Economic and Political Challenges for Scotland's Top Businesses
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Insider Top 500 Business Breakfast 2015, Sheraton Hotel, Edinburgh This event provided business leaders with an economic forecast for Scotland, the UK and across the globe for the year ahead as well as a platform to discuss key business issues for 2015. The event was attended by over 250 corporate guests with Chief Executives, Managing Directors and Financial Directors from the leading companies in Scotland invited to attend.
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Economic and Political Challenges for Scotland's Top Businesses
- 1. Economic and Political Challenges for Scotland’s Top Businesses Professor David Bell University of Stirling
- 2. • Depressed demand in some major markets – European stagnation – Asian slowdown – Robust US growth • But … – Lower oil prices!
- 3. Europe weak – UK/USA relatively robust in 2014 0.0 0.5 1.0 1.5 2.0 2.5 3.0 GrowthRate(4Quartersto 2013Q4)
- 4. But does GDP capture how well people feel about their circumstances? 90 92 94 96 98 100 102 104 GDP GDP Per Head NNI Per Head “RNNDI might be expected to have a close correlation with economic well-being.” (ONS, 2014)
- 5. Weak economy – investment stagnates - currency sinks … Last six months
- 6. The pound has also weakened – poor trade performance Last six months
- 7. • Countries with weak growth likely to have poor investment prospects • Investors may shift in government debt to earn a stable return • Countries with fast growth have better investment returns. Governments have to compete with industry for investment funds. • Countries with high debt and concerns about default are unlikely to have high demand for their debt. Their debt loses value because investors don’t want to hold • Yields increase.
- 8. Sovereign Bond Yields – Cost of Government Borrowing 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Switzerland Germany France Spain Hong Kong United States Portugal Australia New Zealand India Sovereign Bond Yields as of 6/1/2015
- 9. The Oil Issue • Lower prices good for: – Countries/regions that import oil – Companies that use hydrocarbons for energy/manufacturing • Lower prices bad for: – Oil exporting countries/regions – Oil industry • Oil price is highly volatile – difficult to hedge in the long-term
- 11. The Oil Shock – Demand Weakens, Supply Grows
- 12. The UK Perspective • Strong growth performance in 2014, but slower growth from 2015 onward • Price inflation undershooting its target – No scope for conventional monetary policy to increase prices – Unlikely that there will be any interest rate rise • Weak nominal wage growth – Living standards for poorer households static or declining – Offset by increasing population • Uncertainty over course of government deficit = taxes – government spending
- 13. Services dominate recovery so far …
- 14. OBR Forecast Dec 2014 – current growth consumer-based Percentage change on a year earlier Outturn Forecast 2013 2014 2015 2016 2017 2018 2019 Output at constant market prices Gross domestic product (GDP) 1.7 3.0 2.4 2.2 2.4 2.3 2.3 Expenditure components of GDP Household consumption 1.6 2.3 2.8 2.2 2.4 2.3 2.4 General government consumption 0.7 1.1 -0.4 -0.8 -0.9 -0.3 0.0 Business investment 4.8 7.7 8.4 6.3 6.3 6.3 6.3 General government investment -7.3 2.1 3.3 1.6 2.2 1.6 2.3 Net trade1 0.0 -0.2 -0.5 -0.1 -0.1 -0.1 -0.2 Source: OBR
- 15. The Next Five Months PA/BBC
- 16. The Autumn Statement Proposals - cuts and more cuts ….. 32 34 36 38 40 42 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 PercentofGDP Public sector current receipts Total managed expenditure
- 17. Key Political Arguments Over Tax and Spending • How quickly to reduce deficit? • What level of borrowing is acceptable? • Focus on spending cuts or introduce some tax increases?
- 18. UK Public Net Debt As Percent of GDP 0 50 100 150 200 250 1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 PercentofGDP Current Position
- 19. More or Less Debt? • Debt should be reduced in the good times, so that in the bad times it can be increased in order to help individuals and firms adjust to shocks. • Governments should only commit future generations to pay for spending that those future generations will benefit from themselves. • There should be some limit to how much we pre-commit future taxpayers to, not only on fiscal sustainability grounds but also because it involves making a choice on behalf of people who have no power to resist.
- 20. Scotland Act 2012 – Landfill Tax – Land and Buildings Transaction Tax – Scottish Rate of Income Tax (SRIT) – 2015-16 estimated receipts: • Landfill tax £107m • Land and Buildings Transaction Tax £413m • SRIT £4668m • Total £5188m (Out of total budget of £37.5bn)
- 21. Scottish Rate of Income Tax Income Income Tax Rate ÂŁ10k ÂŁ42k ÂŁ100k 20p 40p 45p 10p Scottish Government HM Government = ÂŁ4.7bn Vertical tax competition within shared tax base? Horizontal tax competition over mobile tax base? 15p
- 22. The Block Grant Adjustment (under the Scotland Act 2012) Year 1 Less than ÂŁ37bn? SRIT Reduced Block Grant Year 2 ÂŁ37bn Size of reduction determined by growth in UK tax base Shortfall if Scottish income tax not growing as fast as UK income tax Indexed Deduction Method
- 23. The Smith Commission – Fiscal Powers • Scottish Parliament gains control over all of income tax except the personal allowance • Scottish Parliament to receive the first 10 percentage points of VAT raised in Scotland, but cannot influence the UK’s overall UK rate • Air Passenger Duty • Some welfare powers • Can supplement existing welfare benefits • More borrowing power to cover forecasting errors
- 24. Smith Proposal (example) Income Income Tax Rate ÂŁ10k ÂŁ42k ÂŁ100k 20p 40p 23p ÂŁ40k 43p
- 25. Conclusion – Some Key Questions • Will the powers be used? • How will their use be influenced by business? • How effective could the powers be in stimulating business? • What other business-friendly policies could the Scottish Parliament introduce?