National Strategy for Economic Transformation: third annual report

Economic context

2024 was a year of two halves for the Scottish economy. After a strong start to the year, with growth of 0.9% in the first quarter, growth slowed in the second half of the year and data for the three months to May 2025 show that the economy contracted by 0.4% over the quarter and grew 0.2% on an annual basis. Looking ahead, the Scottish Fiscal Commission forecast economic growth for 2025 as a whole to slow to 1.1% before picking up to 1.8% in 2026.

The slowing performance of the Scottish economy since June 2024 has been influenced by some notable UK fiscal decisions such as the increase in employer National Insurance Contributions. Combined with a sharp rise in global economic uncertainty arising from the significant shifts in US global trade policy, ongoing conflicts in Russia and Ukraine and in the Middle East. Collectively, these have resulted in a downward revision in economic forecasts for 2025. Inflationary pressures have remained largely above target and consumer and business sentiment has been weak.

Scotland’s labour market has remained resilient with low unemployment (3.8% in the three months to June 2025) and strong nominal earnings growth (6%). There are indications however that the weakness in demand, and most recently, the introduction of higher employer National Insurance Contributions, has resulted in the demand for staff softening slightly and the number of payrolled employees has fallen by 0.55% over the past year.

Although nominal earnings growth has remained strong, this has not been reflected in demand from households. The Scottish Consumer Sentiment Indicator fell 11.3 points over the past year to June, likely driven by the recent rise in inflation weighing on real earnings growth coupled with the sharp rise in economic uncertainty.

The combination of weak demand and taxation have been key business concerns over the past year alongside the continuation of broader cost pressures arising mainly from labour costs. Alongside wider global uncertainty, this has presented challenging business conditions which have impacted on business investment. The Bank of England’s Agents’ Summary of Business Conditions indicates that UK businesses are less inclined to expand capacity due to concerns about weak demand although investment in software solutions, AI and low-cost automation is quite widespread. In terms of Foreign Direct Investment, the EY Attractiveness Survey for Scotland set out that investors are seeking longer tern stability and confidence to protect their investments and are favouring locations with strong opportunities in new technology, supply chain and cost base efficiencies, and access to the necessary skills.

The passing through of higher costs to consumer prices, has in part resulted in the inflation rate rising over the past year to 3.88% in July. This rise has been slightly more rapid than forecast and the Bank of England currently projects it to rise to 4.4% by September 2025 before gradually easing back towards the 2% target over 2026.

Despite the rise in inflation, the Bank Rate has fallen over the past year from 5.25% in July 2024 to its current rate of 4% and is expected to continue further on this downward trajectory over the coming year, easing borrowing costs for businesses and households. However, business sentiment remains relatively weak, albeit there are indications of strengthening since the start of 2025. This continues to present risks to spending and investment intentions in Scotland which may partly offset the potential activity stemming from lower interest rates.

At a global level, the latest IMF forecast predicts global economic growth to slow to 3% in 2025, reflecting the downside risks from higher tariffs, trade uncertainty and geopolitical tensions.

Wealthier

The most recent Scottish Income Tax figures were published in July 2025 and show that the total amount of income tax generated by Scottish taxpayers in the 2023 to 2024 tax year was £17.1 billion – an increase of 12.7% compared to 2022 to 2023.
Real annual GDP is now estimated to have grown by 1.2% in 2024. This follows growth of 0.5% in 2023.

Fairer

Palma ratio figures for Scotland show that the top ten percent of the population had 23% more income (before housing costs) than the bottom forty percent combined in 2021-24. Income inequality has been fluctuating since the beginning of this data collection in the mid-nineties and while the Palma measure has decreased in the last year it is unclear whether this is the beginning of a new trend, or another fluctuation.

Regional Inequality, measured using GDP per head, has remained the same over the last two data points although the most recent regional data for Scotland is from 2021.

Greener

Scottish Greenhouse Gas emissions reduced by 51.3 per cent between the baseline period and 2023.

The Natural Capital Asset Index (NCAI) monitors the quality and quantity of terrestrial habitats in Scotland, according to their potential to deliver ecosystem services now and into the future. It is a composite index, based (i.e. equal to 100) in the year 2000. When the Natural Capital Asset Index (NCAI) was launched in 2011, Scotland became the first country in the world to publish such a detailed attempt to monitor annual changes in its natural capital. The most recent data (published in 2025) shows that the NCAI was 102.9 in 2022, unchanged from its 2021 value and 0.2 percentage points higher than its 2020 value. It has remained relatively stable since detailed monitoring began in 2000.