Economic growth in Scotland will accelerate this year but will trail that in the UK as a whole marginally, the EY ITEM Club forecasts.

The think-tank meanwhile said yesterday that, in an already “constrained” labour market in Scotland, “the incremental increases in income tax have created a meaningful cross-border divide”, declaring this was now a “major concern for employers”.

The EY ITEM Club predicts the Scottish economy will grow by 0.7% this year on the gross value added measure, following estimated expansion of 0.1% in 2023.

It projects the UK economy will expand by 0.8% in 2024, following estimated growth of 0.3% last year.

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The EY ITEM Club said: “Scotland’s economy is set to gain momentum this year with the prospect of interest rate cuts from May onwards, a continuing fall in inflation, and decreasing energy prices.

“Continued growth in pay and easing pressure on household finances should also boost consumer sentiment.”

The think-tank projects further acceleration in growth in Scotland, to 1.4% in 2025 and 1.6% in each of 2026 and 2027.

The EY ITEM Club said: “As economic conditions and confidence improve, private sector services are set to drive growth from 2025 onwards. Among these, information and communication is set to lead, returning annual GVA growth of 2.8% in 2025. Activity in other key business service sectors should also gather pace in 2025, most notably administrative and support services and professional, scientific, and technical services, returning growth of 1.8% and 1.7% respectively.”

It added: “The recovery in household confidence and spending over the medium term will support growth in consumer-facing services, with accommodation and food services, and wholesale and retail posting above average employment growth over the 2024-27 period.”

The think-tank noted the Scottish labour market continued to be “resilient as unemployment remains low”, declaring “the outlook is anticipated to improve in 2025 with growth across most sectors”.

However, it added: “It is expected that, over the longer term, employment prospects will be dampened by weak demographic growth, particularly compared to the rest of the UK.”

And it observed that “businesses continue to report recruitment difficulties, with high rates of inactivity and economic uncertainty limiting the supply of candidates”.

The EY ITEM Club said: “The ONS (Office for National Statistics) business insights and conditions survey continues to report that Scottish businesses are struggling to recruit staff, with 36.8% of applicable businesses in November 2023 reporting difficulties recruiting employees. These issues are most acute in manufacturing, accommodation and food, and construction.”

The think-tank declared that, in spite of the pressure easing on household finances, “it should be noted that the proposed Scottish income tax increases for 2024-25 will create a further disparity between Scottish and UK taxpayers”.

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It added: “A Scottish taxpayer earning £125,000 will pay £5,221 more in Scotland in 2024-25 than they would if working elsewhere in the UK. This may change after the UK Government’s Budget in March, but currently amounts to a fiscal tightening for an estimated 154,000 higher earners in Scotland.”

Ally Scott, EY’s managing partner for Scotland, said: “Although economic growth has been relatively flat, Scotland is slowly moving in the right direction with a brighter outlook expected for sectors such as information and communication, energy, and consumer-facing services. That said, there has been a softening in investor sentiment and challenges noted in the labour market, with employment growth remaining low and lagging the UK.”

He added: “In what is already a constrained labour market in Scotland, the incremental increases in income tax have created a meaningful tax cross-border divide, which includes a significant number of NHS professionals, senior teachers and other civil servants. This is now a major concern for employers in Scotland looking to retain talent in an already tight skilled labour market.

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“If these growth sectors hold the careers of the future for Scotland, then we need an environment that encourages investment and promotes business, not one that creates barriers for growth or impacts competitiveness.”

Sue Dawe, EY Scotland managing partner for financial services, said: “The outlook for the remainder of 2024 is somewhat a mixed picture for Scotland, but we do need to consider the longer-term access to a skilled workforce, both in terms of attracting and retaining talent.

"The new Scottish financial services sector growth strategy demonstrates that maximising the potential of this long-established industry for modern times requires a skilled workforce for us to compete on an international stage.”

She added: “Financial services is crucial to a balanced economic growth trajectory in Scotland, supporting emerging technology sectors and the green energy transition. But we need to incentivise our people to stay in Scotland and push for others to see Scotland as a place to build a successful career, rewarding life and, of course, contribute to a thriving, just, local economy.”