While economic momentum and employment growth will gradually build throughout the UK over the next three years, Scotland’s labour market is expected to continue to see challenges and lag other regions, according to the latest EY Regional Economic Forecast.

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%.

According to the report, Scotland’s employment prospects are dampened by weak demographic growth, a high rate of economic inactivity (19.6% for 2023), and tighter fiscal policy. The Annual Population Survey (October 2022 to September 2023), published in the latest Scotland EY ITEM Club Forecast, shows that long-term sickness appears to be a considerable reason for economic inactivity in Scotland, accounting for almost 32% of inactivity, compared to 27% in the UK. Early retirement also appears more significant at 14.0%, compared to 12.7% for the UK. Relatively high inactivity in Scotland is likely to be constraining employment growth and company recruitment activity.

Over the longer-term, demographic trends play a key role in determining the scale of future jobs growth and, in turn, the country’s economic prosperity. According to the latest Scotland EY ITEM Club Forecast, the population growth in Scotland is expected to be relatively weak, with migration only just offsetting the decline from natural change (births minus deaths). Tighter UK policy on immigration is also expected to impact the population outlook for Scotland, which is somewhat weaker than the UK average – largely as a result of lower net migration.

The latest Scottish income tax increases for 2024-25 have the potential to exacerbate some of the trends in the Scottish labour market further. It has been estimated that a Scottish taxpayer earning £125,000 will pay £5,221 more in tax in Scotland in 2024–25 than they would if working elsewhere in the UK. This may change after the UK Government’s Budget in March, but currently amounts to a fiscal tightening for an estimated 154,000 higher earners in Scotland.

Furthermore, the forecast expects Scotland to have the lowest Total Personal Disposable Income growth rate across 2024 to 2027, sitting at an average rate of 1.3%, behind all other regions and the national average of 1.6%. Consumer spending is predicted to be lowest in Scotland at an average rate of 1.7% for the next three years, against the UK average of 2%.

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Scotland also ranks last place against all other regions and the UK average on GVA growth. From 2024 to 2027, EY’s forecast predicts Scotland’s average GVA growth rate to be 1.5%, with the UK average GVA growth rate sitting at 1.9% over the same period.