Scottish growth and tax set to undershoot

Prepare yourself for a number that might focus some minds. And here it is: there is a 5% chance that Scotland's economy is going to grow faster than the rest of the UK.

That's according to Professor David Bell, one of Scotland's foremost economists, based at Stirling University.

You might wish to offer some reasons for that: the oil sector downturn, a weaker jobs market or, perhaps, the lack of economic powers at Holyrood arguably leaving Scotland beleaguered.

From now, the number is not only fuel for argument as to the cause, but it also matters to Holyrood because it helps with an understanding of the money it will have to spend.

If the Scottish economy falls short of UK growth in total economic output, (or Gross Domestic Product), it will have less money to spend than it would do by relying, as it has, on a block grant from Westminster.

In other words, when a large chunk of Holyrood's budget is funded from income tax, as it will be from April, maintaining that level of spending requires taxable income to grow by at least as much as UK incomes.

If and when tax powers are further devolved, then the importance of maintaining that revenue - to maintain spending levels - becomes even greater.

Overshoot

As I've noted before, the Scottish government now has to consider the buoyancy of tax revenue - by how much it could under-shoot, and what to do about it.

Revenue can also overshoot projections, but governments spend less time worrying about that, for obvious reasons.

Ministers have set up the Scottish Fiscal Commission to assess the quality of its forecasting, and it hasn't been all that complimentary so far.

On the relatively small question of how much money comes in from Land and Buildings Transaction Tax, the replacement for Stamp Duty, it has noted that budget planners show little understanding of the changes people make in their financial affairs in response to tax changes.

As people in bigger homes brought forward transactions to last financial year, with lower tax rates on buying expensive homes, it now seems there could be a gap of up to £31m in budgets at St Andrews House.

The rate of economic growth is closely tied in with the income tax powers now being introduced. That is where the Scottish government, along with MSPs who scrutinise it, now find themselves.

Finance Secretary John Swinney will be discussing the implications when he's grilled by committee on Wednesday morning.

At the same time, his statisticians release the growth figure for the third quarter of last year - a figure that is not expected to look reassuring.

Growth in the second quarter was only stopped from moving into reverse - and potential recession territory - by the construction sector.

The total output of the Scottish economy was up only 0.1% compared with 0.5% (revised) figure for the UK as a whole.

To explain the external advice from Professor Bell, he is embarking on a path strewn with pitfalls and others' embarrassments, by forecasting the nation's future growth path.

The Fraser of Allander Institute at Strathclyde has been the main independent forecaster, recently marking its 40th anniversary in the business.

In November, it projected growth of 2.2% in 2016, down on its forecast published in June, comparing with an average forecast for the UK of 2.3%.

Possible outcomes

That, however, is only the central forecast by the Strathclyde economists. They say Scottish growth could be as low as 1.4% or as high as 3%.

Professor Bell has taken a different approach of watching forecasts for economic growth over 17 years, and seeing where the errors have been.

By running 100 different forecasts allowing for those errors, he creates a range of possible outcomes, from which he can calculate how likely future forecasts are to be wrong.

The result is that calculation with which we began - that UK growth, as forecast by the Office for Budget Responsibility - is likely to be ahead of Scottish growth, and there is only a 5% chance that it won't be.

To recap, higher Scottish growth would mean more people earning and/or getting higher pay on average - either way paying more income tax than Scotland would get if it stayed within the long-established block grant system.

Lower Scottish growth means there would either be lower employment and/or lower pay, and reduced income tax revenue, leaving a gap for Mr Swinney to plug.

The questions now: how to get to a higher growth path? And would changes to the Scottish Rate of Income Tax help or hinder that objective?

One complication is that not every pound earned is taxed at the same rate.

It could be that growth disproportionately benefits those on higher pay, in which case there would a higher tax take.

If growth benefits those who pay little or no income tax, then revenue won't be helped much. There's no reckoning on which group would benefit most from growth.

But it points to one reason why governments may quite like inequality - if high earners benefit most from growth, they do more to fill up Treasury coffers.

* Professor Bell has published an update in his calculation resulting from the Scottish GDP growth figure for the third quarter of last year. You can read about it in his blog here.