After Brexit: The UK Internal Market Act and devolution

Annex C: UK economic performance since devolution

The UK Government's approach in the Internal Market Act suggests a worldview that appears to regard difference as harmful, and uniformity and Westminster control as necessary to maintain prosperity across the UK. This is not supported by the facts. There is no evidence to suggest that policy divergence has inhibited economic performance. Scotland has performed well across a range of indicators since devolution and historic gaps between Scotland and other parts of the UK have been narrowed:

• Prior to 2008, Scotland's level of productivity was around 10% lower than the UK average. Latest data for 2018 show that the productivity gap is now around 1%.^[59]
• Since 2008, productivity has grown at an average annual rate of 0.9% per year, compared to the UK average of 0.4% over that period.^[60]
• Gross median weekly earnings for full-time employees in Scotland were £576.70 in 2020, broadly in line with the UK average.^[61]
• Among the nations of the UK, long-term pay growth has been highest in Scotland since 1997.^[62]

Devolution has not inhibited economic performance nor has it inhibited the functioning of the UK economy.

Although the Scottish and rest of the UK economies are closely aligned there are differences in their industrial composition. Whilst both are largely service-based economies, the Scottish and rest of the UK economies have particular strengths in certain sectors. For example, Scotland relies more on Mining & Quarrying Sector (Oil & Gas), Construction and Transport & Storage whilst the rest of the UK had a relative advantage in a larger number of private-sector industries, with particular emphasis on Financial and Insurance activities. The composition of the labour market also differs. For example, Scotland has a greater proportion of employment in the public sector (around 20% vs around 16% in the UK). In part this reflects a deliberate policy choice to support public services.

Scotland has a distinct approach to economic strategy from the rest of the UK and this has enabled Scottish Government to pursue different economic objectives. As noted, the Scottish Government has set out its overall purpose and performance outcomes and indicators in the National Performance Framework.^[63] Similarly, Scotland's economic Strategy^[64] is predicated on the principle that promoting competitiveness and addressing inequality are important interdependent ambitions; reducing inequality in itself is beneficial for economic growth.

As the UK Government's UK Internal Market White Paper itself made clear, the UK market has not exhibited any evidence of increasing barriers to trade, or any decline in flows between the nations and regions of the UK.^[65]

Intra UK trade displays high levels of integration between nations and regions in the flows of goods, services, capital and people. There are no significant barriers to trade in goods and services between the constituent parts of the UK.

Barriers within the UK market are also low compared to international comparators. For example, barriers to trade between German regions are found to be higher than those between UK nations and regions. This has not impeded Germany from achieving a significantly higher GDP per capita and lower income inequality than the UK.^[66]

The United States of America (USA) offers another example of high levels of labour market mobility and a highly integrated internal market. Individual states nevertheless have the power to vary an additional rate of income and corporate tax over and above the federal rate. The USA internal market is also characterised by variation in the minimum wage and in the provision of welfare payments.

In Belgium, although corporation tax rates are set nationally, innovation policy is under the full authority of the regions who can offer grants, R&D tax credits, and payroll incentives.

Much has been made about the need for to operate to a common set of rules. Business already operates with differences across UK which reflect preferences in local markets or policy initiatives on health and environmental considerations pioneered by devolved administrations (for example, sugar tax, minimum alcohol pricing, ban on raw milk, plastic cotton buds, microbeads in cosmetics, recycling targets) – with no evidence that these differences have caused difficulties across the UK market.