Good morning, and thank you for the opportunity to give evidence.
As the committee will know, we published our first report, as a statutory organisation, on 14 December, alongside the Scottish draft budget for 2018-19. That report includes a number of forecasts, in particular on the economy, that will be of interest to the committee, and it also forecasts likely income from devolved taxes and demand-led expenditure on social security. Our focus this morning will mainly be on the economy.
Our report includes a set of forecasts for on-shore gross domestic product for five years. Our understanding is that this is the first time any organisation has made forecasts over such a time period. We hope that they will be of use to the committee in its inquiry on the performance of the Scottish economy.
The report provides a range of detail—there are a lot of numbers in it. We are very conscious of that and will be delighted to explain any aspect of the details that have been included. We would also be happy to provide additional figures or breakdowns of the data, if the committee wants that. The report includes the most important aspects. We also published on our website on 14 December, alongside the report, a set of spreadsheets containing additional detail.
One of the main conclusions in our overall assessment of the Scottish economy is that we forecast what we describe as “subdued” economic growth over the next five years. A number of factors underpin that. One of the key points to make is that we have taken a balanced approach: we have tried to take into account the long-run performance of the Scottish economy since before the financial crash and in the period thereafter—in particular, taking into account the most recent information over the past two to three years. We have tried to draw up a set of detailed thinking on how the economy might roll out over the next five years or so.
I will pick up on a couple of the main points. As the committee will be aware, since the financial crash, overall growth has been very weak by international and historical standards. That has also been the case at United Kingdom level and internationally. We have tried to assess whether that might continue, or how far and how quickly we might get back to the levels of economic growth that we saw prior to the financial crash. Our overall assessment is that it will take some time to return to the historical levels of growth: the key message of the report is about managing expectations of how quickly we could return to those levels. That is a feature at Scotland and UK levels.
Secondly, we try to draw out several particular factors that have impacted on and affected Scotland’s economic activity over the past five years or so. We have identified factors in the early part of the decade, particularly in construction and oil and gas activity, whose impact was to buoy up economic growth. There were particular strengths in that period that come through in the overall assessment data. However, at least some sectors—I am thinking of construction and oil and gas—have weakened recently. Our assessment is that those key areas, along with some others that we might go into later, are unlikely to provide the boost to economic activity that they did in the early part of the decade. That is a second key factor, alongside the weakening of international economic growth, which led to our conclusions about the future.
I emphasise the importance of underlying productivity to the overall performance of the economy: productivity is key to our forecasts. We can unpack that and give the committee some more detail on it.
I want to mention two other things on which we can go into further detail. First, population projections are important in understanding gross domestic product per head, which is a key factor that drives incomes and the future labour market. Population projections are a key additional factor on which we would be happy to answer questions.
Secondly, there is the potential impact of the change in the relationship with the European Union for the UK as a whole and for Scotland in particular, which is something on which we have made a broad-based judgment as part of our forecasts. That is factored into our assessment.
Finally, as one forecaster from the National Institute of Economic and Social Research put it, over the past seven or eight years,
“productivity has … surprised forecasters to the downside.”
In other words, many people’s expectations about growth in productivity have been disappointed. However,
“employment has surprised to the upside”.
In other words, there have been very high levels of employment activity and historic low levels of unemployment. It is worth taking into account that those are two sides of the same coin and are current features of the Scottish and UK economies. That is a key aspect in our forecast. Although much of the emphasis and comment on our forecast has been about the subdued nature of our productivity and growth projections, it is worth emphasising that that sits alongside historically high levels of employment and low levels of unemployment, which we expect to continue.
That is an overview. We would be delighted to take questions and to give further details.