Brexit: Implications for Scotland’s Economy

LGiU Scotland’s Hannah Muirhead (@HCIM90) explores potential impacts of Brexit on the Scottish economy.

Last month I attended CIPFA event Brexit: What Does it Mean for Scotland? This was a highly engaging and informative evening, but as with every other Brexit conversation, it can be tempting to hold off on looking too hard at what was said in the absence of any real-world decision-making. Since waiting for actual progress turns out to be a fruitless strategy, here is what I pulled from the discussion – no doubt just as relevant now as it was four weeks ago:

I guess we should start with the happy observation that the result of the referendum hasn’t immediately triggered a chain of events with catastrophic consequences for the Scottish economy; the uncertainty created by the leave vote is not feeding into economic data. Yet.

When discussing the economic impact of Brexit “Yet” is very much the word of the moment. Other than the drop in the value of Sterling, the implications of which may or may not be sustained, the short-term economic effects of the referendum result have been mild – mostly noise and not a lot of action. Regarding the current and slightly depressing state of Scotland’s public finances, while Brexit probably hasn’t helped, things were challenging already.

The same can’t be said for the medium to long-term effects, particularly those deriving from the impact of Brexit on trade and investment. Of course, the severity of this impact will entirely depend on the details of the way we leave the EU. If we can negotiate a “soft” Brexit and remain in the single market, we could cruise through without too much bother. Maybe.

The worst economic scenario would be a “hard” Brexit that leaves us trading on WTO rules – tariffs and all. Although tariffs aren’t really the main problem here since, even outside the single market, it would be possible for various sectors to negotiate tariff-free trading with the EU. It’s through non-tariff barriers, such as product standards and technical regulations, that leaving the EU is likely to harm us the most.

These barriers are of particular concern to the service sector, which makes up nearly 80 per cent of the Scottish economy. The potential end of the mutual recognition of qualifications throughout the EU would also be a serious threat to this sector.

Hand in hand with trade goes investment. Investing in the UK is likely to become less attractive to foreign interests with the loss of access to EU markets. Productivity is expected to suffer through a combination of reduced innovation, competition and skilled migrant labour. Since Scotland already has productivity levels that are low relative to those of the UK, but has compensated by being better at attracting inward investment, the Scottish economy is at risk of being hit harder than that of the UK in a post-Brexit world of reduced FDI.

Investment in research also runs the risk of being a casualty of Brexit, with universities being pretty important to Scotland’s economy (in terms of jobs created and GVA), and international collaborations being pretty important to Scottish universities. I have heard more than one person mention that they had seen actual instances of potential academic collaborations being abandoned because of Brexit-related funding uncertainties, and it is likely that having to leave the European Research Council would be highly detrimental for Scottish universities and the scientific sector as a whole. Of course, whether this would happen under Brexit would depend on the deal that we don’t yet have.

Lastly, the economic impact of transposing EU legislation is also something that needs to be taken into account. For example, at some point in the aftermath of a Brexit, Scotland is likely to inherit full agricultural policy. Whether Scotland also inherits sufficient funding to pay for it is an altogether different matter.

Useful update: On Monday 24th October there was a Brexit discussion held with the devolved nations after which Nicola Sturgeon said that she was “no clearer” on the UK Government’s thinking about how they are going to manage leaving the EU… the uncertainty continues.