2nd February 2017
Colin Imrie explains why the laws of economics won’t change just because the government wants them to – even though the current situation is more upbeat than forecast immediately after June 24 2016. He compares prospects outside the EU with the proposals for retaining Scotland’s place in the single market. “No matter what the (UK) government (aka the Ministry for Keeping Your Fingers Crossed) says, the bullish predictions are a pipedream. I wish it were not true, but the storm is coming,” he says.
Below is a much shortened version of his article. The full document, including references, can be downloaded here.
There is a broad consensus among economists that the UK as a whole will pay a significant economic price for leaving the Single Market in terms of reduced GDP (5 - 9%), equivalent to up to £5,000 per household. For Scotland, the Fraser of Allander Institute estimates up to a 5% reduction in GDP and loss of up to 80,000 jobs. Other knock-on effects are examined below.
There would be major benefits to the Scottish economy from remaining in the Single Market. First, Scotland would continue to have access to key skilled labour from the EU. There would also be major benefits to productivity growth over time. Similarly, Scottish participation in key EU programmes and the Single Market would maintain flows of EU public investment and almost certainly increase the attractiveness of Scotland to private foreign direct investment. Scotland could make significant gains from the relocation of companies trading in the EU from London. Higher growth rates in the medium to long term will increase the likelihood of an increased tax take, thus ensuring long term sustainability of public investment and promotion of inclusive growth.
But a hard Brexit is more likely to have the following consequences for Scotland:
• A likely significant reduction in growth/GDP, of ca. 5% by 2030. Given the tendency of Scotland to underperform UK growth in recent years, there could be a greater negative impact, especially if recent trends in population growth in Scotland are not maintained. Increasing productivity and innovation performance would become increasingly difficult. EU investment would cease beyond 2020.
• It is likely that once Holyrood controls fishing resources this will bring some benefit to producers through increased landings at Scottish ports. How sustainable any early increases in catch in Scottish waters would be over time remains to be seen. There may be some benefits in other sectors such as agriculture.
• Remaining in the UK will bring benefits to the majority of Scottish economic actors which depend on trade with rUK. There may be opportunities to develop and strengthen market share by ensuring strong Scottish input into the UK industrial strategy and adopt new approaches to procurement and state aids outwith the EU’s rules. It is likely the Scottish Government will want to radically reorient its Economic Strategy to focus more on domestic opportunities. However, a lack of competition could reinforce poor productivity and poor management.
• Trading difficulties will grow in EU markets despite the short term boost to competitiveness caused by devaluation against the Euro, which will be offset in many sectors by rising import prices. In established sectors such as food and drink it could have a serious impact on markets with high degrees of safety-based regulation such as fresh food including seafood. It will also impact on whisky exports, not only within the EU but also in third countries.
• Being outside the Single Market will impact particularly on high growth sectors such as digital technologies and life sciences given the importance of integrated supply chains in these industries. These are unlikely to be offset by other trade deals as export opportunities in third markets such as China are considerably less than current market shares in the single market. Trade in services is much more difficult outside the Single Market.
• A particular challenge will be the availability of EU migrants to carry out specific roles in key Scottish sectors. They form some one third of employment in key sectors such as food and drink, digital industries and hospitality and are key sources of highly skilled labour for sectors such as energy. The key advantage of EU labour is its ability to move quickly without the requirement for the heavy bureaucratic processes involved in getting a visa.
• Removing free movement for EU students and researchers will impact severely on Scotland’s higher education sector given the high number (16%) of academic staff from the EU. Charging fees to EU students, which would be allowed once EU law no longer applies, may bring in badly needed income, however, but this would be offset by the loss of preferential access to EU research grants. Scottish research bodies would also lose their leading role in many collaborative EU projects and students would suffer from a restricted access to student mobility and learning enhancement programmes through ERASMUS.
• Investment and FDI would be badly affected by the lack of access to EU investment opportunities. The EIB has been the main source of investment in low carbon energy projects in recent years, and Scotland also benefits from direct EU grants. FDI from private sources would find Scotland a less attractive place to invest because of lack of access to EU wide supply chains and markets.
• Much of the trade carried out by the financial sector in Scotland is with the rest of the UK. But key sectors, notably asset management, play a central role in worldwide business due to the UK’s location within the EU at a key timescale between the US and Asian markets. There is increasing use of “passporting” by Scottish-based firms. Any reduction in the ability of financial services firms to operate freely across the Single Market could adversely affect entry to new markets, with consequent implications for jobs in Scotland.
• As a result of the 2015 fiscal framework agreement the current higher levels of public spending in Scotland compared with the rest of the UK would be secure till 2021 even if tax take in Scotland reduced. In the medium and longer term, however, there would be no guarantee that this agreement will be continued since it seems likely that post-2021 any new agreement with the UK would have to reflect actual population trends. Lower growth figures will result in a lower tax take, with less room to increase or even maintain public spending levels in Scotland beyond 2021.
If Scotland is to follow the UK outside the single market, there may be short term opportunities to protect and expand markets within the UK. On the other hand, there would be real challenges for exporters to the EU - most heavily in high growth sectors and key industries such as food and drink. Imposing controls on EU migrants would damage the economy, reduce population growth and tax take and hit key sectors such as food and drink, digital technologies, hospitality and the university sector. EU investment, including from the EIB and private FDI, would decrease considerably. Over time all these difficulties would be severely exacerbated by reduced growth forecasts and declining tax take leading to Scotland by 2030 being a considerably poorer place overall than inside the Single Market.