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.

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

10. Oil price crash
Referendum

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
£10k £42k £100k
20p
40p
45p
10p
Scottish Government
HM Government
= £4.7bn
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 £37bn?
SRIT
Reduced Block Grant
Year 2
£37bn
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
£10k £42k £100k
20p
40p
23p
£40k
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?