Tory hard Brexit strangling Scotland's growth prospects

It is undoubtedly a relief that the think-tank expects a sharp acceleration in Scottish growth to 0.7% this year, from an estimated 0.1% in 2023.

This, as the think-tank observes, will narrow the growth gap between Scotland and the UK as a whole from that it estimates was experienced last year.

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The UK is forecast by the EY ITEM Club to grow by 0.8% in 2024, following estimated expansion of 0.3% last year.

You can almost hear the doomsayers cranking up though, to point out that Scotland, if the EY ITEM Club’s forecasts are correct, will have underperformed the UK as a whole in the economic growth stakes over both last year and 2024.

And EY Scotland managing partner Ally Scott’s observations about the increasing income tax gap between Scotland and the rest of the UK for higher earners may well have been music to the ears of some of those who would point the finger at the Scottish Government to claim economic underperformance.

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Mr Scott said: “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.

“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.”

This is a fairly frank observation, it is true.

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However, before the doomsayers get too excited, it should be put in the context of Mr Scott’s analysis that “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”.

What seems crucial to observe is that the growth rates for both Scotland and the UK as a whole, both those estimated for last year and projected for 2024 by the EY ITEM Club, are very low by historical standards.

This underlines the weakness of the overall UK economy.

The International Monetary Fund, in its latest projections published late last month, forecasts the UK economy will this year record the second-weakest growth among the Group of Seven leading industrialised nations, behind only Germany.

The UK is expected by the IMF to expand by just 0.6% in 2024. This IMF forecast is obviously weaker than the EY ITEM Club’s projection, although it is in the same ballpark.

It is worth noting the IMF’s growth projection for Germany for 2024, of 0.5%, is only marginally behind its forecast of expansion in the UK.

France is forecast by the IMF to grow by 1% this year, following expansion of 0.8% in 2023.

The US is projected by the IMF to expand by 2.1% this year.

So the UK is clearly struggling, in an international context.

READ MORE: Scotland will continue to trail UK - think-tank

The Scottish economy’s fortunes are in large part obviously determined by the same factors as those affecting the UK as a whole.

Scotland has a more challenging demographic situation, as the EY ITEM Club points out. It is because of this reality that immigration from European Economic Area countries has been even more important to Scotland than other parts of the UK.

The Tory hard Brexit led to the loss of free movement of people between the UK and EEA. This has fuelled skills and labour shortages in Scotland and elsewhere in the UK, and played a large part in the difficult labour market situation and outlook north of the Border flagged by the EY ITEM Club.

Furthermore, it is vital to recognise the Scottish Government has very little in the way of major devolved levers when it comes to the economy.

And the fact of the matter is there is very little difference between Scotland and the UK as a whole when it comes to the EY ITEM Club’s estimates of 2023 growth and projections for expansion this year.

The think-tank predicts further acceleration of growth in Scotland, to 1.4% in 2025 and 1.6% in each of 2026 and 2027, which is again probably more a matter for relief than celebration.

It is clearly a mixed picture for Scotland, as it obviously is for the UK as a whole.

And, at a UK Government level, policies to stimulate growth remain conspicuous by their absence.

While the forecast acceleration in growth from very low levels in both Scotland and the UK as a whole would if it comes to pass be a significant improvement on the protracted stagnation we have been enduring, the road ahead continues to look daunting, Returning to the employment picture in Scotland, the EY ITEM Club observed that “businesses continue to report recruitment difficulties, with high rates of inactivity and economic uncertainty limiting the supply of candidates”.

The effect of Brexit in fuelling skills and labour shortages has been highlighted by companies in a raft of sectors, in Scotland and elsewhere in the UK.

For its part, the EY ITEM Club observed that the Scottish labour market continued to be “resilient as unemployment remains low and 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.”

Back to that thorny demographic issue - one which has been made so much worse by the ruling Conservatives’ hard Brexit.

This whole sorry situation makes the loss of free movement of people between the UK and EEA all the more lamentable, at least for anyone interested in Scotland being able to deliver on its growth potential.