Productivity performance has long varied across the nations of the UK – and it has continued to do so since the devolved administrations were established a quarter of a century ago. Devolution allows for tailored policies to boost productivity, focused on human capital, innovation and investment.
In 1998, the legislative frameworks for devolution were set out in the Northern Ireland Act, the Scotland Act and the Government of Wales Act. Subsequently, the Scottish Parliament, the Senedd (Welsh Parliament) and the Northern Ireland Assembly were established.
Twenty-five years later, we can examine whether the transfer of economic policy-making powers to Northern Ireland, Scotland and Wales has led to improvements in their levels of productivity.
The evidence shows that Northern Ireland and Scotland have experienced some success, but productivity in Wales has fallen further behind the UK average. All three devolved nations face challenges to improve further.
What is devolution?
Devolution is the decentralisation of policy-making powers from national government to the sub-national or regional level.
Within economic research, devolution is described as a type of fiscal federalism (or fiscal decentralisation). The analysis focuses on how powers over public revenue and expenditure are assigned to lower levels of government – and considers the implications for regional economic performance.
The theory of fiscal federalism can be split into two generations. First generation theory originated following the Second World War and emphasised the benefits of greater decentralisation of decision-making. It focused particularly on the informational advantages that local individuals have relative to a centralised government, enabling a more efficient allocation of resources through public goods and services (Oates, 2005).
Second generation fiscal federalism is a more recent development. It introduces theories relating to public choice and asymmetric information (where, in this case, different levels of government may have different information), to understand why the apparent benefits of fiscal federalism may not be realised. It focuses on the incentives faced by a sub-national government, and how they can lead to an inefficient allocation of resources (Weingast, 2009).
Within the UK, Scotland and Wales both gained devolved governments following referenda held in 1997, with votes in favour reaching 74.3% and 50.3% respectively. This led to the creation of the Scottish Parliament and the Welsh Assembly (now the Welsh Parliament or Senedd), with both opening in 1999.
Northern Ireland’s experience was slightly different. Devolution had previously been introduced following the partition of Ireland, through the creation of the Northern Ireland Parliament, but this was later abolished in 1973 during the period of conflict known as the Troubles. In 1998, the signing and implementation of the Good Friday Agreement led to the establishment of a new Northern Ireland Assembly in 1999, coinciding with devolution for Scotland and Wales.
What economic powers do the devolved governments have?
The UK government has responsibility for macroeconomic policy, but the devolved governments possess key policy levers that enable them to address the microeconomic drivers of productivity. This means that they have the powers to implement policy interventions targeted at improving productivity.
Devolution within the UK sees powers split between the national and devolved governments, with the UK parliament at Westminster remaining sovereign. The powers retained by the UK parliament are referred to as being ‘reserved’ and ‘excepted’: examples include defence, foreign affairs, immigration and trade policy. Government powers that are assigned to the devolved governments in Northern Ireland, Scotland and Wales are referred to as being ‘transferred’.
The devolved powers cover a wide variety of policy areas that can affect economic performance, including education, business and health (see Table 1). These powers are not uniformly held across the devolved governments.
For example, energy policy is only devolved to Northern Ireland, while only Scotland and Wales have powers over income tax. Some powers are also only partially devolved, such as transport, with national and devolved governments retaining responsibility for certain aspects.
Table 1: Devolved powers
| Scotland | Wales | Northern Ireland | |
|---|---|---|---|
| Education | |||
| Health & social care | |||
| Housing | |||
| Environmental issues | |||
| Culture & Sport | |||
| Justice & Policing | |||
| Social security & Employment | Partially | ||
| Local government | |||
| Agriculture | |||
| Pensions and child support | |||
| Transport | Partially | Partially | Partially |
| Business | Partially | Partially | Partially |
| Energy | Partially |
| Scotland | Wales | Northern Ireland | |
|---|---|---|---|
| Council tax | |||
| Business tax | |||
| Property tax | |||
| Landfill tax | |||
| Stamp tax | |||
| Income tax | Partially | Partially | |
| Air passenger duty | Partially | ||
| VAT | Partially | ||
| Aggregates levy | |||
| Corporation tax |
Sources: Institute for Government, 2019 and UK government, 2023
Note: Lighter shading indicates powers that are partially devolved.
There is also variation in the extent of responsibility held by the devolved governments over taxation. Scotland has the most extensive tax powers, followed by Wales and then Northern Ireland. These powers have gradually expanded over the past 25 years, but this expansion has tended to be ad hoc, reflecting the outcomes of negotiations with each devolved government.
What has been the productivity performance of the devolved nations?
The UK suffers from low productivity compared with its international peers (van Ark and O’Mahony, 2023). Figure 1 shows how the UK’s productivity performance is distributed across its 12 regions. This measures productivity as output per hour, with gross valued added (GVA) – a measure of the value of goods and services produced in the economy – divided by hours worked.
Scotland has the third highest productivity of the UK’s 12 regions, at £40 per hour worked, with Northern Ireland in tenth, at £36 per hour, and Wales in last place, at £34 per hour.
Figure 1: Productivity, output per hour (£) by UK region, 2022
Productivity performance in Northern Ireland, Scotland and Wales has changed over time relative to the overall UK level (see Figure 2). When devolution was introduced in 1999, all three devolved nations had a large productivity gap: productivity in Scotland was 8% below the UK average, Wales was 13% below, and Northern Ireland performed worst, at around 20% below.
Since 1998, Scotland has reduced its productivity gap with the UK average. This reduction took place from 2009 onwards, and now stands at just 2% (according to 2022 figures). Northern Ireland has also reduced its productivity gap, to around 13% below the UK level, although this reduction has only taken place recently, following the Covid-19 pandemic. Wales is the only devolved nation to see its productivity decline relative to the UK average since 1998, with the gap widening to 17%.
Figure 2: Productivity, output per hour (UK=100), 1998-2022
Source: ONS, 2024; sub-regional productivity: labour productivity indices by UK ITL2 and ITL3 sub-regions.
Figure 3 shows the contribution of changes in both hours worked and real GVA to productivity growth, between 2004 and 2022. Regions are ranked from largest to smallest productivity growth, where an increase in GVA, or a reduction in the number of hours worked, has a positive effect on productivity growth.
Despite having real GVA growth below the UK average, Northern Ireland and Scotland have had the highest growth in productivity, due to their relatively small increases in total hours worked. The poor productivity growth of Wales – below the UK average – can be explained by a combination of lower GVA growth, and a relatively greater increase in total hours worked.
Figure 3: Contribution to productivity growth, 2004-22
Source: Calculated using ONS, 2024, regional gross value added (balanced) per head and income components; ONS, 2024, sub-regional productivity: labour productivity indices by UK ITL2 and ITL3 sub-regions; HM Treasury, 2024, GDP deflators at market prices, and money GDP September 2024 (Quarterly National Accounts).
What explains low productivity in the devolved nations?
Only London and the South East have productivity above the UK average. This shows that the problem of low productivity is not unique to the devolved nations, and reflects the uneven spatial performance of the UK economy (Kenny et al, 2023).
Even Scotland, which is the third best performing UK region, still lags behind its European peers (Rincon-Aznar, 2022). What can explain why the devolved nations lag behind?
A key reason for low productivity is human capital. This can be measured by the qualifications of the workforce (see Figure 4). Scotland performs well on this measure, while Northern Ireland and Wales lag, consistent with their productivity performance.
In 2023, 55% of Scotland’s workforce was educated to tertiary (RQF4+) level, above the UK average of 47%. This proportion is much lower in Wales, at 43%, and is lower again in Northern Ireland, at 40%.
Figure 4: Qualification levels of working-age adults (those aged 16-64) by UK region, 2023
Source: NOMIS, 2024, Labour Force Survey (ONS).
Northern Ireland’s poor performance in terms of those with degree-level qualifications has been linked to a persistent ‘brain drain’, where a high proportion of young people leave for tertiary education elsewhere and do not return (Pivotal, 2021).
It has been estimated that if Northern Ireland were able to replicate the level of tertiary education seen in Scotland, it would add 0.25% onto the annual real growth rate of GDP through improved productivity (FitzGerald, 2019).
At the other end of the qualifications spectrum, all three devolved nations suffer from an attainment gap. Scotland has a higher proportion of those with no qualifications, at 8.2%, compared with the UK average of 6.6%. This is higher than all of England’s regions, except the North East, at 8.5%. But Scotland still performs better than Wales, where 8.6% have no qualifications. On this measure, Northern Ireland has the worst performance of any UK region, at 12.3%.
Human capital is not limited to the levels of qualifications in the workforce. In Wales, low productivity has been linked to the problem of individuals not having the right skills to match the needs of employers, particularly at intermediate skill levels (Henley, 2021).
Northern Ireland also has the problem of low skill levels among individuals combined with low levels of skill use by firms, leaving it difficult for the region to break out of a ‘low skills equilibrium’ (Mac Flynn, 2017).
A further area of skills where the devolved nations perform relatively poorly is management practices. Poor management that lags behind best practice is linked to low productivity (Bloom and Van Reenen, 2007).
Indeed, a recent survey of UK businesses finds that Northern Ireland and Scotland have the worst management practices of any UK region, both scoring 0.52, while Wales scored better, equal to the UK average of 0.55 (ONS, 2024).
Are there other explanations for low productivity?
A second key explanation for low productivity in the devolved nations relates to innovation. There is evidence of lower levels of business innovation in all three devolved nations.
Businesses are considered ‘innovation-active’ if they are improving their product or processes and/or generating or acquiring new knowledge. Only 32% of businesses in Northern Ireland and Scotland were innovation-active, while Wales fared worst of any UK region, with only 31%, according to the most recent UK Innovation Survey for 2020-22. Comparably, 37% of businesses were innovation-active in England, with 35% for the lowest English regions – all ahead of the devolved nations (Department for Business and Trade, 2024).
Within innovation, low investment in research and development (R&D) has been linked to the UK’s poor productivity performance (Jones, 2023). Figure 5 shows the level of R&D expenditure per job in the total workforce in 2022.
Across the devolved nations, Wales has the lowest R&D spending, reflecting a track record of particularly low levels of investment over time. This is also highlighted by low levels of employees in R&D roles across the workforce (Henley, 2021). Similarly, R&D expenditure in Scotland has been ‘chronically low’ compared with the UK as a whole and has deteriorated over time (Tsoukalas, 2021).
Northern Ireland also has a poor long-run track record for R&D investment (Crafts, 1995). It has recently started to outperform other low productivity regions, as Figure 5 shows, but this is yet to be reflected in higher productivity (Jordan and Turner, 2021).
Figure 5: R&D expenditure per job in the total workforce, 2022
Source: ONS, 2024, business enterprise research and development, UK (designated as official statistics); ONS, 2024, sub-regional productivity: labour productivity indices by UK ITL2 and ITL3 sub-regions; HM Treasury, 2024, GDP deflators at market prices, and money GDP September 2024 (Quarterly National Accounts).
A third key explanation for low productivity in the devolved nations is investment. This is shaped by the regulatory and political environment provided by government, which affects the levels of both public and private investment.
Indeed, the UK has been identified as suffering from persistently low levels of investment relative to international peers, reflected in the UK’s capital stock. This has created a barrier to productivity growth (Chadha and Venables, 2023).
The picture is mixed for the devolved nations. The share of Wales in total UK capital investment has lagged behind its relative share of total UK output (Becker and Martin, 2023). In contrast, Northern Ireland and Scotland have performed better, seeing their share of UK capital investment exceed their share of output.
While Northern Ireland performs well for the aggregate level of capital investment, it has been identified as having severe infrastructure gaps in specific areas, such as water, sewerage and technology, including 5G and electric vehicle charging. These gaps create barriers to productivity growth (Jordan and Turner, 2021; Donaldson et al, 2023).
The regulatory and political environment provided by government can also create a barrier to business investment and productivity growth. In 2023, 22% of small and medium-sized enterprises (SMEs) across the UK saw political uncertainty and future government policy as creating obstacles to running their business over the next 12 months (BVA BDRC, 2024).
This proportion was the same in Scotland, at 22%, but it was much higher in both Wales, with 28%, and Northern Ireland, with 29%. Similarly, 29% of SMEs in Northern Ireland and Wales perceive legislation, regulation and red tape as a major obstacle, compared with only 22% in Scotland and 20% for the UK as a whole. In both cases, Wales and Northern Ireland performed worst of the UK’s 12 regions.
Can policy improve productivity in the devolved nations?
Although Northern Ireland and Scotland have seen some success in reducing their productivity gap over the past 25 years, there is still much work to be done. For its part, Wales faces the challenge of reversing decline.
Despite the importance of productivity for long-run living standards, the issue receives varying degrees of emphasis from the different devolved governments.
Scotland has put improving productivity at the heart of policy-making and its economic strategy. Indeed, productivity is a central theme in recent industrial strategies (Tsoukalas, 2021). It is also included as one of ten economic indicators used to measuring progress towards the 11 national outcomes targeted by the Scottish government (Scottish Government, 2024).
The Welsh government has similarly included productivity within its Well-being of Future Generations Act 2015, although it receives relatively less emphasis than in Scotland.
The Northern Ireland Executive has put the least emphasis on addressing its productivity gap, only reintroducing productivity as a central policy objective and measure of economic performance in its most recent Draft Programme for Government.
Devolution provides the ability to tailor policy and address the areas where each devolved nation lags behind. To see long-term tangible improvements, productivity will need to be a central focus of policy across several electoral cycles.
Where can I find out more?
- How have the institutions of UK devolution affected economic performance? Economics Observatory article by Esmond Birnie exploring the role of institutions in devolved economic performance across the UK.
- Northern Ireland’s productivity challenge: Exploring the issues: David Jordan and John Turner examine the reasons why Northern Ireland suffers from the persistent problem of low productivity.
- Investigating the factors driving Scotland’s productivity gap with international countries: Ana Rincon-Aznar, Larissa da Silva Marioni, Francesco Venturini and Catherine Robinson examine Scotland’s productivity performance in an international context.
- Is higher productivity at odds with improved wellbeing in post-pandemic Wales?: Economics Observatory article by Andrew Henley on the Well-being of Future Generations Act in Wales, and the trade-offs between productivity and other objectives.
- Northern Ireland's productivity challenge: Picturing success: Paul Mac Flynn compares the productivity performance of sectors in Northern Ireland against the UK and the Republic of Ireland.
