On 9 December 2021, the House of Lords is due to consider the following motion:

Baroness Fraser of Craigmaddie (Conservative) to move that this House takes note of Scotland’s contribution to economic recovery and renewal, and how this may support wellbeing and quality of life across the UK.

Scotland’s economy

The ONS estimated that Scotland’s population was 5.47 million in mid-2020, 8.1% of the total UK population. The Office for National Statistics (ONS) reported that the Scottish economy represented approximately 8% of total UK gross domestic product (GDP) in 2019.

In August 2021, the Scottish Fiscal Commission forecast that Scottish GDP growth would be 6.7% in 2021 and 4.0% in 2022.

In October 2021, the UK Office for Budget Responsibility (OBR) forecast that growth for the UK as a whole would be 6.5% in 2021 and 6.0% in 2022.

There is little analysis that explores the different growth forecasts from the OBR and the Scottish Fiscal Commission, for example to consider why Scotland is predicted to grow faster than the wider UK in 2021 but more slowly in 2022. However, for Scotland, the commission said that there was a ‘catch-up’ effect in the high growth rate for 2021, for example as wealthier households spent savings accumulated during the pandemic. For the UK, the OBR said that the high figure for 2022 reflects a weaker expected level of growth in 2021.

Trade with the UK and elsewhere

The rest of the UK remains Scotland’s most important trading partner. Data from the Scottish Government showed that in 2020, 62% of Scotland’s exports went to the rest of the UK and the remaining 38% to other countries. 67% of Scotland’s imports originated from the rest of the UK and 33% from other countries.

Scotland had a trade deficit with the rest of the UK (ie, it imported more than it exported) of 7.6% of Scottish GDP in 2020. This has fallen over the last 20 years from 13.1% in 2000. This is a result of exports to the rest of the UK remaining at around 32% of GDP while imports have fallen from 44% to 39% of GDP. The Scottish Government stated that in 2019 the largest industry for Scottish exports to the rest of the UK was financial services and insurance. Utilities was the second largest industry in this category and the fastest growing between 2018 and 2019, driven by an increase in electricity exports.

Over the same period, Scotland’s trade with the rest of the world has moved from a surplus of 2.3% of GDP in 2000 to a deficit of 0.7% in 2020. Both exports and imports have fallen as a percentage of GDP, but with exports falling faster (from 24% in 2000 to 19% in 2020) than imports (22% of GDP in 2000 to 20% in 2020).

Public finances

The Scottish government is funded by a combination of a block grant from the UK government, devolved taxes—primarily, income tax—and borrowing. The block grant reflects the fact that taxes collected in Scotland, other than those that are devolved, go to the UK government. The grant is calculated through the Barnett formula. This aims to allocate the Scottish government a share of any changes in spending announced in England, adjusted for population size.

The Institute for Fiscal Studies (IFS) has said that in 2020/21, 67% of total funding for day-to-day spending (‘resource funding’) in Scotland came from the block grant, if extra temporary funding to address the coronavirus pandemic is included, or 57% if Covid-19 funding is excluded. The IFS also reported that most Scottish Government investment (‘capital’) spending is also funded through the block grant. Overall, the IFS found that per-person funding for the Scottish Government in 2020/21 was 131% of that for England for the equivalent responsibilities, and that the vast majority of the difference is accounted for by the block grant.

In 2020/21, the Scottish Government’s total fiscal deficit was 22.4% of GDP including an illustrative share of North Sea oil and gas revenues, or 23.8% excluding North Sea revenue. For the UK as a whole, the Office for Budget Responsibility reported a deficit of 15.2% of GDP.

Labour market

According to the ONS, the unemployment rate in Scotland was 4.1% on the most recent data, relating to July to September 2021. This is slightly below the UK average of 4.3%, which is also the figure for England. The rate for Wales was 3.8% and for Northern Ireland 4.0%.

The ONS also reported that average earnings for full-time employees in Scotland were £675 per week. This was below the UK average of £695 and the English average of £705. The rate for Wales was £621 per week and for Northern Ireland £584.

Plans for recovery from Covid-19

Scottish Government’s recovery strategy

The Scottish Government published its Covid-19 recovery strategy on 5 October 2021. Its three aims are to:

  • address the systemic inequalities made worse by Covid;
  • make progress towards a wellbeing economy; and
  • accelerate inclusive person-centred public services.

In relation to interactions with the rest of the UK, the Scottish Government said it would engage with its counterparts as the recovery progressed. It aimed to work “in equal partnership with the UK Government”. However, the Scottish Government said it was “constrained by our current powers and by the UK Government’s increasing undermining of our devolved responsibilities”.

The Scottish Government has also established a cross-party steering group to consider the opportunities that exist for “social and economic recovery” from the pandemic, in order to support the “wellbeing and prosperity of every person in Scotland”.

UK Government’s strategy

In March 2021, the UK Government published its strategy for post-Covid growth, Build Back Better. It included a number of references to working with Scotland and the other devolved governments, with policies which it said would strengthen the union. These included:

As part of its levelling up initiative, the UK Government has announced several funding streams that will support projects in Scotland, Wales and Northern Ireland, as well as some English regions. Amongst these is the levelling up fund, which the Government has said will deliver £4.8 billion of funding between 2021/22 and 2024/25 with the aim of improving local infrastructure. The March 2021 prospectus for the fund said that for the first round of funding, at least 9% of UK allocations would be set aside for Scotland. It stated that, when selecting projects for funding, the UK Government would “seek advice from the relevant devolved administrations at the shortlisting stage”.

Wellbeing in Scotland and the UK

Some economists have argued that GDP and economic growth alone should not be the only target of economic policy. Instead, they propose including wider measures of peoples’ wellbeing and quality of life.

The national statistical bodies for the UK and Scotland conduct surveys aimed at assessing individuals’ wellbeing. There are also other initiatives in Scotland and elsewhere that aim to increase the importance of wellbeing in policymaking.

UK statistics

The ONS publishes statistics on wellbeing by region in the UK. It is based on survey data and reports respondents’ views on the following four measures. In each case, the respondent can choose a rating between 0 (lowest rating on each measure) and 10 (highest rating).

  • Overall life satisfaction. In 2020/21, the scores from respondents in England, Wales and Scotland were identical on average at 7.38. Northern Ireland was slightly higher at 7.54.
  • The extent to which people feel the things they do in life are worthwhile. In 2020/21, Scotland had the lowest score of the four UK nations on this measure (Northern Ireland 7.90; England 7.71; Wales 7.69; Scotland, 7.68).
  • Overall happiness. Again, in 2020/21, Scotland had the lowest score of the four UK nations (Northern Ireland, 7.49; England, 7.31; Wales, 7.30; Scotland, 7.27).
  • Level of anxiety. In 2020/21, Wales had the highest anxiety score (3.42) and Northern Ireland the lowest (3.10), with Scotland and England on the same score (3.31).

National wellbeing indicators in Scotland

The Scottish Government’s national performance framework includes 81 measures of wellbeing aimed at assessing progress towards 11 national outcomes.

For example, in 2019, under the ‘communities’ outcome, 57% of respondents said that their neighbourhood was a “very good” place to live. This has increased from 51% in 2006, but has been broadly stable at 56% to 57% since 2011.

Scotland is also a member of the Wellbeing Economy Governments Group (WEGo). The Scottish Government describes this as “an initiative where member countries are working together to understand the key priorities for a wellbeing economy”. The other member countries are Wales, Iceland, New Zealand and Finland.

Other UK wellbeing initiatives

In 2015, Wales passed the Well-being of Future Generations Act (Wales) 2015. The Welsh Parliament’s research service, Senedd Research, described the aims of the act as:

To put sustainable development at the centre of decision making, and […] to ensure actions meet the needs of the present, without compromising the ability of future generations to meet their own needs.

There is no UK-wide equivalent act. In June 2021, Lord Bird (Crossbench) introduced a Wellbeing of Future Generations Bill. It received its second reading on 25 June 2021 for which the Library produced a briefing. Following a motion in the House to omit committee and report stages, the bill is currently awaiting its third reading. A date for this has yet to be scheduled.

Economic benefits of devolution for the UK: academic commentary

As explored above, UK government policy includes measures to boost the economy of Scotland as well as the wider UK. Meanwhile, devolution has allowed the Scottish, and other, administrations to develop policies aiming to improve their own economies and wellbeing. Another relevant question is what impact devolution has had for the UK economy as a whole.

In a 2019 essay for the Institute for Government, academic Leslie Budd remarked that finding a direct correlation between devolution and economy growth (what he calls a “devolution dividend”) was “all but impossible”. He argued it is difficult to separate the effects of devolution from the impact of changing UK government policies, and also that major events, such as the financial crisis and Brexit, further cloud the picture.

Reviewing prior studies, Budd found that effects of devolution might have included:

  • a “marginal” increase in gross value added (GVA, a measure of national income) per head as a result of the creation of the Scottish Parliament;
  • it did not impact regional economic performance between 1999 and 2019;
  • it has not prevented an increase in regional inequalities across the UK; and
  • “there has been some economic dividend in some places over the past two decades, but the results have not been comprehensive or evenly distributed”.

Budd also argued that geographical disparities in the UK are sustained by a low level of local fiscal autonomy. For example, he said that in 2015 67% of local government revenue in the UK came from central government grants, compared to 26% in France, 30% in Sweden, 34% in Spain, 38% in Germany and 40% in Italy. He also concluded that frequent changes in UK regional policy over time may have undermined the potential for a devolution dividend and reinforced regional disparities.

In an earlier 2010 essay, academics Andy Pike et al also emphasised the elusive nature of a devolution dividend. They argued that it was “highly contingent” on the devolution institutions in place at any time, how these institutions are funded and the “willingness for redistribution on the part of national central states”.

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Cover image by Efraimstochter from Pixabay.