Scotland: not in shock

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What do the latest statistics (Q1 2018)  on economic growth tell us?

The latest figures on Gross Domestic Product (GDP) in Scotland, for the 1st quarter 2018, were published earlier this week by the Scottish Government. Perhaps first quarters are lucky: this is the first time since Q1 2017 (and before that Q1 2015) that Scottish quarterly growth is higher than the UK as a whole.

However, with 0.2% quarterly growth in Scotland compared to 0.1% in the UK, these are still very weak figures, and lower than last quarter (0.3%). The change over the year in Scotland (0.8%) continues to be lower than the UK as a whole (1.2%).

SPICe_Template_FSU_GDP_Latest data - Scotland UK comparision.png

The Scottish GDP index continues to be lower than the UK.

SPICe_Template_FSU_GDP_Scotland UK comparision - Time series.png

Construction sees the only broad sectoral decrease. At -3.5% compared to the previous quarter and -9.2% compared to the same quarter last year, this marks the ninth quarterly decrease in a row in construction with output now at its lowest since Q4 2014. We are unlikely to see the types of growth rates observed in 2014-15 and 2015-16 in this sector any time in the near future. All other sectors of the Scottish economy are growing, with production (which represents just under 20% of the economy) leading the way at 0.9%, stronger than the UK’s 0.6%. See SPICe infographic GDP 1st Quarter for more on this.

Are we in a Scotland-specific economic shock?

The fiscal framework (Scotland’s fiscal rulebook), states that a “Scotland-specific economic shock” occurs when onshore Scottish GDP growth is below 1% in absolute terms on a rolling 4-quarter basis, and 1 percentage point below UK real GDP growth over the same period. This can be triggered from outturn data or forecasts, and if forecast shocks do not materialise at outturn, no retrospective adjustments to borrowing powers are applied, so getting their GDP estimates right is really quite important for both Governments .

The big news in Q1 2018 is that Scotland has not experienced a Scotland-specific economic shock , as had been feared. Being in such a shock  would unlock additional borrowing powers to the tune of £600 million. This money could only be used to cover forecast or actual shortfalls in tax revenues (known as a “forecast error”). Earlier this year the Government helpfully clarified in its Scottish Government Sixth Annual Report on the Implementation and Operation of Part 3 (Financial Provisions) of the Scotland Act 2012 that this means borrowing to plug a hole in the Scottish budget caused by:

  1. the Scottish Fiscal Commission tax or social security forecasts for Scotland, and/or
  2. the Office for Budget Responsibility’s tax or social security forecasts for the rest of the UK (rUK) as these are the basis of the calculation for block grant adjustments (see this SPICe briefing for more on the fiscal framework)
  3. outturn figures for any Scottish taxes and/or social security benefits
  4. outturn figures for any rUK taxes and/or social security benefits that are devolved to Scotland.

Table 1 shows Q2 2017 to Q1 2018 Scottish and UK figures (figures may not add up due to rounding).

Table 1: GDP, rolling 4-quarter basis, Q2 2017 to Q1 2018, Scotland and UK

GDP publication Rolling 4 quarters Scottish growth UK growth Difference Scottish growth below 1%? Scottish growth 1 ppt below UK growth?
Q2 2017 Q3 2015-Q2 2016 compared to Q3 2016-Q2 2017 0.5 2.0         1.5 Yes Yes
Q3 2017 Q4 2015-Q3 2016 compared to Q4 2016-Q3 2017 0.5       1.9         1.5 Yes Yes
Q4 2017 Q1-Q4 2016 compared to Q1-Q4 2017 0.8 1.8         1.1 Yes Yes
Q1 2018 Q2 2016-Q1 2017 compared to Q2 2017-Q1 2018 0.8 1.6         0.8 Yes No

While Scotland would have qualified to be in a shock in the previous three quarters, as this part of the fiscal framework was implemented in April 2017, four quarters from that date (so Q2 2017 onwards) are needed to see rolling 4-quarter growth qualify, and in Q1 2018 it does not. What Table 1 demonstrates is that it is not so much thanks to Scottish GDP growth that Scotland is not in shock (as it is still below 1%), but rather sluggish UK growth which means there is now less than 1 percentage point difference between the two.

Last month, Murdo Fraser MSP asked the Government, if the fiscal framework had kicked off in April 2016 rather than April 2017, whether the economy would have been in such a “shock” . It would (Table 2).

Table 2: GDP, rolling 4-quarter basis, Q2 2016 to Q1 2017, Scotland and UK

GDP publication Scottish growth UK growth Difference Scottish growth below 1%? Scottish growth 1 ppt below UK growth?
Q2 2016 0.5              2.0

        1.5

Yes Yes
Q3 2016 0.4              1.9

        1.5

Yes Yes
Q4 2016 0.2              1.9

        1.7

Yes Yes
Q1 2017 0.4              1.9

        1.5

Yes Yes

 

It is reassuring that this trend seems to have been bucked (at least for now), not least because it might mean that the Scottish economy is slowly picking up (notwithstanding debates about whether economies should always be growing, or whether measuring growth using GDP is the most appropriate), but also because borrowing triggered by a Scotland-specific shock was intended to be just that – for a shock, and not the norm, which it had been following seven consecutive quarters of hypothetically qualifying. It remains to be seen whether this is something that will be revisited when the fiscal framework is reviewed in 2021.

Anouk Berthier, Senior Researcher, Financial Scrutiny Unit