The economy in recent weeks has resembled the Scottish weather: not quite the summer we hoped for but definitely could be worse, and we hope for better to come (writes Fraser of Allander’s Institute’s EMMA CONGREVE).
Inflation easing
This week’s announcement on inflation coming in at 7.9% in the year to June 2023 was lower than markets were expecting.
According to the ONS, the fall was driven by lower motor fuel prices and an easing in the rate of food price growth. We’re sure readers of the FAI weekly update don’t need to be reminded of this, but just in case, remember that a drop in the inflation rate does not mean that average prices are falling.
However, as the Resolution Foundation’s Torsten Bell pointed out in a useful thread on Twitter, in June 2023 it looks like we (finally) had a situation where average wage growth was higher than inflation, meaning that real wages rose.
Of course, averages are just that, and will not apply to all, but it’s a chink of sunshine nonetheless. Many will hope that this easing of inflation will ease the pressure on the Bank of England’s Monetary Policy Committee.
The next rate decision is due on the 3rd of August.
Recent labour market news
On the 11th June, the latest labour market statistics were released covering the period March to May 2023.
The employment rate reduced slightly over this period, leading to an increase in both unemployment (people seeking work) and inactivity (people not working and not seeking work).
Inactivity statistics have been moving in opposite directions in Scotland compared to the rest of the UK over recent quarters, although as the chart shows, this follows a period of relative convergence of the UK and Scottish rates, and rates have tended to be higher in Scotland than the UK average over recent years.
Chart: Economic Inactivity Rates in Scotland and UK
“Risky” Finances
According to the OBR, in a report published on the 13th July, the pressure on UK public finances has risen considerably over the last year, due to a combination of inflation and interest rate rises, and accelerated changes in demographic change.
One key part of this is the fact that the UK has a relatively high proportion of inflation linked debt compared to other advanced economies. Their frankly terrifying forecasts see UK public debt rising to over 300% of GDP over the next 50 years, from around 100% now (indeed statistics out today show that the UK’s debt pile is now officially higher than GDP in June 2023).
Nothing is inevitable, and these forecasts are drawn up to provide context and evidence for government decision-making in the years ahead. Difficult decisions, as ever, loom.
That’s it for this week. If you haven’t seen it yet, I’d encourage you to watch our colleague Adam’s presentation as part of this year’s Pride in Economics Event. You can find it on our website.
The big economic news this week was undoubtedly the 12th consecutive rate rise from the Bank of England (writes Fraser of Allander Institute’s MAIRI SPOWAGE). The Bank have done this to continue to bear down on stubbornly high inflation, which is still in double figures at 10.1% (latest data for March).
The Bank’s outlook for the UK economy has improved considerably since their last set of forecasts were published in February. Broadly in line with the Office for Budget Responsibility, they now think that the UK economy will overall be flat in the first half of 2023 before returning to growth in the second half of the year.
The Bank are forecasting 0.7% growth in 2023, followed by 0.8% growth in 2024. It is worth highlighting though that this figure for 2024 is pretty anaemic, and below the current forecast from the OBR for the same period.
The Bank’s expectations are still for inflation to fall sharply from April, in part as the high price levels from a year ago come into the comparison. The next data are out on 24th May: let’s see if the economists are correct this time, as to be fair we’ve all been expecting the rate to fall below 10% for some months now.UK
Economy grows in Q1
Today, we got data from the ONS that confirms that the UK economy grew during the first quarter of the year, albeit by only 0.1%. That is balanced out with the news from the monthly data that there was a contraction during March, with wholesale and retail contributing the most to this contraction. This could suggest that the wider economic conditions are starting to bite on consumers, so it will be interesting to see how this is reflected in next month’s data.
Reports about talks about talks
Officials from the Scottish Government and HMRC were at the Public Audit Committee this week to give evidence about the administration of Scottish Income Tax. This session, as one may expect from the Public Audit Committee, was on the technical details of the collection of the tax (which, while partially devolved, is collected by HMRC rather than Revenue Scotland) and also the audit arrangements for the tax collection.
There were some interesting nuggets in there from a tax policy perspective. There was the view of the Scottish Government on the reasons for Scottish Income tax lagging behind the rest of the UK: mainly laid at the feet of the decline in oil and gas jobs: but there didn’t seem to be much clarity on whether we would ever be able to analyse whether this was actually the case.
We also heard that the fiscal framework review has moved “back into an active space”. For those who are after a recap of what on earth this is all about, see our blog in late 2021.
Slightly depressingly, as the PAC Convener Richard Leonard characterised it, this review is currently in the status of “talks about talks”. It is still very unclear when this may be concluded (or even start). Hopefully, we’ll see some news about this from both Governments soon.
This week, the Chief Economist of the Bank of England, Huw Pill, generated many headlines when he said that “we’re all worse off” due to the stubbornly high inflation the economy is experiencing – and bluntly, that we all just need to accept that (write MARI SPOWAGE and EMMA CONGREVE) .
Given this follows on from Governor Andrew Bailey’s comments that people shouldn’t ask for pay rises, it adds a bit to the narrative that the Bank of England is a bit tin-eared to the way workers and households feel right now.
However, Pill’s comments are a reflection of the current outlook. Even with the more optimistic forecasts that we had from the OBR recently, meaning that a recession may be avoided, living standards are still projected to fall significantly over the course of 2023.
It is important though that we have a debate about who in society should bear the brunt of the costs we are experiencing, and whether indeed it is ever going to be possible to protect much of our society from these external shocks.
No sign of a recession… yet
On a more optimistic note, data published this week showed that the Scottish economy grew by 0.2% in February 2023, which follows on from growth of 0.5% in January. Services grew by 0.4%, and particularly encouraging was that consumer-facing services grew by 1.3%.
This means it looks like Q1 2023 is going to show some growth, rather than a contraction as many (including us) had feared.
It will be interesting to see how the economy evolves as we move past the end of March, when we know government support for energy bills started to wind down, particularly for businesses.
How does Scotland compare to other regions of the UK?
ONS have published their latest data on regional economic activity – which you can get split up by all sorts of levels of geography, including local authority and city region, and by industry.
This data allows us to compare the level and type of economic activity across the UK, for the year 1997-2021. Looking across the 12 regions of the UK, known as International Territorial Level (ITL) 1 Regions, we can see that economic activity in London far outstrips that of the other region of the UK. Scotland usually performs pretty well on these metrics, generally 3rd or 4th in the UK depending on the year.
Chart: GVA per head, ITL 1 Regions
Source: ONS
[As statto aside, this is “onshore” Scotland only. Aficionados of economic statistics in the UK will be aware that activity associated with the whole UK Continental Shelf is put into a 13th region called “extra-regio”, which also includes activities in embassies abroad.]
There are also significant differences between different local authorities within Scotland, with the main cities outperforming many other areas of the country. We have to remember of course that the economic activity data reflects where activity takes place – i.e. the location of the place of employment – rather than where people live, so there is a significant commuting effect associated with this data.
Chart: GVA per head, local authority
Source: ONS
Despite another instalment in the long running NCS saga, we still have no certainty over what, when or how much
Last week, it became clear that the National Care Service legislation (and by extension its delivery) will be pushed back (again). In a letter to the Health, Social Care and Sport Committee on the 17th April, the Minister stated that the Scottish Government would be seeking parliamentary approval to extend Stage 1 of the Bill till after the summer recess.
We have written before on some of the questions that remained following the introduction of the Bill and the accompanying Financial Memorandum. The Finance and Public Administration Committee shared many of our concerns (and had others) about the lack of detail in the Financial Memorandum and asked the Scottish Government for an updated version. The Convenor of that Committee, Kenny Gibson, wrote to the Minister this week noting that the Committee are becoming:
“increasingly concerned at the lack of information available on the financial implications of the Bill and frustrated that we have still not received the updated FM we requested back in December last year”
They have asked for a new Financial Memorandum no later than Friday 12 May along with a breakdown of spend to date on the NCS.
The importance of the NCS to those who work and draw on social care, and to wider society, is huge. Although there remains a difference of opinion on how reform should happen, all agree that reform is needed. The delays that we have seen with the programme to date have been concerning. Understanding the financial implications of what this all means has been nigh on impossible. This call for clarity is welcome.
Scottish politics is of course a little up in the air at the moment, following the decision of the current First Minister to resign and high drama of the start of the leadership race (writes EMMA CONGREVE, Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute).
We’re yet to hear too much about the economic policy intentions of her successor, but with nominations closing today (Friday), we expect to hear much more about that in the week ahead.
Aside from the distractions of the SNP leadership contest, here are few other issues making the news this week:
UK – public finances
There was a larger than expected surplus in UK Public Sector Net Borrowing in January 2023. January is typically a year when there is a bump in tax revenues due to the self-assessment tax deadline and these were up £5.5 billion on the same time last year. Energy costs were also lower than expected with the government’s energy price subsidy coming in around £1 billion less than expected by the OBR.
Overall, in the financial year to January 2023, the public sector has borrowed around £30 billion less than the OBR were predicting back in November 2022. This does give some extra fiscal headroom for the UK Chancellor ahead of the upcoming UK Budget on the 15th March, although we wouldn’t expect any big changes given the Chancellor’s stated preference for caution off the back of the turbulence caused by his predecessor.
Scotland – Scottish Budget
In Scotland, the Scottish Budget passed stage three. As we often find at this point in the budget process, there was a little more money to play with due to extra funding (£125 million) coming through the Barnett formula as a result of spending in devolved areas in Westminster. There was also confirmation of an additional £21 million to correct for an error in a previous allocation.
Extra money (£100 million) has been promised to local authorities to help with pay offers for non-teaching staff, which comes off the back of money last week (£123 million) for teaching staff. Creative Scotland also got a boost.
Scottish council’s are now starting to finalise their budgets for the year ahead, with positions on Council Tax increases understandably getting a lot of attention. Already, Orkney have confirmed an increase their Council Tax by 10% with councillors in Aberdeen being recommended by to do the same. Although the very lowest income households are protected from these increases by Council Tax Reduction, many who do face them will of course be concerned over what this means for their household finances.
ONS – financial vulnerability
This week, ONS published an article on groups of people experiencing some form of financial vulnerability who are most exposed to cost of living increases. Whilst the groups cited as being most vulnerable to cost of living increases are what we would expect to see (renters, young people, parents with dependent children, and low-income households) it is great to see ONS continuing to use their data and tools to pull out these insights.
Quantitative data from the ONS does play an important role in policy development, and having data pulled out like this will also help with monitoring the impact of policies to help financial vulnerable groups over time.
This week has seen the appointment of a new Prime Minister, but in terms of economic news it has been a far less tumultuous week than recent ones (writes EMMA CONGREVE, Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute).
Both the UK and Scottish governments announced the postponement of planned budget events. The Scottish Government’s decision not to go ahead with its ‘Emergency Budget Review’ at this time was not surprising. However, there are questions around what budgetary changes will be made this financial year in response to inflation’s impact on public spending.
As highlighted in an article last week, that includes understanding the detail of employability cuts (announced back in September), and indeed the detail of where else the Scottish Government is eking out savings. We need better transparency over how these decisions have been made and the impact on people providing services and the people they support.
If/when the Emergency Budget Review goes ahead is unclear. It may well end up being rolled into the draft Scottish budget announcement for 2023/24, due on the 15th December.
The UK government’s decision to postpone its planned fiscal statement (now rebranded as the Autumn Statement) from the 31st October to the 17th November is justifiable given the prime ministerial change (and in light of the decisions of the incoming Chancellor Jeremy Hunt the previous week).
Delaying the fiscal statement should also mean that the outlook for borrowing costs should be slightly better than it would have been had the statement been published next week since it shifts the reference period for bond yields that the OBR will use in its forecasts.
The publication of the UK Autumn Statement on 17th November means there will be a window of four weeks between the UK Autumn Statement and the Scottish budget on 15th December.
Assuming the UK Autumn Statement is definitive about spending plans in 2023/24, this should provide adequate time for the Scottish government to prepare its 2023/24 by the 15th. There is little scope to push back the draft budget statement into January due to the timescales required to get the Budget Bill through the Scottish Parliament in time for the 2023/24 financial year.
With an expectation of further fiscal tightening by the UK government, the Scottish Government will be braced for more difficult decisions.
Until we see the UK Autumn Statement however, it remains very uncertain how the UK government will prioritise different tax and spending measures, and over what timescales, and hence the implications for the Scottish budget in 2023/24 and beyond.
As always, we will be looking for evidence-based rationales and transparency in how spend has been prioritised from both governments; a subject we will no doubt return to in the coming weeks.
More detail on the impact of the cost of living crisis
As we discussed last week, CPI inflation for September was estimated at 10.1%. This week, the ONS have published supplementary analysis on how rising prices are affecting adults across Great Britain.
9 in 10 people surveyed reported that their cost of living had increased compared to a year ago and the survey asked questions on the extent to which this had impacted their lives.
Around 45% of adults in both GB and Scotland reported finding energy bills somewhat or very difficult to pay and around 30% of GB and 25% of Scottish adults reported finding rent and mortgage payments difficult to afford.
Other breakdowns by protected characteristics showed different experiences. For example, 55% of disabled people, 69% of Black or Black British adults, 59% of Asian or Asian British adults and 60% of renters were finding it somewhat or very difficult to pay energy bills (compared to the population average of around 45%).
These differences are likely to be linked to socioeconomic status: around half of those with a personal income of less than £20,000 per year said they found it difficult to afford their energy bills which reduced to 23% for those with a personal income of more than £50,000.
This week, the ONS also published a ‘highly experimental’ (their words!) analysis of low-cost groceries. For half of the sampled items, the average lowest price goods increased at a faster rate than the official CPI inflation measure for food and non-alcoholic beverages over the past year.
The highest rising prices were for vegetable oil (65%); pasta (60%) and tea (46%). Bread and milk were among other items that rose by more than the CPI average.
The pressures are also of course affecting businesses. The latest Scottish Government analysis of the BICS survey found that 49.8% of businesses reported that the prices of materials, goods and services bought in September 2022 were higher than in August 2022. Around 60% of businesses reported absorbing these costs, and around 35% reported that at least some of the price increases were passed on to customers.
Going back to the previous survey of GB adults, the most significant behavioural changes reported were ‘spending less on non-essentials’ (62% of adults in GB and in Scotland) and ‘using less fuel such as gas and electricity in my home’ (52% of GB adults, 57% in Scotland). If the latter prevails into the colder season, there is of course a concern that this will have serious adverse impacts on health.
Upcoming webinar for your diary
On the subject of health impacts, the Fraser of Allander Institute, in collaboration with MRC/CSO Social and Public Health Sciences Unit at the University of Glasgow and the Health Foundation are holding a webinar on the 15th November (3 – 4.30pm) to discuss trends in health and the socioeconomic drivers of health in Scotland.
Our report on the trends in socioeconomic determinants of health over the past twenty years will be out in the coming weeks.
Click here to sign up to the webinar to hear all about it.
