It might be the threat of leaving the European Union. It might be the years of austerity imposed by the cruel-hearted English. Heck, it might even be the legacy of the crushing of its industry by Mrs Thatcher three decades ago. There are lots of potential explanations – north of the border anyway – for why the Scottish economy might not be living up to its full potential within the UK.

But here’s the real reason. It simply doesn’t have enough businesses.

According to figures just published by the Scottish Government, the number of companies is now falling in Scotland, while it is rising rapidly across Britain as a whole. It is hard to see that as anything other than very worrying for the future of its economy – for the simple reason that without lots of businesses, and new small businesses in particular, it is very hard for growth to be sustained.

Unless a way can be found to turn that around, Scotland has little future as an independent economy – and if it stays, as seems more likely, it will turn into more and more of a drag on the rest of Britain.

There can be little debate that the Scottish economy is starting to persistently under-perform the rest of the UK. An analysis by the economist John McLaren published in the summer found that Scottish GDP fell last year, while growing for the UK. Overall, it has expanded by only 4pc since the recession of 2008/2009, compared with 23pc for the UK. In the second quarter of this year, the Scottish growth rate was a whole percentage point behind the UK rate. Relentlessly, the country is lagging behind the rest of Britain, opening up a widening gap in productivity and wealth. Year after year, the Scots are getting poorer relative to the UK.

The decline in North Sea oil has, of course, been one factor in that. But it is far from the whole story. In truth, Scotland has become an increasingly unattractive place to base a business – and that is starting to have an impact.

The Scottish Government has just published figures on the numbers of companies operating in Scotland. They show that there are about a quarter fewer businesses in Scotland, measured on a per capita basis, than for the whole of the UK. More precisely, it has 768 enterprises per 10,000 people compared with 1,040 for the UK as whole – a huge difference given that, on the surface, you would expect the numbers to be roughly equal. Even more significantly, it now has the lowest ‘business density’ rate of any region or country within the UK – it is performing even worse than Northern Ireland and Wales, the next two regions with the lowest results.

David Fuller's view

For centuries Scotland has had a proud history of engineers and scientists.  Scottish inventions and discoveries have been equally distinguished.  

These achievements continue today, although increasingly the best talent from Scottish universities heads across the border to pursue careers in the rest of the UK or the USA.

Governance is Everything, as we never tire of saying at Fuller Treacy Money, and years of Scottish Labour Party rule no longer encouraged the entrepreneurial spirit in Scotland.  Instead, it relied on North Sea oil, in the belief that this underwater cornucopia would provide ever higher revenues to support a Socialist utopia. 

When this did not live up to expectations, the Scottish National Party (SNP) won electoral control and blamed England for the region’s problems.  It demanded that successive UK governments grant Scotland ever more independence and also subsidies as the price for staying in the UK. 

Scotland’s bluff is that it will leave the UK, which it co-founded in 1707, for that bigger Socialist utopia known as the European Union.  However, the SNP’s ‘once in a generation’ independence referendum on 18^th September 2014, to answer the question: “Should Scotland be an independent country, yes or no”, was defeated by 55.3% to 44.7%.  This heavy defeat occurred even though anyone living in Scotland could vote whether or not they were a UK citizen, but all Scots living outside Scotland were not allowed to participate in the vote. 

I maintain that the SNP’s popularity peaked earlier this year, following the failed independence referendum.  With Scotland’s economy underperforming, the SNP’s sole raison d'etre is to hold another referendum, in the hope that it can join a disinterested EU.  I suspect that vote would hold little appeal for most of Scotland’s voters, even though they did not support the UK’s Brexit vote. 

Prime Minister May understandably wants to take a long-term view on Scotland, and not just because she has no shortage of Brexit challenges on her hands.  Meanwhile, it will take time for Scotland’s Labour and Conservative Parties to gather support.  However, Labour’s leader Kezia Dugdale and especially the Conservative’s Ruth Davidson are worthy, articulate rivals for the SNP’s strident Nicola Sturgeon.   

Here is a PDF of Matthew Lynn’s article.