{"id":6326,"date":"2018-01-18T14:56:32","date_gmt":"2018-01-18T14:56:32","guid":{"rendered":"https:\/\/sceptical.scot\/staging\/?p=6326"},"modified":"2026-04-18T19:34:32","modified_gmt":"2026-04-18T19:34:32","slug":"scotlands-continued-fragile-economic-growth","status":"publish","type":"post","link":"https:\/\/sceptical.scot\/staging\/2018\/01\/scotlands-continued-fragile-economic-growth\/","title":{"rendered":"Why do Scottish v UK growth forecasts differ?"},"content":{"rendered":"\n

The Scottish Fiscal Commission\u2019s forecasts for economic growth in Scotland over the next five years, published in December, raised some eyebrows. <\/strong><\/p>\n\n\n\n

Growth in GDP per capita<\/em> will average just half a percent a year over the period to 2022 according to the forecasts. This is about half the average growth rate seen during the noughties. It is also slower than the 0.7% average growth rate that the OBR is forecasting for the UK.<\/p>\n\n\n\n

The latest GDP statistics for Scotland, published last week<\/a>, included a downward revision to recent rates of GDP per capita growth. Prior to the revision, recent growth of Scottish GDP per capita had already been looking weak, with growth of just over half a percent between Q1 2015 and Q2 2017. But following the data revision this positioned has worsened, with GDP per capita actually shrinking fractionally over that same period, according to the revised figures. In contrast, UK GDP per capita grew 2.7% over the same period, opening up a marked gap in relative performance. (See chart).<\/p>\n\n\n\n

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In this context, its difficult to argue that the SFC\u2019s forecasts are too pessimistic. The SFC is effectively arguing that future growth will be more rapid than we\u2019ve seen during the past 2.5 years, and on a par with average growth rates over the past decade (see Chart). (Scottish GDP per capita has grown barely 1% since Q1 2007).<\/p>\n\n\n\n

True, the SFC forecasts do imply that the gap that recently opened up between Scottish and UK growth rates will continue to widen slightly going forward \u2013 but equally, the future differential performance between Scotland and the UK is not forecast to be as great as the one we have seen in the past three years.<\/p>\n\n\n\n

Nonetheless, the SFC is forecasting that GDP per capita in Scotland will grow slightly slower than the OBR forecasts for the UK. It might be expected that slower growth in GDP per capita would translate into slower forecast growth in income tax revenues per capita in Scotland than in the UK. If it did, under the new fiscal framework for Scotland<\/a>, the implication would be that Scottish income tax revenues would be smaller than the block grant adjustment for income tax. In other words, the Scottish budget would be worse off as a result of income tax devolution than it would have been without, under the Fiscal Framework arrangements.<\/p>\n\n\n\n

But in fact, the SFC forecasts imply that Scottish income tax revenues will grow more quickly than the block grant adjustment. How can we reconcile these positions? (GDP per capita growing more slowly in Scotland than UK, but income tax revenues per capita growing more quickly?)<\/p>\n\n\n\n

According to the SFC\u2019s forecasting model, the main determinants of income tax revenues are employment and earnings. What are the SFC\u2019s judgements about how these two factors will evolve?<\/p>\n\n\n\n