It can be difficult to find too many good news stories just now about the economy and public finances. Indeed, last month the Prime Minister warned of a "painful" budget this autumn, with the hint of tax rises and spending cuts.

But for all the gloomy headlines, there are tentative signs of an improving economic outlook.

So far, 2024 has seen stronger and more consistent economic growth than in 2023. For the first two quarters of this year, growth in the UK economy was 0.7% in Q1 and 0.6% in Q2. Whilst unspectacular, it does still represent the first set of near-normal growth figures in a while. As context, growth for the entirety of 2023 was just 0.1%.

READ MORE: Time for a frank conversation on the public cost of climate change

Leading indicators also point to a more positive picture, with the latest PMI measures – a scorecard of businesses reporting growing/falling activity – positive and above market expectations.

An improving economic outlook is crucial for the public finances.

Faster growth means a higher tax take even without any policy to raise the burden of taxation. At the same time, governments typically measure the underlying sustainability of their borrowing and debt requirements relative to the size of the overall economy. Growth, therefore, provides more headroom to support day-to-day public spending and investment in schools, hospitals and infrastructure.

We can expect the Chancellor to say more about the government’s plans for boosting the economy in her first Budget next month. October’s Budget will also mark a crucial milestone for the budget process here in Scotland.

Ministers will learn, for example, of "Barnett consequentials" from any decision by the UK Government to increase (or decrease) spending in comparable Whitehall departments.

As the Cabinet Secretary highlighted to Parliament last week, ministers face a difficult task of balancing their budget this year in no small part to increased pressures on public sector pay. Those pressures are unlikely to go away next year.

Post tax devolution, the outlook for the Scottish economy also now has important implications for the Scottish Budget. An improving outlook should lead to higher income tax, land and buildings transaction tax, and business rates revenues.

READ MORE: Time to focus on the economy we have in UK, not the one we fantasise about

Under Scotland’s fiscal framework, what is particularly important is not just Scotland’s absolute economic performance, but our performance relative to the rest of the UK. This is because the framework is designed to make the Scottish Parliament accountable for the risks and rewards of divergence with the rest of the UK.

Here the story has been a mixed picture in recent years.

In our fiscal update published last month, at the Scottish Fiscal Commission we highlighted how the most recent data shows a positive income tax net position of £257 million for 2022-23. In other words, Scottish income tax revenues are creating a net benefit for the Scottish Budget.

Furthermore, these revenues in 2022-23 came in above our forecast - a welcome uplift to the Budget in these challenging times.

However, this positive net tax position is being driven by the decision of the Scottish Government to raise the tax burden on higher earners rather than through relative economic performance.

READ MORE: What happens in the world’s biggest economy affects our prosperity too

Indeed, we estimate that since income tax was devolved in 2016-17, relatively slower economic growth has acted as a drag on Scottish income tax revenues. Had Scotland’s economic performance tracked that in the rest of the UK, the Scottish Government would be better off to the tune of £624 million in 2022-23.

The good news is that this negative "economic performance gap" seems to be closing. Driven in part by a recovery in economic activity in the energy sector, earnings growth in Scotland looks to have outperformed the rest of the UK in the last couple of years.

High quality economic growth is vital, not just for jobs and living standards, but also for the public finances. If we want high quality public services, particularly with looming pressures from our ageing population, then a growing tax base is essential.

So, for all the political noise that will accompany upcoming tax and spending announcements, the most important decisions for our public finances will centre upon the boldness of structural reforms that help unlock the UK’s (and Scotland’s) economic potential. If policymakers get this right, then we’ll hopefully be less reliant upon having to search for those one or two good news stories in the years to come.

Graeme Roy is professor of economics at the University of Glasgow’s Adam Smith Business School