Hansard

Thank you for the opportunity to contribute to the committee’s investigation of the potential economic impacts of the result of the EU referendum. I welcome the scope of the committee’s considerations and look forward to receiving its recommendations in various areas. When I appeared before the committee on 28 June, which was less than a week after the EU referendum result, I highlighted several points: the result had changed the economic climate in Scotland, the United Kingdom and the whole of Europe; it would inevitably lead to a period of economic uncertainty; and it would add to the already significant external headwinds facing the Scottish economy. However, I made it clear that the Scottish economy is facing those headwinds from a position of relative resilience and strength, and the experience of the past few months has underlined that point. Scotland’s economy grew by 0.4 per cent in the three months leading up to the referendum, which was the highest rate of quarterly growth since the start of 2015. Scotland’s labour market has continued to perform strongly. The latest data shows that the employment level in Scotland is now 40,000 above its pre-recession peak and 166,000 above the recession trough. The unemployment rate in Scotland has fallen to 4.7 per cent, which is lower than the UK’s rate of 4.8 per cent. Therefore, despite continuing economic concerns following the EU referendum result, it is encouraging that the underlying resilience of the Scottish economy remains strong. However, if we look ahead to the next 18 months, we see that the outlook for growth in Scotland and the UK has weakened following the referendum. Economic forecasters have significantly downgraded their growth projections for 2017 to reflect the heightened uncertainty and increasing inflationary pressures following Brexit. All of that will start to dampen employment prospects, business profitability, household incomes and earnings. In the longer term, independent economic forecasts point to a range of possible impacts on the economy from a redefined relationship with the EU. There is widespread agreement that a UK-EU trade relationship that relies on World Trade Organization rules—which is often referred to as a hard Brexit—represents the worst possible outcome for trade and the economy. The path ahead is uncertain, but we are very clear that Scotland’s relationship with the EU and its place in the single market must be protected. We have a small, open economy in a rapidly changing and globalised world, and our ability to create a more productive and fairer Scotland depends more than ever on trading with the rest of the world and attracting investment into our economy, businesses and assets. Being part of the EU makes the free movement of goods, services, workers and capital easier, and it opens up opportunities for citizens, workers, businesses and consumers. Any relationship with the EU short of full membership of the single market risks increasing barriers to trade, reducing exports and lowering migration, all of which will affect growth rates and reduce productivity. The Fraser of Allander institute has estimated that leaving the single market under the WTO scenario could result in our economy being worse off overall by about 5 per cent—approximately £8 billion—after a decade, in comparison with our position if we were to remain in the EU. It would mean 80,000 fewer jobs and real wages reducing by £2,000 a head per year. There is a rare consensus among economists—who do not often share a consensus—and various think tanks on Brexit. Analysis has shown that Brexit will be bad for exports, investment and jobs, which means that it will be bad for productivity, economic growth and tax receipts. That view is shared by the Office for Budget Responsibility and the Treasury, and it was set out quite clearly by the chancellor during his autumn statement. Brexit has lowered the outlook for economic growth, which has, in turn, led to forecasts of increased borrowing to the tune of more than £100 billion over the forecast period. Ultimately, for households that are already dealing with the impacts of austerity, Brexit has led to a rise in inflationary pressures that, combined with a benefits freeze and a weaker outlook for earnings, will squeeze incomes further. Crucially, analysis by the Institute for Fiscal Studies shows that, by 2021, wages will still be lower than they were in 2008. That implies 13 years without any growth in real wages, which is the longest period of stagnant wages since world war two. There is, therefore, a pressing need for us to try to minimize that potential damage, which is why we have been unequivocal on the importance of membership of the single market and on our determination to retain that membership. That is not to say that we prioritise our trade with the EU at the expense of our trade with the UK; we are clear that we want to maintain our relationship with both vital partners, and the two are not incompatible. We have heard from David Davis that there will not be a hard border between Northern Ireland and the Republic of Ireland, and I am confident that the same would be the case between Scotland and the rest of the UK should Scotland be able to secure our relationship with the EU. We are currently in the process of opening a trade and investment hub in London to attract further investment north of the border, building on recent post-EU referendum investments from companies such as Chevron Aircraft Maintenance and GlaxoSmithKline. Those investments are a vote of confidence in the economy, and the Scottish Government is clear that we remain open to investment from the rest of the UK, Europe and further afield. However, as I have alluded to, it is not just the vote to leave the EU that is providing an unnecessary headwind for the Scottish economy. We are also hamstrung by much of the economic policy that is being led from Westminster. On oil and gas, the chancellor has chosen not to implement the strong package of support that is needed for the North Sea and affected communities, which continue to be impacted by low oil prices. More generally, our economic progress is hindered further by continued austerity and a protracted period of underinvestment in economic infrastructure. Even with the increased investment that was announced last week, which is welcome, Scotland’s capital budget will still be 8 per cent lower across the decade. What was announced last week was simply a moderation of existing cuts. In contrast, we have prioritised capital investment despite cuts to capital budgets. We have invested in major transport projects such as the Queensferry crossing; the M8, M73 and M74 motorway improvements project; and the continuation of the Edinburgh to Glasgow rail improvement programme. We will also invest £3 billion to build 50,000 affordable homes over the current session of Parliament and, during 2016-17, we will invest £90 million in Scotland’s digital infrastructure to help us towards our 2017 target of ensuring that 95 per cent of premises in Scotland have access to next-generation broadband. All that investment is aimed not only at stimulating our economy but at improving our asset base in order to boost long-term productivity. We have made progress in improving productivity performance, narrowing the productivity gap with the UK since 2007. However, we know that further improvement is required, and our ambition is for Scotland to rank among the top-performing Organisation for Economic Co-operation and Development nations. The vote to leave the EU is an unwelcome barrier on the road to fulfilling that ambition. That is why the Government’s goal is to keep Scotland—and, indeed, the whole of the UK—inside the single market. I welcome the opportunity to listen to and work closely with MSPs from across the Parliament who share that goal. I have made that offer before. In the coming weeks, we will produce specific proposals to protect Scotland’s interests and keep us in the single market, even if the rest of the UK decides to leave, because we believe that that outcome is in the best interests of everyone in these islands. I look forward to the committee’s forthcoming recommendations, and I am happy to take any questions that members may have.