Every quarter, Scottish GDP figures are released and the political conversation that follows is predictable. One side points to the number being positive and claims vindication. The other side points to the number being lower than the UK average and claims failure. Both sides then move on until the next release three months later.
This is a poor way to think about the Scottish economy. The number that actually matters, and that almost nobody talks about outside specialist circles, is productivity. Scotland has had a productivity problem for more than a decade and it is getting worse.
Productivity, measured as output per hour worked, is the single most important determinant of living standards over the long run. Countries and regions with high productivity can pay higher wages, fund better public services, and sustain better quality of life. Countries and regions with stagnant productivity cannot, no matter what else they do.
The UK as a whole has had a productivity problem since the 2008 financial crisis. Scottish productivity has tracked the UK figure broadly but sits below it. The Fraser of Allander Institute, the Office for National Statistics, and the Scottish Government’s own economy team have all confirmed the pattern. Recent research from the Productivity Institute places Scotland below the UK average on most measures.
The political response to this has been inadequate. Political attention focuses on headline economic indicators that make good press releases. GDP growth, employment rates, inflation. Productivity is harder to explain, harder to politicise, and harder to improve quickly. So it gets less attention than it should.
That is a mistake. Without productivity growth, Scotland cannot sustain higher wages without damaging competitiveness. It cannot fund the rising costs of health and social care without either cutting other public services or raising taxes to levels that deter economic activity. It cannot compete internationally for the investment it needs to modernise its industries.
The causes of Scotland’s productivity problem are not mysterious. The UK’s productivity puzzle has been studied extensively. Underinvestment by business, weak management practices in the long tail of smaller firms, skills gaps in key occupations, and inadequate infrastructure all feature. Scotland has additional specific issues including a relatively high proportion of public sector employment, a long tail of small low productivity firms, and a concentration of high productivity activity in a few sectors and cities.
Some of this is within Scottish control. Scottish Enterprise, Highlands and Islands Enterprise, and the colleges and universities have roles to play in business support, skills, and innovation. The Scottish Government controls relevant policy levers around infrastructure, housing, and some elements of business taxation.
Some of it is not. Monetary policy sits with the Bank of England. Most labour market policy sits at Westminster. Industrial strategy is largely a reserved matter, though Scotland has its own National Strategy for Economic Transformation. Reform of the business investment climate depends heavily on UK corporation tax and capital allowance decisions.
This should not be an excuse. Governments, businesses, and trade bodies in Scotland can do more within the existing framework. Three things would help.
First, Scottish productivity data should be published and debated as systematically as GDP data. The Scottish Government’s chief economist could host a quarterly productivity briefing that the media treats as equal in importance to GDP releases. At present, productivity figures surface occasionally in academic reports and are almost never covered in mainstream Scottish media.
Second, the Scottish enterprise support system should be honest about which firms are most likely to deliver productivity gains. High growth potential firms in exportable sectors matter more than most traditional small business support. That conclusion is uncomfortable but it is supported by decades of evidence from regional economic studies.
Third, capital investment in infrastructure, housing, and skills should be protected from short term political pressure. Scotland’s productivity problem is a capital problem as much as anything else. Public capital spending decisions made on political timescales routinely cut long term productivity enhancing investments to protect current spending on politically sensitive services.
None of this is novel. The arguments have been made by economists, by the Fraser of Allander Institute, by the Institute for Fiscal Studies, and by successive advisers to Scottish Government. The problem has not been a shortage of analysis. It has been a shortage of political and media attention.
That is something the Scottish business press can help with. Reporting on productivity is harder than reporting on GDP releases. The figures are technical, the stories are long term, and the public appetite for structural economics is limited. But if Scottish business journalism does not take this seriously, nobody else will either.
Scotland is not broken. The Scottish economy continues to grow, Scottish businesses continue to compete, and Scottish workers continue to produce. But the rate at which Scotland is improving its economic performance is too slow. Productivity is the lever that would change that. It deserves more than the occasional sentence in a quarterly GDP commentary.
Author bio
Iain MacPherson is the Editor of Business News Scotland. This opinion piece represents his own views. He holds a degree in economics from the University of Strathclyde and has reported on the Scottish economy for fifteen years.
