Bad government is holding back Scotland’s economy

The Scottish economy is having a tough year. So tough that the EY Scottish Item Club has just cut its forecast for growth this year to a mere 1.2% (down from 1.8%)

Much of this is obviously down to the carnage in the oil and gas industry.Thousands of jobs have gone here already and, according to another report from the Bank of Scotland, (reported on in The Times) one third of firms expect to cut more people from their payrolls this year.

This all has obvious ripple effects throughout the economy (from the housing market in Aberdeen to consumer spending and engineering). But the authors of the report aren't sure that the problem is all about oil and gas.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The ripple, they say, "seems to have been bigger and stronger than might have been expected on past relationships. There is a kind of nagging feeling that there is something else holding back the Scottish economy but it's difficult with the available data to put your finger on it." So what might that something else be?

One answer is the odds of a second referendum: with the SNP planning another independence offensive over the summer it would seem obvious that, just as the EU referendum is affecting the UK as a whole, concerns about the instability another independence referendum would bring are holding back investment in Scotland.

Another answer might be farming. It isn't a huge sector for Scotland any more in GDP terms only 1.8% of the working population fishing (or around 8% of the rural population) is directly employed in agriculture, and it directly accounts for not much more than 2% of GDP. But that doesn't mean it isn't still reasonably important. 75% of Scotland's landmass is farmed and the total output of their efforts comes to £2.3bn a year. It's also worth noting that the NFUS reckons that for each direct job in agriculture "another three jobs exist in businesses connected to agriculture (agricultural supplies, food and drink processing etc). They may be overegging slightly but even if we knock a bit off we are still on around 5%.

With that in mind look at pages 14-16 of this report from Audit Scotland on the matter of the payment of Scotland's farm subsidies (a large percentage of farms are totally unviable without subsidies). There is a new system (cost so far: £126m). It hasn't worked very well. By the end of April, only 77% of farmers had been paid any of the entitlements that had been promised to them by December last year. None had been paid their full subsidy entitlement. Farmers also know that some of the payments they have had are subject to clawback under certain circumstances.

That, I imagine, will also be having rising ripple effects if you haven't been paid and you don't even know how much you might end up being paid, you definitely don't buy a new tractor (or anything else for that matter) and you might not pay your suppliers either. There's a confidence issue there.

So back to the "something else" holding back Scotland's economy. Neither the neverendum nor the agriculture sector are doing it alone, but they give us a hint as to what might be. Bad government perhaps?