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New research questions Scotland's growth rate

30.08.2007
A new paper published today by members of the Centre for Public Policy for Regions (CPPR) throws considerable doubt on the reliability of the data that is currently used to measure Scotland’s economic growth rate (as measured by the Scottish Executive's quarterly published series for Gross Value Added (GVA) at basic prices).

Over the post devolution period (1998-2006) the new research delves deep into the data at sub industry level and finds a number of difficult to explain trends, especially in relation to comparable UK trends.

The authors conclude that without satisfactory explanations for these growth differentials the new Council of Economic Advisers (CoEA), who are due to have their inaugural meeting in September, will find it difficult to draw any firm conclusions on performance or policy in relation to the Scottish economy.

The biggest unexplained differences relate to industries within the Services sector.

In terms of private sector services, the consumer and leisure boom that is generally assumed to be a leading factor in developed countries growth rates has been almost invisible in Scotland:

-the Wholesale and Retail (shopping) sector showed no growth between 1999 and 2005 in Scotland, while for the UK it grew by 25% over the same period

-the Hotels and Catering (including restaurants and bars) sector rose by only 1% between 1998 and 2006 in Scotland, while in the UK it rose by 33%

As well as the Scotland-UK differential the Scottish growth data also contradicts alternative Scottish data sources. In particular, the official growth statistics are inconsistent with those obtained from the ABI (Annual Business Inquiry), which is generally considered the most reliable source for these areas of activities due to its size. The official growth rates also fail to match with alternative figures from the Regional Accounts for GVA and with employment data. In addition, survey data (BRC/RBoS) in relation to the retail sector suggests positive growth over recent years.

In what are largely public sector services the position is equally confusing:

-the Education sector data has Scotland outgrowing the UK sector, at 25% versus 8% over the period 1998-2006. This contrasts with the trend in relative employment figures (higher for the UK) as well as the number of education aged citizens (5-24) which has risen in the UK but fallen in Scotland

-in contrast the Health and Social Work sector has grown more slowly in Scotland (20%) than in the UK (31%) over the same period. Again this contrasts with the relative employment changes, where growth has been higher in Scotland than the UK over this period.

Part of the explanation for the public service differentials may be down to the use of different data sources to compile Scottish and UK output data. Scotland principally uses employment data while the UK uses indices based more on actual activity (e.g. number and expense of treatments and operations in Health). At present the data series are not being compiled on a comparable basis and so their contributions to overall growth are inconsistent.

Does this matter?

The short answer is yes.

Scotland’s growth rate cannot be known with any absolute certainty if the main measure published is inconsistent with other Scottish data, which is probably of a higher standard.

Equally Scotland’s relative growth rate, of great importance in the current debate over Scotland’s economic performance, suffers from the same problem, in particular when comparison is made to UK growth figures.

The cause of the problems is also important.

If the data are wrong then clearly they need to be corrected and a new, and more accurate, growth rate for Scotland calculated.

If the data are right then there may be serious implications for economic policy. Why are the retail and hospitality sectors performing so dismally and what can be done about it? Is the common perception of our towns and cities being populated by more bars and restaurants and by bigger shopping outlets a mirage?

In 2004, before the Scottish retail figures were substantially revised down, the Scottish Executive proclaimed that “the retail sector is a key indicator of the health of consumer demand generally, and crucial to both economic prosperity and employment prospects.” If that remains true then the current figures need explaining and appropriate action taken.

As an example of the possible relevance of these problems, of the 0.7% per annum growth differential in the official data for Scotland and the UK (1998-2006):

-half of this would disappear, if Scottish growth in the ‘Wholesale and Retail’ and ‘Hotels and Catering’ sectors is actually on a par with the UK,

-the other half would disappear if changes in relative population were adjusted for.

As a result the post devolution growth differential would disappear, in terms of growth in standards of living for Scotland and the UK.

Of course there are many other possible outcomes depending on what the true story is, but we will not know that until the quality of the data is confirmed and any trend differentials properly analysed.

On the relevance of this work to the agenda for the new CoEA John McLaren said:

“The advantage of having a Council of Economic Advisers is that they can now act as a new and strong influence in demanding a better explanation of the existing economic data. Given the difficulty in reconciling or explaining the industry sub-sector trends shown in this paper it seems an essential first step for the CoEA to ensure that the growth data is fit for purpose before drawing any firm policy conclusions with respect to bolstering the performance of the Scottish economy.”

In relation to the implications for statistics on the Scottish Economy Richard Harris said:

“The implications of this work are very serious not just for growth but also for understanding Scotland’s productivity performance and by implication it’s relative competitiveness. Greater resources, human and financial, may well be needed to be spent by the Scottish Executive in both collecting and analysing data. Consistency in methodology between Scotland and other countries, in particular the UK, is essential. Without these improvements we will be simply making stabs in the dark over the most appropriate economic policies needed to improve performance.”

(CPPR PAPER – ‘MEASURING GROWTH OF THE SCOTTISH ECONOMY’ – John McLaren, Richard Harris)

Martin Shannon | alfa
Further information:
http://www.gla.ac.uk
http://www.cppr.ac.uk/media/media_39552_en.pdf

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