition the VAT data show the a trend rise in the Scottish share of UK VAT registrations since 2004 which peaked in 2010 at 6.60% but has fallen since to 6.45% in 2012. The historic problem with the business birthrate in Scotland is still evident since we are still adrift of a population share of 8.3%.

And the CSCB data?

Maybe the data are too partial since they cover new business opening accounts with the main banks. Perhaps Scottish new firms are increasingly using using other banks and sources of finance: hence the continuing downward trend in the data despite recovery.

Scottish Jobs and the UK

Some time ago someone asked me in the context of the referendum debate: "How many jobs in Scotland depend on links with the UK?" I said: "I don't know but I can attempt to find out. But the harder question is determining how many of these jobs might be at risk if Scotland chooses to become independent."

So in a later post I shall look at the jobs in Scotland that can be said to be dependent on the UK.

In the next post I shall try and make an assessment of which and how many of those jobs might be at risk through the process of Scotland became politically independent.

Jobs dependent on the UK

We can identify 5 broad categories of jobs that depend on the UK in some sense. These are jobs in:

• Rest of UK owned/controlled companies
• Companies exporting from Scotland to the rest of the UK
• The reserved public sector, less financial institutions in current UK state ownership
• UK public sector contracts for Scottish companies, especially defence
• Scottish R&D in the HEI sector financed by UK grants

These jobs we can call the direct jobs dependent on the UK. But there are also further jobs that depend on the jobs that are dependent on the UK. These are the secondary jobs in local companies supplying the direct jobs in one or more of the above categories. They are obtained technically by applying Type 2 Employment multipliers at the appropriate sectoral level using the Scottish Government's input-output tables.

The grand table with source links and descriptions of the calculations is presented below

Source: Own calculations using the following

(1) http://www.scotland.gov.uk/Topics/Statistics/Browse/Business/Corporate/alltables Table 3

(2) BIS calculations based on Scottish Input-Output tables 2009 data, retrieved May 2013, http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/Input-Output/Downloads and http://www.scotland.gov.uk/Topics/Statistics/Browse/Labour-Market/BRES-Employee-Jobs-Sco

(3) http://www.scotland.gov.uk/Topics/Statistics/Browse/Labour-Market/TrendPublicSectorEmp

(4) http://ukdefencejournal.org.uk/what-impact-would-independence-have-on-scotlands-defence-industry/ 75% of jobs assumed to depend on MOD spending

(5) 9,034 research staff: active academics plus research fellows and assistants equals 12.1% of UK total. Assume at a minimum without UK R&D grants Scotland would have a UK population share at 8.3% - Source: http://www.universities-scotland.ac.uk/uploads/briefings/Research%20facts%20and%20figs(2).pdf

(6) Derived from 2009 Scottish Input Output tables by aggregation to appropriate sector http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/Input-Output/Downloads/IO1998-2009All

 

The source spreadsheets for these calculations can be accessed here: Download Business in Scotland 2013. Download Jobs in Sco-ruk exports 2009  Download Scottish I-O tables 1998-2009

Now this table must be viewed with great care.

First, there will be some, probably quite a bit of, overlap between at least two of the categories of direct jobs: in rUK owned firms and in companies exporting to rest of UK. Clearly, many jobs in rUK owned firms will be associated with export sales to rest of UK. We have no data for the overlap, so we take the share of employment that is in rest of UK owned firms in Scotland (18.7%) apply that to the estimated direct export jobs 247,000, giving 46,000, then reduce the jobs in rest of UK owned firms – 359,000 - by that amount. The adjusted – rounded - numbers are presented in Table 2.

Table 2: Scottish Jobs Dependent on UK adjusted for overlap

Type of Job	Direct	Secondary	Total
rUK owned firms	313,000	204,000	517,000
Exports to rUK	247,000	350,000	597,000
Other to UK	75,000	86,000	161,000
Total	635,000	640,000	1,275,000

 

There is a further problem with the estimates presented in Table 2: the estimated secondary effects are almost certainly too high. Where there is a large change in the demand for goods services, and labour in the economy prices and wages will adjust as well as output. In the event of a reduction in demand and loss of jobs prices and wages will fall and so the competitiveness of supplying firms will increase to partially offset the loss of demand. In our – the Fraser of Allander Institute's – analysis, in the June 2010 Economic Commentary,of the impact of cuts in the Scottish DEL under the austerity proposals of the new UK Government, a flex-price analysis led to a reduction in jobs which was about half – 51% - of the fall when prices were held fixed under the standard Input-Output multiplier approach.

Applying that adjustment uniformly across all categories to the secondary jobs in Table 2 we get Table 3

Table 3: Scottish Jobs Dependent on UK adjusted for price and wage change 

Type of Job	Direct	Secondary	Total
rUK owned firms	313,000	104,000	417,000
Exports to rUK	247,000	179,000	426,000
Other to UK	75,000	44,000	119,000
Total	635,000	327,000	962,000

 

So, with the adjustments in place, Table 3 tells us that almost 1 million jobs – 962,000 – depend on links to the rest of the UK. This is a clear indication, if anyone wanted one, of the extent to which the Scottish economy is integrated with the rest of the United Kingdom.

 

Fraser Economic Commentary - March 2014

Scottish economic growth continues to improve but the recovery could be threatened by imbalances in both the Scottish and UK economies according to our latest Economic Commentary sponsored by PricewaterhouseCoopers LLP. The recovery is being driven by household consumption, activity in the service sector and part-time and self employment. Growth is more likely to be sustained if there is an improvement in investment and net exports, in manufacturing and construction activity and in full-time employment. In addition, an increasingly unbalanced recovery across the regions and nations of the UK does not augur well for future growth.

GDP growth is forecast to be 1.7% in 2013; a further upward revision from our October forecast of 1.3%. For 2014 we have also revised up our forecast from the 1.8% predicted in October to 2.3%, while for 2015, we have revised the forecast up from 2.1% to 2.3%.

The forecasts for 2013 and 2014 are higher than in October because of better than expected outturn data on the growth of household spending, a pick-up in investment, improving trade conditions and increasingly optimistic business surveys. We are now predicting that growth will move above trend next year.

Projected net job creation is 31,450 in 2013, rising to 39,600 in 2014 and 42,800 in 2015. The majority of jobs created continue to be in the service sector. The unemployment forecast has been revised down further again from October, reflecting higher employment given the growth of output.

Unemployment on the ILO measure at the end of 2013 is now projected to be 195,000 (7.1%). By the end of 2014 unemployment is now forecast to be 179,900 (6.6%) falling further to 170,214 (6.3%) by the end of 2015 as growth in the economy strengthens.

Other Key Points

GDP Performance

• Positive growth has now been recorded for the Scottish economy in the last 6 quarters.
• In the third quarter, GDP in Scotland was -0.9% below the pre-recession peak, whereas UK GDP stood at -1.9% below its pre-recession peak more than 5 years ago. But during 2013, the UK recovery has again been stronger in each of the three quarters of published data so far.
• When oil and gas production is removed UK GDP - ex oil & gas - has a much stronger recovery from recession than Scottish GDP. Scottish GDP has recovered by 4.9% since the trough of recession while UK GDP - ex oil & gas - has recovered by 6.8% from its trough.
• At the industry level, Scottish services' growth is underperforming the overall performance of the economy in the recovery whereas that is not the case in the UK where the recovery in services has been somewhat quicker.
• It is the production sector that has boosted Scottish growth, growing by nearly 10% in the recovery while it has been a significant drag on the recovery in the UK with zero growth since the trough of the recession, which is partly a consequence of the weakness of oil & gas production on the UK production and GDP figures.
• It is the performance of manufacturing that is the main driver of the differential performance in production between Scotland and the UK. Scottish manufacturing GVA continues to stand at -4.6% below the 2009-09 pre-recession peak, while the figure for UK manufacturing has dropped slightly to -9% from -9.8% in the second quarter. The favourable gap between Scotland and UK manufacturing performance during the recovery therefore continues to be large.
• In Scottish construction while growth in the sector has picked up since the heavy recession period of 2010q4 to 2012q1 performance appears to have weakened relative to the UK from the start of last year. The sector is still very much depressed in both the UK and Scotland. However, the recent stronger performance of UK construction is evident with GVA in the sector standing in the third quarter at -10.9% below its pre-recession peak compared to -13.6% in Scotland.
• Business and financial services continue to contribute positively to the growth of the Scottish economy. By the latest quarter, the sector in the UK had moved to +1.3% above its pre-recession peak from -0.4% in the previous quarter, while its Scottish counterpart moved further ahead to stand at 2.2% above its pre-recession peak.
• Financial services, however, have contracted since the start of recession but have enjoyed a sustained recovery since the fourth quarter 2012. Some of this lost output may never return. This could still be the case despite the recent recovery in financial services. Moreover, with the recent RBS announcement that significant further cut backs in activity and jobs losses in the bank are to be expected the recent recovery in the sector may fail to be sustained.

Labour Market

• The latest labour market data provide further welcome evidence of an improvement in conditions in the Scottish labour market.
• The unemployment rate now stands at 7.1% compared to 7.2% in the UK.
• Scottish jobs are now -0.2% below their pre-recession peak, which continues to be worse than the UK, where the jobs total is 1.4% above the pre-recession peak. The greater gap between the UK's GDP and jobs position in relation to pre-recession peak compared to the position in Scotland suggests that productivity has fallen relatively more in the UK.
• But, the weak labour productivity position in both Scotland and UK is underlined by evidence which shows that increasing numbers of workers are taking part time employment in the absence of full time work.
• The employment 'recovery' continues to be driven by an increase in part time work and self-employment, although this may now be starting to moderate.

Policy Recommendations

• The Institute believes that there is no substantive reason why Government should accept this weak investment profile.
• In addition to increased UK government spending on capital investment, we contend that there is a strong argument for the Chancellor to introduce a programme of private sector investment incentives, such as accelerated depreciation, in his forthcoming Budget.
• Moreover, rising regional inequality in growth and income per head in the UK may threaten the recovery, which suggests that there should be differential regional investment incentives as well.
• In addition, the Scottish Government should consider raising the funding for its Regional Selective Assistance (RSA) programme and other investment funds administered by Scottish Enterprise.
• Of course adopting such incentives is a bit of a policy minefield because of the EU State Aid rules. However, the EU's General Block Exemption Regulation (GBER) allows for regional incentive programmes under certain criteria.
• Furthermore, academic evidence on the impact of regional policy in the 1960s shows that it works best when the national economy is expanding or recovering and firms are thinking about investing. So now would is the right time.

A Fiscal Dividend: UK Union or Scottish Independence?

The publication today of Government Expenditure and Revenue Scotland 2014 (GERS) provides information on Scotland's fiscal position in 2012-13 with revisions for earlier years. The document is obviously important since it is the last one in the series before the independence referendum on 18 September.

What is the prospective voter in the referendum to make of the figures contained in it?

Danny Alexander, Chief Secretary to the UK Treasury states:

The Scottish government's argument for independence has been undermined by their own figures. It shows that in 2012-13, the Scottish deficit per person was almost £500 worse than that of the UK.

While Alex Salmond, First Minister of Scotland argues:

Today's Gers report confirms what independent commentators and analysts have been making clear - Scotland is one of the wealthiest countries in the world. The figures show that tax revenues generated in 2012-13 were £800 higher per head in Scotland compared with the UK, meaning that now for every one of the last 33 years, tax receipts have been higher in Scotland than the UK

So who is correct?

Well, in a sense, they both are!

The problem is that these statements do not really give much of a guide about the fiscal position in an independent Scotland compared to the position within the UK union. This is of course a complete unknown because economic conditions and policies will be likely to be different in both a future UK union and a future independent Scotland.

However, what might be of help is to conduct a form of thought experiment. In this experiment we can ask has Scotland over the past five years enjoyed a fiscal dividend in the UK union or has it suffered a fiscal cost compared to independence?

Clearly, such an analysis cannot change policies or economic conditions but I still think it is an illuminating exercise none the less.

We know from GERS what Total Managed Expenditure (TME) has been in Scotland over the last five years. We also know the GERS estimate of total tax revenue. We can proxy tax revenues under independence by adding in a geographical share of North Sea oil revenues. We can proxy public spending under independence by taking a Scottish population share of UK TME, so that the Scottish people are no worse off in terms of public services than their rUK counterparts.

That done, we can then compare with the estimated spending and revenues in GERS published today, which is what the table below shows:

	(£ million)
Fiscal   Year	2008-09	2009-10	2010-11	2011-12	2012-13
Spending
Total   Managed Expenditure for Scotland	59,440	62,087	64,095	64,869	65,205
Scots per capita share of UK   TME	53,393	55,219	56,271	56,934	57,538
Excess spending	6,047	6,868	7,824	7,935	7,667
Tax Revenues
With Geographical share of oil revenues	55,349	47,733	51,773	56,315	53,147
Scots tax revs plus Per   capita share of oil revenues	44,820	42,557	45,023	47,264	48,118
Excess revenues	10,529	5,176	6,750	9,051	5,029

 

Excess spending shows the gain to the Scottish people in the UK union - loss under independence - of the spend on public services compared to the rest of the UK, which is the assumed counterfactual minimum that would be expected under independence.

Excess revenues shows the gain in tax revenue under independence - loss under the UK union.

The figure below charts the two and the figure after that the difference between the two:

So there is a fiscal dividend from independence in two of the five years and a fiscal dividend from the UK union in three of the five years. Taking the five years together there is a net dividend in favour of independence of £193 million. This amounts to 0.3% of average TME in Scotland over the five years, or £39 per person or roughly £8 per year.

The following points can be made:

• The fiscal dividend to independence can therefore be considered to be very small and appears likely to be negative in the near future.

• There is no estimate of the economic and fiscal transition costs of Scotland becoming an independent state, which if included would additionally make the dividend negative.
• In the fiscal year 2008-09 oil prices and oil revenues were high. In the future, oil revenues are likely to decline as the volume of production falls considerably from the position in 2008-09.
• During the last five years the Scottish people have had returned to them in higher public spending almost all of the oil tax revenues that went to the UK Treasury.
• We cannot determine the fiscal position of an independent Scotland in the long-term because different economic conditions and policies in both rUK and Scotland will determine whether there is a fiscal dividend, or a fiscal cost to independence.