Thank you very much, convener. I thought that it would be helpful to run through—quite quickly—from an economics perspective, the key issues that Brexit throws up for the Scottish economy. I will not talk about those issues in a positive or negative way; rather, I will mention the types of issue that will need to be resolved over the next wee while and what will drive the impacts on the economy that people like me are saying are likely to happen.
I have grouped the issues into long and short-term effects. On the long-term effects, there are probably five key issues that the committee would want to think about. The first of those issues is the trading relationships that are thrown up by the decision to leave the European Union. Obviously, within the European Union is a single market. Moving away from that single market means that a new trading relationship will have to be designed. Just over 40 per cent of Scottish exports go to the European Union. That is an important fact that needs to be taken care of.
There are lots of different models that could be designed for having new trading relationships. The committee will have heard of what being a member of the European Economic Area entails, which is the Norway-type model. There is the Swiss-type model, which is more about having in place bilateral arrangements. There are also more alternative versions around free trade areas and moving completely into the World Trade Organization, under which the country would operate with normal tariff barriers.
That is the first set of issues. The second set of issues concerns the implications for investment. Scotland has been quite a successful area within the United Kingdom in attracting international investment. A large part of that has been because of the skills and the wider infrastructure of the Scottish economy, but we know that international investors come to the UK and to Scotland to access the single market.
The third set of issues concerns the population and the labour market. Over the past few years, Scotland has had net migration coming in from different parts of the European Union. The European Union has also been quite strong in putting forward regulations not only on the labour market, but on the product market. If we move out of the European Union, those issues will need to be thought about and resolved.
The fourth issue is fiscal contributions. During the referendum there was quite a lot of debate about the United Kingdom’s net contribution to the European Union and the difference between gross and net contributions. Gross contributions are the total amount that is paid into the EU, but once we take off things such as the rebate and the other revenues that come into the United Kingdom and Scotland through research funding, the common agricultural policy and various other elements, there is a set of issues that needs to be considered around what the potential fiscal implications of leaving the EU would be.
The final issue—it is probably the one that economists are a bit more interested in and concerned about—is about what we would call the dynamic effects. We know that we have companies that export and we know that inward investment tends to have a positive impact on things such as productivity and skills. If our exports and investment were to change over time, that could have implications for such things as productivity, our overall growth rate and competition. There is a set of issues in there that might be quite significant over the long term.
On balance, the view of most independent economists would be that, in the long run, leaving the EU would tend to have a negative impact on output and jobs, all else remaining equal. Obviously, policy choices could flow from that that might change all that. The thing that is probably more uncertain and a bit more complex is what might happen in the short run.
We have published some forecasts this morning that try to estimate what we think will happen to the Scottish economy over the next three years. It comes down to two key issues, one of which is the impact of uncertainty on the economy. We know that, in an uncertain world, investors and businesses tend to put off decisions. In the short run, that can largely be temporary and, when clarity comes in, they start investing again. The impact is therefore largely short term and there is a bounce back. However, the longer that the uncertainty goes on, the more likely it is that decisions to postpone investment turn into cancellations and changes in plans.
There is also policy uncertainty. We do not yet know what the end result from the negotiations will be. We do not know whether we will have access to the single market or be outside it. That injects another element of uncertainty into the mix, which has implications for how businesses will respond.
Financial markets have been volatile and are likely to continue to be so as the negotiations go forward, which in itself can have an impact on business decisions. It is more likely that risk premiums will be added to borrowing costs as people factor in potential volatility and uncertainty.
The final issue is that, linking back to the long-term adjustments, over time people will start to make decisions about what the relationship will be with their trading partners in the EU. We would expect that businesses will gradually start to change their decisions and investments. We think that, on balance and in the short term, that will have a negative impact on Scottish growth over the next three years.
This morning, we have revised down our forecasts for each of the next three years. However, I would offer a note of caution by saying that we also believe that the situation is quite different from the financial crisis, so we are not predicting an immediate, long recession; all that we are predicting is a period of relatively slow, flat growth while we adjust to the new relationships.