Update: How is Scotland’s economy faring in the pandemic?

Despite a recent divergence in Covid-19 restrictions between Scotland and the rest of the UK, outcomes during the pandemic have largely converged. Many of the economic challenges facing Scotland are longer term in nature.

New restrictions in Scotland (and Wales) have led to, arguably, the greatest variation between the nations of the UK in how governments are responding to the Covid-19 pandemic. Over Christmas, newspapers in Scotland were predicting a flood of people across the border as revellers sought out opportunities to celebrate Hogmanay. Of course, the reality was (and was always going to be) quite different. But how has Scotland been faring relative to the rest of the UK so far in the pandemic?

As in other parts of the UK, cases of Covid-19 have been on the increase in Scotland in recent weeks. On Monday 3 January, positive Covid-19 cases reached over 20,000 for the first time. Public transport – from trains through to the ferries that connect Scotland’s islands with the mainland – has been cut back for most of January as staffing levels have been hit. Even the men’s Scottish Professional Football League brought forward their annual ‘winter shutdown’ as spectator numbers were limited to 500.

Figure 1: Confirmed new Covid-19 cases

Source: GOV.UK

As we have discussed in previous articles, one of the notable public policy features of this crisis in the UK has been that responsibilities for managing the public health and economic response have been split across devolved and national governments – see: What are the implications of coronavirus for fiscal devolution in the UK?

One success in the UK’s response to the pandemic has been the vaccination rollout. While there have been variations in how each nation of the UK has distributed vaccinations, the data show that the level of performance in vaccinations (and boosters) has been relatively similar (see Figure 2).

Figure 2: Vaccination (second dose and booster) by nation of the UK

Source: GOV.UK

Away from public health data, just how well has the Scottish economy been coping with the effects of Covid-19? And is there updated evidence of any apparent divergence in economic outcomes with the rest of the UK?

Economic performance since the start of the pandemic

The Scottish government publishes a range of information on the performance of the Scottish economy. A tri-annual publication by the chief economist – the State of the Economy – provides a good overview and analysis of how the Scottish economy has been performing during the pandemic. The latest economic statistics can be found here.

Scotland entered lockdown like the rest of the UK on 23 March 2020 – for a timeline of the various policy announcements in Scotland, see this information sheet on the Scottish Parliament’s website.

Scottish economic activity fell 22.3% between February and April 2020, compared with a fall of 25.1% in the UK as a whole (see Figure 3). Since then, and like the rest of the UK, economic activity has picked up. As of October 2021, the Scottish economy was 0.93% smaller than its pre-pandemic January 2020 level, whereas the UK economy was 0.75% smaller. In other words, there is no appreciable difference.

Figure 3: Scottish and UK GDP

Source: Office for National Statistics (ONS) and Scottish Government

Of course, these aggregate numbers for both Scotland the UK disguise the significant variations in economic experience we have seen over the course of the pandemic.

Across different sectors, we see huge variations in levels of economic activity. For example, in accommodation and food services, economic activity remains well below its 2020 level and is faring much worse than the overall economy (see Figure 4). Other sectors, such as professional, scientific and technical services, have bounced back and are now above their pre-pandemic peaks.

Figure 4: Scottish monthly GDP changes during the pandemic (from February 2020)

Source: Scottish Government

In terms of jobs, the furlough scheme helped to limit the expected increase in unemployment in Scotland (see Table 1). At the peak, around 780,000 jobs in Scotland were furloughed under the UK government’s Coronavirus Job Retention Scheme (CJRS), equating to 32% of the workforce.

Overall, labour market outcomes in Scotland remain broadly similar to the UK average.

Table 1: UK regional labour market outcomes, for the three-month period August – October 2021

	Employment Aged 16-64 Rate (%)	Unemployment Aged 16+ Rate (%)	Economically inactive Aged 16-64 Rate (%)
United Kingdom	75.5	4.2	21.2
Scotland	74.6	4.1	22.1

Source: ONS

But one thing that we are seeing in the labour market is a variation in outcomes within Scotland. In particular, the job market in the North East of Scotland – traditionally one of the most prosperous parts of Scotland – appears to be more challenging.

This trend, arguably, has less to do with the immediate Covid-19 crisis and more to do with long-term structural change in the North East economy as the North Sea oil and gas industry continues to enter its twilight years (see Figure 5). Indeed, this is something that the Scottish Fiscal Commission noted as being a potential factor driving a divergence in long-term growth prospects between Scotland and the UK.

Figure 5: PAYE employment in regions of Scotland and the UK

Source: HMRC

The policy response

While most public health policy levers – including indirect levers such as the opening and closing of schools – are controlled by the Scottish government, the key macroeconomic policy support levers (such as the furlough scheme and large-scale government borrowing) are held by the UK government. This means that throughout the crisis, the policy response has been a joint effort between Westminster and Holyrood.

But throughout the pandemic there have been controversies between the Scottish and UK governments over the allocation of funding and the ability of the Scottish government – and the other devolved governments – to have greater flexibility over the overall spending envelope that they have. A recent Institute for Fiscal Studies (IFS) report provides some useful insights on how the funding arrangements for the devolved nations has worked during Covid-19.

The Scottish government implemented a range of economic support packages, such as business rates holidays and business support grants. At the start of the crisis, the measures introduced were largely consistent with those announced for the UK as a whole, funded by ‘Barnett consequentials’ (a mechanism used to adjust public spending in devolved nations to reflect changes in spending allocated to public services in England) from equivalent programmes in England.

But in recent times, for example, in relation to business rates relief for businesses in retail, hospitality and leisure, there has been a greater divergence. The Scottish government initially offered a more generous scheme but plans for this year are less generous than those in England.

Given the limited levers to provide immediate economic support, the Scottish government’s primary economic policy focus has therefore been on the recovery and rebuilding the economy over time. During the height of the pandemic, the Scottish government published a report setting out its ambitions for the recovery with a focus on economic wellbeing. It also plans to publish a new National Strategy for Economic Transformation early in 2022.

What next?

Throughout the pandemic, the economic performance of Scotland has broadly tracked that of the UK as a whole. But many of the long-term challenges that were facing the Scottish economy prior to Covid-19 remain – from the declining oil and gas sector through to a population profile that is ageing more quickly than the UK as a whole.

With the Scottish government’s budget dependent, to an increasing extent, on the revenues raised from taxes that have been devolved to Scotland, the importance of economic growth is now even more significant.

The latest forecasts from the Scottish Fiscal Commission, published in December 2021, paint a challenging picture for the outlook of the nation’s public finances. Despite significantly higher income tax rates for those in Scotland earning above £27,850, the Scottish government has not seen its budget increase beyond the level that would have been realised without income tax devolution. This is primarily because of the slower growth in the tax base in Scotland relative to the rest of the UK.