The average employment growth rate in Scotland between 2024 and 2027 is expected to be 0.8%, lagging all other regions across the UK, with Northern Ireland and Wales sitting at a close second at 0.9%. All three are predicted to be behind the UK national average of 1.1%.

Factors contributing to this include weak demographic growth, high economic inactivity (19.6% in 2023), and a tighter fiscal policy. Long-term sickness and early retirement significantly contribute to economic inactivity, posing constraints on employment growth and company recruitment.

Demographic trends, highlighted in the Scotland EY ITEM Club Forecast, indicate weak population growth, primarily offset by migration. Tighter UK immigration policies are expected to further impact Scotland’s population outlook, making it weaker than the national average.

Adding to the challenges, the latest income tax increases in Scotland for 2024-25 may exacerbate trends in the labour market. Higher earners in Scotland could face an additional £5,221 in taxes compared to working elsewhere in the UK, potentially affecting around 154,000 individuals.

The forecast predicts Scotland to have the lowest Total Personal Disposable Income growth rate (1.3%) and consumer spending (1.7%) from 2024 to 2027, both below the UK average of 1.6% and 2%, respectively. In terms of GVA growth, Scotland ranks last, with an average rate of 1.5%, compared to the UK average of 1.9%.

Sector and city spotlight

Specific sectors forecasted for growth in Scotland from 2024 to 2027 include Information and Communication (8.8%), Energy (8.51%), and Construction (6.84%). Glasgow is predicted to be the fastest-growing city with a GVA growth rate of 1.9%, matching the UK average, while Edinburgh follows closely at 1.8%. However, Aberdeen faces challenges with a predicted growth rate of 0.8%, the lowest in the UK, primarily due to issues in the oil & gas sector.

Ally Scott, EY Scotland managing partner, said: “Although the economic outlook is expected to gradually improve over the next three years, Scotland lags the rest of the UK on many macroeconomic factors – namely, employment growth and personal disposable income growth, where it ranks lowest out of the whole of the UK.

“We have already noted a softening in investor and business sentiment, and now individuals living in Scotland are also likely to feel the effects of the constricted labour market and fiscal tightening more acutely.

“Barriers to growth, such as the widening income tax cross-border divide, may result in job seekers choosing to settle in other more lucrative locations across the UK. This is a concern for our high growth sectors looking to attract the talent that is required to reach their economic – and tax-take – potential.”

Labour market as the key focus

The labour market remains the focus for the performance and economic outlook for Scotland – and the UK as a whole – to set the foundation for a stronger recovery in 2025 and beyond.

The forecast says that understanding regional differences in labour markets, and steering policy makers at both local and national level to address these differences, will be vital to supporting Scotland’s future economic growth. This could include incentivising those who have left the labour market back into employment to address some of the structural challenges as well as ensuring that re-skilling is focused towards sectors where demand for labour will be the greatest, including information and communication.

Sue Dawe, EY Scotland managing partner for financial services, said: “To sustain economic growth over the next three years, it will be crucial for Scotland to have a talented and robust workforce in place – one that is ready to up-skill, re-skill and adapt.

“For the Scottish financial services sector, retaining and attracting new talent will play a large part in the success of the sector’s growth strategy. People need to be incentivised to stay in Scotland, while attracting new external candidates, into what should be a successful and rewarding place to work.

“But Scotland can only achieve its full potential with the right policies and incentives in place. This is a forecast rather than a score card and only with the correct mix of interventions and policies can Scotland hopefully avoid the worst of what’s predicted.”

Nationwide disparity in sector mix and economic inactivity set to persist

While the UK anticipates an annual average GVA growth of 1.9% between 2024 and 2027, regional variations persist. London and the South East lead with 2.1% and 2% growth, while Scotland lags at 1.5%. The North East, Wales, and Scotland are forecasted to have the slowest rates.

Disparities in high-value sectors contribute to regional differences, with professional services and technology industries expected to be among the fastest-growing. However, their concentration varies across regions, impacting employment opportunities.

Higher economic inactivity levels correlate with lower growth, with Northern Ireland having the highest inactivity rate at 25.7%. The South West, London, and the South East exhibit lower rates, highlighting the correlation between labour market participation and growth.

Overall, the forecast suggests that overcoming challenges in Scotland’s labour market will be pivotal for a robust economic recovery, demanding strategic policy interventions and incentives.