Scottish Economy Watch

Punching above our weight

On Wednesday of this week - 9 December- the Office for National Statistics (ONS) published its annual update of Gross Value Added (GVA) and GVA per head for the Nomenclature of Units for Territorial Statistics (NUTS) 1, 2 and 3 regions and nations of the UK. This is a useful exercise although there are technical issues to be confronted in the construction of estimates of GVA across the UK regions and territories. The present data series is constructed using household income data, later this month - on 16 December to be precise - ONS will publish GVA estimates based on counting produced output: the two do not always produce the same result! A further point is that GVA is much the same as GDP. I won't go into the difference.

Anyway technical issues aside, I was interested to read In the Herald that Stewart Hosie, the SNP’s deputy leader and economic spokesman, in commenting on the publication had said

“Today’s ONS figures show, once again, that Scotland continues to punch above its weight in its contribution to the UK economy. The strong showing for Scotland is testament to the successful economic policies of the SNP Government from crucial infrastructure investment to vital support for small businesses.This has resulted in record numbers of registered businesses in Scotland, increased productivity, growing value of international exports, and record employment.”

I read these comments before I had chance to look at the ONS data. So, I thought: "That's interesting. If Scotland is 'punching above its weight it must mean that we are generating more income than our size (equals weight?) would warrant. The main indicator of a territories size is population, so according to Mr Hosie GVA per head in Scotland must now be higher than the UK. And, this might be due to SNP Government policy"  

I rushed to look at the data and the chart below is what I found:

So, the chart reveals that on a reasonable definition of "punching above its weight" Scotland lags behind the UK as a whole. Indeed, the relative is lower than it was in 1997. It is lower than it was at the trough of the recession in 2009 but the high point of 97.2 was due principally to the recession being stronger in the UK than in Scotland. Between 2009 and 2012, the Scottish relative fell as the recovery from recession in UK GDP was faster than in Scotland. After 2012 the Scottish recovery picked up and so the relative rose a bit.

But there's little in these data to suggest that Scotland has exhibited a "strong showing" at all. It is true that Scotland moved into third position in the GVA per head rankings in 2013 just ahead of East England as the recovery in Scotland strengthened and this might have been influenced by SNP government policy in prioritising investment spending and the pick up in construction activity here. But as the chart below shows all regions and nations appear to have lost out to London during the recovery. If Scotland has managed to achieve "record numbers of registered businesses in Scotland, increased productivity, growing value of international exports, and record employment", which I think is not wholly supported by the data, it has not registered much, if at all, in the GVA relative and certainly could not lead one to conclude that Scotland is "punching above its weight."

Scotland is thriving

The latest version of Regional economic performance indicators (REPI) published on 21 September by the Department of Business Innovation and Skills (BIS) is a fascinating source of data on the economies of UK countries and regions.

If we ignore the implied insult that brands Scotland as a 'region' there is much in the database to inform our understanding of the absolute and relative performance of the Scottish economy. I shall be returning to some of these data in later blogs.

For this first blog using these data, I want to contribute to the debate that has emerged between myself, George Kerevan and Tom Miers on the absolute and relative overall performance of the Scottish economy. I plan to provide a more detailed response to Kerevan's piece in a later post. But today I want to focus on the Scottish economy's performance and the income of Scottish households in the noughties, the devolution years.

George Kerevan argues that

the relative underperformance of Scotland grew worse in recent years. Between 1998 and 2006, the UK economy grew at 2.7 per cent while the Scottish economy grew at only 2 per cent, a gap of 35 per cent.

I don't think this is accurate in itself and it certainly is at variance with the evidence on the performance of the Scottish economy in the period of devolution.

The Scottish economy performed more strongly in the period of devolution from 1999 to 2007 when the Great Recession started. Over this period GVA in the Scottish economy grew at 2.6 per cent while the UK economy grew at 2.7 per cent.

Moreover, when one looks at GVA per head, which allows for population change, the Scottish economy improved its relative GVA position as this chart shows

So, I'm afraid Tom Miers can't cleverly use the Scottish GVA performance data under devolution to argue against both devolution and independence!

What these data show is that the gap between Scotland and the UK almost closed over the devolution years. In contrast, in both Northern Ireland and Wales their relative GVA per head position deteriorated and in Northern Ireland markedly so. The disproportionate impact of the Great Recession may account for the recent deterioration in Northern Ireland's GVA performance and perhaps even for the recent improve in the Scotland-UK relative. It will be remembered that the depth of the recession was a little less here.

Also for technical reasons, the inclusion of total north sea oil GVA in UK data but not in Scottish data can distort the Scottish UK relative. This seems to have happened recently to flatter relative Scottish performance because of the weakness of North Sea oil production - see my post here.

So we need to look at the income of Scottish households relative to the UK. The REPI data from BIS allow us to plot what happened to household disposable income (GHDI) over the period. The chart is here

The chart is interesting because it shows that when we look at household incomes, the improvement in the Scottish relative is still clearly present. But now Wales and Northern Ireland are seen to have improved their relative position, all be it marginally.

Why should this be?

The answer, in part, is because of the UK union. In the union, Scotland, Wales and Northern Ireland can draw on, and contribute to, the risk pooling arrangements that exist through UK government transfer payments. These affect household incomes, that is GDHI.

These data might be interpreted as offering some support for the UK union, especially for Northern Ireland and Wales. The data also show that Scotland is thriving.

And it is thriving under devolution.

Wealth and Inequality in Britain

I have written several posts on income inequality in Scotland and the UK: here and here. Last week the ONS published information that allows us to examine wealth inequality in Britain.

The information comes from the Wealth and Assets Survey (WAS) 2008/10. Comparisons can also be made with the WAS undertaken in 2006/08. This is a valuable data source. More detailed data from the latest survey will be published later this year.

The first thing that stands out is how much greater wealth inequality is than income inequality. The Gini coefficient (0 = perfectly equal; 1 = perfectly unequal) for total wealth was 0.62 in 2008/10 and 0.61 in 2006/08. This is almost twice the Gini measure for income inequality of 0.35 for Scotland and 0.36 for the UK in 2009/10. We also note that the degree of income inequality in Scotland and UK was considerably higher than the OECD average of 0.31.

The stability of the Gini coefficient between the two surveys suggests that household wealth inequality while high did not change much over the two years. However the same cannot be said for wealth inequality across the regions and countries of the UK.

The chart below shows the change in regional and country median household wealth Compared to Britain between 2006/08 and 2008/10 in percentage points.

What these data show is that there was a marked regional/country divide in Britain in the change in median household wealth. The median household in London dramatically improved its wealth position relative to the median household in Britain. Median households in Scotland, Yorkshire & the Humber, North West, South East and England as a whole also improved their relative position but by a much lower order of magnitude than London.

In contrast, households in Wales lost out compared to their counterparts in the rest of Britain. And in England, households in North East, East Midlands, South West, and West Midlands lost out considerably relative to the median household in Britain.

What accounts for these changes over the two years?

It is not clear.

There has been a large rise in pension wealth between the two surveys due, it would appear, to improved measurement. But this should not affect median household income given the concentration of pension wealth. It would affect the (arithmetic) mean, however. In addition, detailed pension and financial wealth data, which might help answer this question, will not be available until later in the year.

It must be remembered that the period between the two surveys coincides with the Great Recession and fall in property and other asset prices. Net property values fell in most regions except South West and Scotland. And as the Report notes:

The largest decreases in the mean net property wealth occurred in the North East, Wales and the North West, which showed decreases of 8.8, 8.7 and 8.6 per cent respectively.

Change in net property values might account for some of the relative deterioration in North East and Wales but runs counter to the change in the North West and South West.

Changes in physical wealth also seem unable to account for the regional variation since physical wealth is a small proportion of overall household wealth and the movements were not well correlated with the change in regional wealth.

So, we are left with change in financial wealth as the likely factor accounting for the regional variation in median household wealth. This begs several questions and among them what is the link to median household wealth from

• rising salaries in banking and financial services in London, Scotland and North West?
• rising CEO and senior officer salaries in many companies headquartered in London?

There is evidence - see here - that labour's share of income is falling relative to capital in the US and other OECD countries. But higher incomes, whether from labour earnings or not, allow higher savings and accumulation of assets and in this way income and wealth inequality are linked. But Thomas Piketty and Emmanuel Saez in this 2006 paper found

that the dramatic recent increase in income concentration is a primarily a labor income phenomenon and this has not yet translated into a dramatic increase in wealth concentration.

But maybe there are regional effects if neutral at the national level.

We need further data before we can begin to provide answers to these questions.

 

 

Regional pay: the first step to fiscal federalism?

It is alleged that Chancellor George Osborne and the Treasury plan to scrap national pay rates for some public sector workers in the UK. The reason? Well, public sector unions argue that the government is simply trying to save money and help it to reduce taxes on the rich. But the rationale given by the Treasury for the proposal is the variation in private sector salaries for comparable jobs across the regions of the UK. With public sector workers paid the same for similar jobs across the country the regional gap between public and private salaries varies considerably. So the FT notes that

The Treasury estimates that the so-called "pay premium" between public sector jobs and their private sector equivalents ranges from 0.5 per cent in the south-east to 18 per cent in Wales. ... Mr Osborne sees the move as a way of ensuring public sector pay reflects local market conditions and of avoiding private sector employment being crowded out in poorer areas of the country.

There is folly, insight and potential unintended consequences in Osborne's proposal.

The folly lies in the implication that lack of job creation in some regions of the UK is due to civil service wages being too high relative to private sector wages. At the present time the UK is labouring under a significant deficiency of aggregate demand with the unemployment rate at 8.4%. This is affecting all UK regions and nations. Some regions such as the North East are more affected by the drop in aggregate demand hence their high unemployment rates. Because of this the rate of growth, and possibly the level, of private sector wages paid is low relative to the public sector. With such a deficiency of demand and high levels of unemployment and spare capacity it doesn't make sense to argue that public sector activity is crowding out the private sector. Indeed, cutting public sector wages or restricting their growth relative to the private sector will limit the growth of demand further and so contribute to the problem of relative demand deficiency in such regions.

The insight in the proposal for regional pay lies in the possibility that in more normal times, when the regional economies of the UK are closer to full employment – more technically, closer to the non-accelerating inflationary rate of unemployment (NAIRU) or the 'natural' rate of unemployment – a lowering in public sector wages relative to the private sector could help boost the competitiveness of the local private sector. And this particularly in regions/nations where the public sector is relatively large. In such circumstances, the price effect on private sector competitiveness is likely to be more significant than the effect on regional aggregate demand of the incomes of public sector workers being a little lower.

But even if there was a positive effect on private sector competitiveness would lowering or slowing the rate of growth of public pay in so-called 'poorer' regions be warranted?

In simple theory, a market economy will pay workers according to the value of their marginal product. It is difficult to argue that the productivity of a nurse, or any other public sector worker, at the margin is lower in the North East than London. However, if prices and incomes are lower in the North East then the value in monetary terms placed on the work of the nurse might be lower. This might justify a lower wage than in London. But who is to determine the monetary value placed on the provision of a public good in a region such as the North east? Should it really be left to the UK Chancellor of the Exchequer?

An alternative view that chimes better with the ethos of regional variation and the rejection of national pay is that it should be the people in the North East themselves, who should decide. But to do that they would require a government that raises and spends taxes in the region according to regional preferences. In other words, it seems to me that the logic of regional variations in public sector pay is fiscal federalism with regional governments having responsibility for a range of taxes and the provision of public services including setting the pay rates of public workers.

Scotland has already gone a considerable way down this route and is likely to go further. While John Swinney, the Scottish Cabinet Secretary for Finance and Sustainable Growth has said that

the Scottish government will go absolutely nowhere near this proposal for the areas of pay policy that are under our control.

It does seem likely that the Scottish government will eventually pay its public sector workers according to how it values their services and according to what it can afford. It will not let London decide. The English regions might eventually follow Scotland's lead.

Reasons to be cheerful: Scottish Enterprise and SDI

Yesterday's report from Cardiff Business School: Selling Wales: the Role of Agencies in Attracting Inward Investment highlights the decline in Wales as a destination for inward investment. This occurred especially after the abolition of the Welsh Development Agency (WDA) in 2006 when the WDA was effectively rolled into the civil service under the Welsh Assembly.

The basic inward investment story is shown here:

Percentage of UK new inward investment projects (excluding London)
Rank 2005-10	Area	Average %	Rank 2003-04 and average %
1	Scotland	9%	1 (8.5%)
2	North west England	6.8%	3 (6.5%)
3	West Midlands	5%	4 (4.5%)
4	Northern Ireland	4.3%	5 (4%)
5	North east England	3.7%	6 (3.5%)
6	Yorkshire and Humber	3.7%	9 (2%)
7	East Anglia	3.7%	8 (2.5%)
8	East Midlands	3.5%	8 (3.5%)
9	Wales	3.5%	2 (7.5%)
10	South west England	3.3%	6 (3%)

Source: UKTI and FDI Markets ™ from the Financial Times

Wales' share of new UK inward investment projects excluding London has dropped from an average of 7.5% in 2003-04 to 3.5% in 2005-10, a drop in the UK 'regional' rankings from 2nd to 9th.

One respondent surveyed in the Report noted the contrast with Scotland

Over the last three years we have seen the SDI [Scottish Development International] ramp up their overseas work, they have a very clear goal of where they want to be and how they want to get there, and it seems to me that this pressure has possibly caused a squeeze on some of the targets we originally had. IBW [International Business Wales] could not compete with them, it is too slow, everything has to be double checked and put through too many people's desks.

The superior performance of Scotland also seems to be evident in the overall GDP per head statistics as this chart shows:

And, while Scotland has been on an upward track since 2000, while Wales has been on a downward track since 1997, there is a hint of a widening of the gap after 2006.

We must be careful of the logical fallacy of post hoc ergo propter hoc but I think we should feel cheerful in Scotland that we have the professional input to economic development provided by Scottish Enterprise and Scottish Development International.

Would those politicians agitating for the abolition of Scottish Enterprise in 2007 and at last year's election please admit that they might have been wrong!

 

Super Wednesday

Today saw the publication of a plethora of outturn data and survey findings on the Scottish economy. The main outturn data were the official third quarter 2011 GDP figures, the manufacturing export index for the third quarter and labour market statistics for September-November. The survey data refer either to the final quarter of last year or December. I shall focus in this post on the official outturn data.

The basic picture continues to be one of weak recovery with a further weakening apparent towards the end of 2011.

GDP grew by 0.5% in the third quarter identical to UK growth, compared to 0.2% in both the second and first quarters. While this rate of growth is close to the trend rate of growth it is weak for the recovery phase of the business cycle.

The chart shows that Scottish GVA now stands at -3.3% below the pre-recession peak, while the figure for UK GVA is -3.6%. However, while the depth of the recession was greater in the UK than Scotland, the recovery of UK GDP has been slightly faster than in Scotland.

At the broad sectoral level services (0.9%) and manufacturing (0.6%) were the main drivers of third quarter growth. Indeed, the Scottish performance was stronger than in UK services (0.7%) and UK manufacturing (0.1%). So some comfort from a Scottish standpoint can be drawn from the latest data. But the performance of both sectors was weaker in Scotland over the year. Moreover, the construction sector was much weaker in Scotland in the third quarter contracting by -1.2% compared to an increase of 0.3% in the UK. It is worth noting, though, that over the year the performance of Scottish construction was slightly better with growth of 5.9% compared to 5.4% in the UK.

Manufacturing exports grew by 0.2 per cent in real terms during the third quarter of 2011. But this represented a weaker performance than the second quarter, which in turn was weaker than the first quarter.

In the labour market the weakening continued as net job creation fell and unemployment rose, both at a faster rate than the UK. Employment fell by 8,000 and unemployment rose by 19,000 in the quarter and by 5,000 and 7,000, respectively over the year. The rate of job loss and unemployment increase was greater than in the UK. There was some net job creation in the UK (18,000) despite the rise in unemployment of 118,000 and percentage rise in unemployment of 9% in Scotland compared to 5% in the UK. The weakness of the jobs recovery is underlined by the following chart:

The Scottish labour market is -3.56% below its pre-recession peak compared -1.41% in the UK. Moreover, when we allow for the growth of working population we see that the ratio of jobs to the supply of labour has hardly recovered at all as shown by this chart.

With unemployment now standing at 231,000 (8.6%) this is little different from the level of unemployment of just under 237,000 (8.8%) at the bottom of the recession in the labour market in May-July 2010. Furthermore, Scotland's strong unemployment position compared to UK regions has slipped a bit as this chart shows:

Further analysis of the latest GVA and labour market data will be provided in the Fraser of Allander Institute's Economic Commentary which we expect to publish at end February/early March.

Scotland's relative prosperity

Yesterday the Financial Times published an article on the widening "north-south divide" and growing regional disparities in the UK since the financial crisis began in 2007. Specifically,

London has opened a wider gap in economic output with the rest of the UK amid growing regional disparities since the financial crisis began more than three years ago.

But the FT notes that

Scotland remains the most prosperous region outside London and south-east England, with output 99 per cent of the average, up 1.9 points over three years.

This was followed up today by an article in the Daily Express with the headline "Economic boost puts Scotland on a par with wealthy south east." The article as might be expected contained quotes from John Swinney including

This is a welcome and important analysis, confirming Scotland's economic potential with the powers of financial responsibility and independence.

I find it hard to see what the data have to do with the case for, or against, independence. It is true that Scotland's GDP per head relative to the UK, using the ONS Regional Accounts data has been rising. We can unambiguously welcome this. However, the picture is much more complicated than both the FT and Express articles allow. Nor do the data support the view that Scotland's relative economic performance has improved under an SNP government, which would be even better if Scotland was independent - if that is what we are meant to take from John Swinney's statement.

In the June Economic Commentary last year we published an analysis of the ONS Regional Economic activity data to 2009 that was published at the end of 2010. In that piece we noted the rising Scottish GDP per head relative but after further analysis concluded that

The evidence of an appreciably higher Scottish GDP per head relative to the UK by the end of the first decade of the new millennium is the result of both the differential effects of large cyclical movements and slower (Scottish) population growth on the relative. It does not appear to be explained by an improvement in Scotland's relative competitiveness, or underlying economic performance.

We showed in the Commentary that, when the Regional Accounts (RA) data were substituted by the GDP growth rates drawn from the Scottish government's own GVA dataset, the increase in the Scottish relative was lower and was even lower still when allowance was made for the weaker Scottish population growth. The chart below shows the differences

Using the Scottish governments (SG) GDP growth data and applying UK population growth to Scotland the Scottish GDP per head relative would have fallen over the ten years between 1999 and 2009. But a rise in the relative to 2007 is evident across all estimates, which was probably due to the strong growth of financial services in Scotland prior to the credit crunch and recession.

There is no doubt that Scottish GDP held up better than UK GDP during the financial crisis and recession, falling by -5.9% compared to a UK fall of -7.2%. This appears to have been due to the public sector having a bigger share of Scottish GDP and because manufacturing despite contracting held up much better in Scotland than the UK. Financial services also boosted its GDP share in both Scotland and UK as I noted in this post. This may through supply linkages have helped Scotland to hold up better.

The view, if that is what it is, that Scotland's relative economic performance has improved under an SNP government needs to be heavily qualified. First, the FT has used data from the ONS Regional Accounts, which is presented in terms of five year moving averages. This is to smooth out annual fluctuations. However, if you want to analyse change under different governments then it seems more appropriate to use the unsmoothed data. This is available in Table 1.11 in the latest ONS Regional Economic Activity data. The data are graphed below

The rise in the relative is clearly evident on both series, for the reasons discussed above. We see from the unadjusted series that the rise in the relative still occurs post 2007 but is less at 1.4 percentage points rather than the 1.9 points reported in the FT. Moreover, when we look at the growth of the Scottish GDP per head relative over the period we get the following chart

Most of the growth occurs before 2007 and indeed the growth is lower after 2007 even though the level of the GDP per head relative is higher.

A more competitive Scotland?

On 23 December the ONS published data on labour productivity in the UK for the 3rd quarter 2011. The release and supporting datasets also contain information on labour productivity across the UK regions compared to the UK between 2003 and 2010. As with earlier posts what is interesting from these data is the change pre recession and post recession. The charts show labour productivity in Scotland, measured by nominal GVA per filled job and nominal GVA per worked hour. Clearly, the number of hours worked can vary independently of the numbers employed, so both are useful statistics, with GVA per hour tending to be preferred by economists.

The first chart shows the track of Scottish labour productivity relative to the UK = 100 between 2003 and 2010.

The chart shows that in the years to 2007 labour productivity in Scotland remained broadly in the range 94% to 96% of the UK figure. However, after the recession, by 2010, labour productivity in Scotland had risen to parity with the UK on GVA per job and to just below the UK - 99.3% - on GVA per hour.

What explains the change?

The most obvious explanation is that the loss of jobs during the recession was relatively greater in Scotland than in the UK as a whole, while output held up better in Scotland. See this post and the November Fraser of Allander Institute Economic Commentary.

But, the lesser recourse to labour hoarding may not be the whole explanation.

The following charts show labour productivity relative to the UK across the UK regions before recession in 2007 and, roughly, at the recession trough in 2010.

From these charts it is clear that Scotland's relative position improved from 4th to 3rd in the regional rankings on both productivity measures. Specifically, Scotland overtook the East of England. An examination of the recent regional GVA statistics suggests this relative improvement to the UK and the East of England may have been due to manufacturing output - which tends to have higher labour productivity - holding up better in Scotland during the recession. In addition the financial services sector, another high productivity sector, held up better in Scotland than in East of England during the recession.

So, the tentative conclusion is that the improvement in Scottish labour productivity is due to a greater jobs shakeout and sector composition effects. These data cannot tell us whether the Scottish economy has become intrinsically more competitive than the rest of the UK. For that, we need data on labour costs and crucially information on changes in capital productivity. Unfortunately, data on multi-factor productivity is not readily available for Scotland, or the other UK regions.

Hitting the buffers

This week the ONS published Regional Economic Activity (GVA) data for the UK. The release contains much interesting information on annual GVA, employee compensation and gross operating surplus/mixed income, on a residence and workplace basis, by region and sector, in nominal terms. Unfortunately, the data only go up as far as 2009. Nevertheless, the data offer some interesting insights into the incidence of the Great Recession.

The data reveal, as would be expected, that the public sector acted as a buffer in all NUTs 1 regions as the growth of nominal income slowed and in some cases fell, between 2007 and 2009. See chart which shows shares of the 'public sector' in regional GVA in the two years.

Broadly, those regions which depend more heavily on the public sector and/or where manufacturing is important, such as Northern Ireland, Wales, the North East, West Midlands and East Midlands, experienced the greatest increase in their public share as the recession started to bite. Manufacturing was hit strongly during the recession.

It is therefore tragic that those regions that had to rely the most on the public sector as a buffer during the recession are now being hit badly by Cameron and Osborne's austerity programme. There's a lot more analysis to be done here, but the current pattern of unemployment rates goes some way to support that story - London is affected, I think, by a difference between resident (unemployment) and workplace (GVA in this example) indicators.

Oh, and what about Scotland? Its middling position is, I suspect, due to a relatively lesser reliance on the public sector as a buffer in the recession - its share rose by a little over one percentage point in Scotland compared to a rise of nearly four percentage points in the North East. Moreover, manufacturing held up better in Scotland, with its share of the Scottish economy remaining largely unchanged at between 11% and 12%. But in the North East the share of manufacturing fell by nearly two percentage points to just above 13%.