A Scotland for the future: opportunities and challenges of Scotland's changing population

Why Is Demography Important?

Demography shows us the structure our population through the number of births, deaths and migration in, out and within Scotland. Through the collection of data, we are able to see how Scotland's population has changed over time and predict what might happen in the future.

Scotland's National Performance Framework sets out the sort of country we want to see and at its heart is our purpose to create a more successful country with opportunities for all of Scotland to flourish through increased wellbeing and sustainable and inclusive economic growth.

To achieve that vision, to meet our targets to address the global climate emergency, to raise educational attainment and to build the necessary skills and infrastructure Scotland needs, to create a fairer, greener and wealthier country.

Around 30% of the Scottish Government's budget comes from Scottish Income Tax

To fund and deliver quality public services, we need a well-skilled, healthy, and resilient population. A significant proportion of the government's budget (around 30%) comes from the income tax paid by people living and working in Scotland. Understanding more about who those who pay tax, and those who don't, will allow us to forecast how much public money is likely to be needed to fund our visions for Scotland, while continuing to deliver public services, like health and education.

Fiscal impacts of changes to population growth 

The Scottish Fiscal Commission is Scotland's official independent Economic and fiscal forecaster. The Commission, whose forecasts directly inform the Scottish Government's budget, has stated that the size of the working age population is very important for Scotland's future economy and public finances.

In May 2019 the Commission published their Economic and Fiscal Forecasts report setting out their five-year forecasts of the Scottish economy, tax receipts, social security expenditure and an assessment of government borrowing. Their comments about the importance of population growth highlight the impact of demography on our economy:

We expect growth in Scottish GDP to be significantly lower than in the UK, primarily because of slower population growth in Scotland

The Commission's latest Economic and Fiscal Forecasts^[1] were published in January 2021 including new population forecasts and these show the indirect impact of COVID-19 and the ending of free movement by projecting the population of Scotland aged between 16 and 64 to be smaller by around 14,000 compared with their February 2020 forecast. These new population projections lower trend GDP relative to the projections used in February 2020 by 0.5 per cent in 2025 Q1 and have been revised mostly due to lower anticipated net migration to Scotland as a result of the pandemic rather than excess deaths.

The fiscal framework agreed between the Scottish Government and the UK Government insulates the Scottish budget from differences in overall population growth in respect of devolved tax revenues and social security expenditure. However, this does not protect the Scottish budget from all demographic change. The budget is not protected from a reduction in the proportion of the population accounted for by working age people, and a consequent reduction in tax revenues per head or increase in social security spend per head. As set out in the Scottish Government and Scottish Parliament's Finance and Constitution and Social Security Committees joint working group report, these demographic risks to the Scottish Budget are one of the key issues that should be considered as part of the review of the Fiscal Framework. 

Economy and Labour Market

How Scotland's population is changing is fundamental to the current and future health of our economy and labour market.

Beyond the importance to government finances and the ability of the public sector to provide services to its population, Scotland's population is a driver of overall economic activity and growth. Scotland's business base, the domestic customers that provide them with demand, and the workforce required to supply that demand are all derived from its resident population.

In recognition of this, monitoring population growth is, as set out above, a component outcome of the Scottish Government's National Performance Framework^[2] and ensuring Scotland has a well-skilled, productive, healthy and resilient population is an action identified in Scotland's Economic Strategy as a requirement to achieve sustainable growth.^[3]

Scotland's Labour Market Pre-COVID-19

Prior to COVID-19, compared with historical trends and similar economies, Scotland's employment rate was high and unemployment rate low. Scotland's employment rate reached a record high of 75.9% in Feb-Apr 2019 (Office for National Statistics (ONS),^[4] Labour Force Survey (LFS)) and was the culmination of consistent employment growth as the economy recovered from the effects of the 2008 financial crash and global recession that drove unemployment in Scotland to around double today's rate, reaching 8.8% in May-July 2010.

However, even during this period of recovery and strong employment growth, the UK's and Scotland's labour market faced long-standing challenges affecting efficiency. For example, in the form of weak underlying productivity growth and widespread skills shortages and gaps.^[5]

As in many economies there was also persistent inequality in our labour market based upon gender, age, disability, ethnicity and geography. Progress has been made against some of these inequalities, for example sustained growth in female participation in Scotland's labour market, with Scotland's female employment rate rising from 66.3% in 2011 to 71.7% in 2019^[6].

However, COVID-19 has been shown to have a generally regressive impact on our labour market by disproportionately affecting already disadvantaged groups. For example, young people have experienced higher increases in unemployment and reductions in employment than other age groups, employment rates for lower qualified employees have fallen more than higher qualified employees, and in latest data (ONS, LFS, July to September 2020) the disability employment gap widened over the year.^[7] The effects of COVID-19 have yet to fully materialise in Scotland's labour market. However, the medium term outlook remains highly uncertain.

Sustaining Public Services

Having a sustainable and growing working age population is important and this is measured by the dependency ratio of people aged under 16 and those of pensionable age as compared to those between those ages, in what is generally referred to as the working age population. There are many people over the age of 65 who are working just as there are many who are in the working age population who are not currently working. However, this ratio is an internationally recognised measure which helps to assess the number of people able to contribute to paying taxes to deliver our necessary public services.^[8] Scotland's dependency ratio is currently 56.2 but that masks significant divergence as the dependence ratio ranges from 41.5 to 71.6 in Glasgow City and Nah-Eileanan Siar respectively. 

As well as the importance of having a population that is able to fund our public services, we also need people who are able to work and deliver these crucial services. For example, a large number of our nurses are aged over 50, and we will need to recruit and train more to support our vital NHS services both now and in the future.

Local Level

Population change is important at a local level as well as a national level. Declining population levels can impact on the sustainability of some local communities, and the retention of key local services. A declining working age population means that there are fewer people available to deliver key public services or to meet gaps in the workforce. In addition, the lack of working age families can threaten the sustainability of essential public services like schools which risks families moving elsewhere. Conversely, planning future development can be challenging in areas where demand is high and infrastructure is constrained.

To deliver a more successful country with opportunities for all we need a skilled population across Scotland's communities. However, our overall population growth is slowing with all future population growth depending entirely on migration. Our population is ageing and while some of our communities are facing the challenges of rapid population growth many others are struggling with depopulation. This raises significant challenges.