The UK’s economic performance in recent years has largely been described as sluggish. Beneath the negativity at the headline level lie figures showing even worse economic performance for particular geographic areas. The devolved nations of Scotland and Wales arguably present the two clearest examples.

Both of these economies have hardly grown in recent years. The latest official data from the Office for National Statistics (ONS) show that Scotland’s economy was 0.7% smaller in 2022 than in 2019, the year prior to the pandemic. Though data published by the Scottish Government earlier this week suggested that the onshore economy eked out a marginal expansion in 2023, this would still leave output short of its pre-pandemic size if applied to the ONS figures, which also include the nation’s offshore oil and gas industry.

The situation in Wales is worse. The latest official data showed that the Welsh economy was 1.8% smaller in 2022 than in 2019, making it the worst performer of any region or nation on this metric. The gap between Wales’ and England’s GDP per capita, therefore, grew to over £10,500 in 2022. This compares to a gap between Scotland and England of around £3,500.

Meanwhile, short-term indicators from the Welsh Government showed that output across the services and production sectors declined by an estimated 1.3% and 5.0%, respectively, last year. Given that these sectors collectively account for around two-thirds of all activity, this suggests that Wales’ economy experienced a contraction in 2023, adding to the shortfall relative to pre-pandemic levels.

Given the fiscal arrangements of these two nations, it would be easy to point to devolution as a driver of their recent subpar performance. However, Northern Ireland, which also has devolved status, has performed strongly in recent years, providing a notable counterexample to this argument.

Instead, specific policies implemented by devolved administrations, rather than the devolutionary arrangement itself, are more likely to be at play. For instance, workers are subject to different income tax rates in Scotland, with a higher burden for higher earners relative to the rest of the UK. This arguably acts as a constraint on both consumption and labour supply decisions.

Meanwhile, the regulatory environment for businesses is also different. Recent results from the Federation of Small Businesses’ Small Business Index have shown that Scottish enterprises are more frequently concerned about the impact of the regulatory environment on their growth relative to a UK-wide sample. The shift away from North Sea oil extraction, a high value-added industry, is also likely holding back Scottish growth, as is high public spending, given its potential to crowd out the private sector.

There are also questions of poor economic fundamentals. This is particularly the case in Wales, which has long lagged behind the rest of the UK on several metrics. In terms of productivity, output per capita is the second-lowest of any region on official data, while spending power data produced by Cebr in collaboration with Asda place Wales firmly below the UK-wide average. Already weak living standards meant that Wales was particularly exposed to the cost-of-living crisis, the effects of which have been strongest amongst lower earners.

In terms of sectoral composition, Wales also relies more heavily on manufacturing and production more broadly than the UK as a whole. Such sectors have faced volatility in recent years because of global headwinds, holding back growth in Wales disproportionately. Poor infrastructure, including a limited motorway network and the recent imposition of low-speed limits in certain areas, is also a factor restricting Wales’ performance.

A question for the near term is whether these regions can turn a corner. In line with Cebr’s projections for improved prospects for the economy as a whole, we do expect growth to pick up for both Scotland and Wales in 2024, at annual rates of 1.1% and 0.7%, respectively. This would be sufficient for the former to surpass its pre-pandemic size, though Wales would still fall short, being the only regional economy to do so.

The aggregate growth would not be sufficient to mark a return to 2019 levels in per capita terms, however, given that both nations’ populations are also expected to increase this year. This suggests that living standards will remain below those witnessed prior to the pandemic. Indeed, Cebr forecasts suggest that output per head in Wales will remain £1,100 short of pre-pandemic levels in 2024, while the equivalent figure for Scotland is £600. Though UK-wide GDP per capita is also expected to fall short relative to pre-pandemic this year, the divergence is significantly smaller than these values.

Longer-term solutions to improving these economies’ prospects may require a more active approach to encouraging activity, particularly on the supply side. Steps have been taken in recent years, such as the provision of levelling-up funding and the establishment of two freeport zones in each of Scotland and Wales. Notably, the economic case for the Anglesey Freeport was supported by Cebr research. Beyond these measures, the broader levelling-up agenda does seem to have taken a backseat in policy circles recently. Bringing such discussions back to the table may represent an opportunity for policymakers to deliver real economic outcomes, regardless of whether they sit in Westminster, Holyrood, or the Senedd.

For more information contact:

Sam Miley, Managing Economist and Forecasting Lead
Email: smiley@cebr.com Phone: 020 7324 2874

Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.