The latest quarterly economic commentary from the Fraser of Allander Institute (FAI) is forecasting growth for Scotland of 0.9% in 2024, 1.1% in 2025 and 1.2% in 2026.

“The forecast has been revised up from 2024 due to stronger than expected growth in the Spring, but the forecasts for 2025 and 2026 have remained unchanged from the previous set in June,” said the FAI.

However, the Deloitte-sponsored quarterly assessment said following a positive start to 2024, economic growth in the summer months has been more hesitant for the UK and Scotland.

“The latest data on business conditions suggests a slight faltering of confidence about the next few months compared to the beginning of the year,” said the FAI.

“Consumer confidence indicators are displaying a similar pattern. Some research suggests that confidence may be being impacted by the wider political discourse over tough fiscal decisions to come.”

Professor Mairi Spowage, Director of the Institute, said: “The new UK Government has come into place in July, and the new Chancellor Rachel Reeves has set out her view of their fiscal inheritance and the difficult decisions which may need to be made in order, as they would see it, to restore economic stability.

“The rhetoric around this has the potential to dent business and consumer confidence and contribute to the softening economic performance over the summer. However, it is always difficult to definitively say that – the economy is a dynamic organism rather than a predictable mechanism.

“Many businesses may well be waiting to see what is in the budget on 30th October to have the confidence to grow and invest.”

Douglas Farish, Head of Tax for Scotland at Deloitte, said: “With the country facing economic challenges and financial constraints, bold public service reform is not just desirable—it’s essential to improve the way public services are delivered.

“As we approach the UK Budget in October and the Scottish Budget in December, there is understandable uncertainty across both the public and private sectors.

“Amidst these challenges, businesses and communities will be looking for stability and a clear path forward. It’s critical that these announcements provide thoughtful and decisive reforms that address today’s fiscal pressures, creating a more efficient and resilient public sector that can help navigate these economic headwinds while facilitating long-term, sustainable growth.”

As well as the usual economic analysis, the Institute’s quarterly commentary also includes analysis of the public sector in Scotland. This highlights the differences in the level of pay in the public sector in Scotland compared to other parts of the UK.

João Sousa, Deputy Director of the Institute, said: “The analysis we have published today highlights the surprising statistic that median pay for public sector workers in Scotland is higher than the UK average, behind only London.

“This has also changed over the last few years, with median pay overall growing faster than the UK average. We also show that a greater proportion of the Scottish workforce is in the public sector (22% compared to 17% for the UK).

“This has interesting fiscal consequences. With higher initial pay, and a greater proportion of workers in the public sector, comparable pay deals will cost more to settles in Scotland. This could mean that any Barnett consequentials that derive from deals in England may not be sufficient to cover deals in Scotland, putting further pressure on the Scottish Budget.”