Bill Jamieson: Fiscal gamble turns up the heat on Brexit crucible

Scotland’s Finance Secretary Derek Mackay says he is creating a more progressive tax system – seldom has the word “progressive” concealed a harsher reality. He added that stronger growth for Scotland could have a positive impact on this risk-sharing “reconciliation” in future years. Take from this what reassurance you can.

And lest you thought such shortfalls were a uniquely Scottish phenomenon, along came figures last Friday showing UK government borrowing (excluding public sector banks) in June hit £7.2 billion – some £3.8bn more than in June 2018, and the highest June borrowing total since 2015.

This takes borrowing in the year to date to £17.9bn or £4.5bn more than in the same period previously.

As for the overall tally of government debt, this rose by some £27bn at the end of June to £1.8 trillion or 83.1 per cent of GDP – though this ratio has come down by 1.5 percentage points. Whatever slim comfort can be taken from that last statistic, don’t rush out to celebrate.

The Office for Budget Responsibility warned last week that UK public borrowing could double next year to almost £60bn if there is a no-deal Brexit. This compares with a putative £29.3bn if a deal is agreed.

The OBR says the scenario – based on International Monetary Fund data – assumed a no-deal Brexit would cause a UK recession. The IMF analysis shows the UK economy would contract by 2 per cent in 2020 before recovering in 2021.

This would come as tariffs of 4 per cent were imposed on goods traded with the EU – up from zero currently. In this scenario, the OBR said that “heightened uncertainty and declining confidence” would deter investment, while higher trade barriers with the EU would “weigh on exports”.

Taken together, “these push the economy into recession, with asset prices and the pound falling sharply”. It added this could raise inflation and squeeze real incomes. It would also hit tax receipts, causing public sector borrowing to rise and leaving debt 12 per cent higher by 2024.

As if for good measure, the OBR added this was “not necessarily the most likely outcome” but also “by no means the worst-case scenario”.

It also warned that both Conservative leadership contenders had made “a series of uncosted proposals for tax cuts and spending increases that would be likely to increase government borrowing by tens of billions of pounds if implemented”. As for the Treasury, it has predicted a £90bn hit to the economy by 2035.

There are worrying features about all of this. First is the problem of public confidence and trustworthiness in such assessments, given that previous deeply pessimistic forecasts in the wake of the 2016 EU referendum vote proved woefully inaccurate.

The second is that the more these forecasts permeate the political domain and are given further currency, the greater the risk that we may talk ourselves into a recession. If businesses and households fear that the outlook is so bleak, it is likely that business investment will continue to suffer, expansion plans will be put on ice and households will defer big spending commitments.

From every official quarter – the Treasury, the Bank of England, the CBI and not least the UK Chancellor – gloom and foreboding pour forth. Indeed, we might have fallen into recession already had not employment continued to grow – the UK employment rate is up 0.4 per cent at 76 per cent compared with a year ago, unemployment is at a 45-year low, unfilled vacancies, though slightly down, are still running at an historically high 827,000, pay rises are running at an annual rate of 3.4 per cent, public sector pay growth is 3.4 per cent higher (the highest since 2010), with overall regular pay running in real, after inflation, terms, 1.7 per cent higher.

So: more numbers in work, more households earning, pay packets outstripping inflation and household spending rising at an annual rate of 1.9 per cent: while the pace of labour market improvement may be slowing, such a prolonged improvement – little short of miraculous in the face of the political gloom – has never been in the official script. Nor has the rise in UK corporate profits to £115,312m in the first quarter of the year – an all-time high – nor the rise in house prices, nor the 4 per cent rise in UK tourism overseas to 4.8 million visits: seldom has economic foreboding been more well-heeled.

Nevertheless, the relentless political uncertainty over Brexit – the prolonged haggling over the government’s negotiation tactics, the three abject failures of the Withdrawal Agreement, the endless rounds of parliamentary voting, the interminable Conservative leadership election hustings – has cost the UK dearly in terms of business ambition and confidence.

Indeed, the cost of three and a half years of uncertainty must rank as one of the most damaging self-inflicted goals of modern economics.

And it is hard to see how Scotland can avoid the likelihood of economic slowdown as the 31 October deadline approaches.

New powers to set the rates and bands for income tax in Scotland have further added to household and business uncertainty as previous “best guess” calculations are now found to have fallen significantly short.

The gamble of the SNP administration now is that Scotland’s apparent stronger economic growth than the rest of the UK will continue and could have a positive impact on the tax and spend calculations for 2018-19 – though data will not be published until next year.

What’s clear for now in this horrendous Brexit fog is that we are approaching the cauldron of 31 October with a political crisis breaking, confidence ebbing lower – and with government budget problems on both sides of the border.