Election 2016: Q&A on Scotland's economy
Holyrood puts key questions to some of Scotland’s top economic experts
Have lessons been learned from the 2008 financial crisis?
Stephen Boyd, STUC assistant secretary: No, the policy response has been risible. The proximate causes – weak regulation of, and awful incentives in, the financial sector – have been inadequately addressed at UK level. The underlying causes, including global imbalances, slow wage growth, increasing economic and political power exerted by the financial elite, continue to be largely ignored. Revealingly, neither the UK nor Scottish Government has ever presented a coherent critique of the post-crisis economy nor explained how current policy will help prevent a future crisis.
Jeremy Peat, visiting professor at Strathclyde International Public Policy Institute: We are gradually coming to appreciate that the economic world in the foreseeable future will be different from our past, pre-financial crash experience. There are still lessons to be learned regarding regulation of the financial sector, and top management across big business has still failed to grasp that shareholders and the general public alike recognise when rewards to the big beasts of business are clearly grossly excessive.
In addition, in the world of economic policies, we not only face learning to deal with a rapidly shifting global order, but also a world in which we need to learn new (perhaps novel) approaches to macro-economic management. Central bankers and finance ministers alike need to think outside their standard pre-recession boxes. If zero interest rates are not stimulating investment or consumption, then where do we turn next? The risks and uncertainties are now clearly seen to be greater than previously recognised; while the global public is becoming as interested in the ‘fairness’ of the distribution of income and wealth as it is in how to maximise growth per se. Policy creativity will be critical to (broadly defined) economic success.
Angela O’Hagan, lecturer at Glasgow Caledonian University and researcher with WiSE Research Centre: The initial response by governments to the global financial crisis was intervention to bail out the banks and cut interest rates to stimulate economic activity, however, pretty soon the old economic orthodoxy returned. So we are still caught in the narrative and reality of austerity, with a fixation on public sector deficit reduction while private debt spirals. The political choices of successive Westminster governments, to reduce public spending and make tax allowances for higher earners, have combined to make lower income earners and people who are more reliant on public services and public sector employment worse off.
As Professor Diane Elson, visiting professor at WiSE and chair of the UK Women’s Budget Group, has reflected, these measures have particularly affected women across the board, but especially older women and women lone parents. Disabled people have been increasingly affected by the dismantling of current ‘welfare’ arrangements, which as well as harming individuals are seeing significant amounts of money withdrawn from the Scottish economy.
Are the financial powers included in the latest round of devolution a coherent package?
John Elvidge, former permanent secretary to the Scottish Government and chair of the David Hume Institute: It would be insulting to the Smith Commission and all our political parties, who collaborated to produce an agreed package, to call it incoherent. It is designed to do some things, notably, to allow Scottish governments more control over the amount of money they choose to spend and more scope to determine how the tax burden is spread, and not others. As we see in the continuing political debate, it is possible to continue to argue for different broad choices but that doesn’t make the choices which were made incoherent.
For me, it is the borrowing powers which are likely to be more significant than the income tax powers because the effect on aggregate expenditure is more certain and therefore, a better basis for planning investment. We have no evidence yet of the way people will react to any changes in the income-tax regime, but evidence from elsewhere suggests that some people adjusting their behaviour to offset the impact of tax changes is one inevitable effect. Nicola Sturgeon has already made public the expert advice she has had that attempting to reintroduce a 50 per cent higher rate of tax would be likely to reduce tax revenues rather than increase them.
Jeremy Peat: The powers amount to something of a ragbag rather than anything more coherent. However, specific financial powers are not what will really matter for the medium and longer term prospects of our economy. First of all, we are very much at the mercy of broader international forces. For so long as key European and Asian markets remain subdued so will the global economy, and that will adversely influence our prospects, not least because oil and gas prices will remain relatively low as demand remains weak, and this will have wide-ranging negative impacts here.
Changes at the margin in income tax or indeed other key taxes will not have significant early impacts. What we should be focusing on is means of raising our competitiveness in international markets and our efficiency at home. How can we be more entrepreneurial as a nation, with a more ambitious business sector, making better use of our strong skill base and all of that intellectual capital being generated in our distinctly strong higher education and research sector? That is the key challenge. Tax changes may assist in achieving in part distributional goals but will not fundamentally change our economic status.
How can Scotland grow its tax base?
Stephen Boyd: The fact that there is limited scope to use current and forthcoming powers to broaden the tax base is no excuse for inaction. The first thing to recognise is that lowering marginal tax rates will not produce the magical incentive effects often assumed by the ignorant or ideologically motivated. Rather, a bolder approach to taxation of (top) income and wealth is unavoidable for any Scottish administration genuinely motivated by a commitment to reduce inequality.
The council tax should be abolished and replaced with a steeply progressive property tax and the risible giveaway that is the Small Business Bonus must be withdrawn. Over time, a shift towards stronger local government with more tax powers will help broaden the base, increase revenues and boost trust and democratic participation.
Angela O’Hagan: As highlighted by the Commission on Local Tax Reform, we need a broad range of measures to expand the tax base. A mix of income, property, land, and discrete taxes phased in over the next five to ten years would see an extension of the tax base. Revaluation of residential properties, again, as demonstrated by the analysis for the commission, along with a re-banding of property tax, would generate substantial uplift in tax revenue.
Tackling low paid jobs with poor contractual terms and conditions is imperative in increasing the quality of employment and subsequently the tax base. WiSE research has previously argued that an increase in investment in high quality childcare is central to our economic infrastructure and would generate employment in construction, the childcare workforce, and expand the employment opportunities of working parents. All of which would contribute to an expanded tax base.
What role should private investment play in creating Scotland’s infrastructure?
Stephen Boyd: Key components of Scotland’s infrastructure such as telecoms and energy are already fully privatised. The record of investment in these sectors is less than impressive. With new borrowing powers and the benefit of historically low interest rates, there is a compelling rationale for public financing of essential infrastructure. The extent to which the private sector should be involved depends on the project and the terms on offer. The role of the private sector should always be fully transparent and subject to public scrutiny. It is certainly unacceptable for foreign, authoritarian and increasingly mercantilist governments to build and own Scotland’s strategic assets.
John Elvidge: The private sector already makes a huge contribution but can do more if opportunities are created. The real question is the terms on which that happens rather than whether it should happen. We have a bit of a false debate about this, given that the money to pay for infrastructure comes from the private sector, whether it is borrowed by government or invested directly, and the infrastructure is almost entirely built and maintained by private companies, either under contract to the public sector or directly.
There is a huge appetite in the private sector internationally for opportunities to invest in, construct and operate good infrastructure. Such opportunities match the needs of pension funds and sovereign wealth funds for long-term investments with fairly safe and stable returns. As you would expect, as chair of Edinburgh Airport Limited, I believe that the private ownership model demonstrates the scope for much larger benefits to the Scottish economy than were previously thought achievable. There is a natural overlap of commercial interest and the wider public interest. Although we believe that we lead the pursuit of growth, particularly through our very heavy investment in growing the airport’s capacity, ultimately we can only thrive as a business if the economy around us is also thriving.
How can Scotland make its workforce more productive?
Angela O’Hagan: I doubt that people on low incomes, particularly women working multiple low paid jobs to cover their bills and continuing to care for their families, feel they are any less productive than previously. This provisioning by women is not included in measures of productivity or economic forecasts, but yet it continues to underpin and maintain the ‘productive economy’. Recognising the value of care and the contribution of the care economy to Scotland’s economic and social wellbeing would make for significantly different economic policy in Scotland with better outcomes for all. Investment in our social infrastructure is essential as evidenced by the research from WiSE on the extension of childcare and other forms of care, and in the arguments for sustainable funding of social care support as advocated by Independent Living in Scotland and others. There are economic and human rights dimensions to economic policy. If we are to support people into quality employment, boosting our skills base as well as our tax base, and if commitments to inclusive growth and tackling inequality are to be meaningful, then economic policy has to recognise the value and contribution of care to economic and social wellbeing.
Jeremy Peat: I so wish that I knew the answer to this, absolutely critical, question. Since the financial collapse, the UK’s productivity performance has lagged behind its historical norm and also fallen way behind the performance of the great majority of our key competitors. The data on Scotland are limited, but it would appear that Scotland has not out-performed the UK and may even have fallen behind – while the UK falls behind others. Our prospects are dim so long as this state of affairs pertains. And that applies as much to achieving a more balanced and equitable economy as it does for GDP growth as a whole.
I have argued elsewhere for the establishment of a (short-term) ‘productivity commission’. This would include representatives of business (large and small) and employees, as well as academics experienced in the production of intellectual capital and those with a positive experience of utilising that capital to best effect. To be more productive we need to make best use of our skilled manpower, and to encourage the further development of those with limited skills so that they too can increasingly contribute to efficiency and output. We need much more ambition and much enhanced management in public and private sectors, to make the most of that which is available. There is no panacea, but we should aim high and not be satisfied with the second rate world of productivity in which we now dwell.
What one thing could a Scottish government do to improve the economic outlook of Scotland?
Angela O’Hagan: Effective gender and equalities analysis of economic policy, labour market dynamics and the budget process are essential. Government needs to understand better and act upon unequal opportunities and outcomes in the labour market and in publicly-funded training programmes such as the Modern Apprenticeship schemes. Previous Scottish governments have recognised that inequality is a “drag on economic growth”. So, effective and funded policies tackling occupational segregation, using the ministerial duties within the Public Sector Equality Duty to direct enterprise agencies, public authorities and others in receipt of public finances to be more proactive in their procurement, training and employment practices to draw a wider pool of labour into higher quality employment should all be part of economic policy development.
John Elvidge: The most powerful thing which any government can do for the economy is to establish a framework which enables businesses to succeed and create jobs and investment. We take many of the things which government already does in that way for granted: for example, an education system which provides a high-quality labour supply, including attracting outstanding talent from outside Scotland to our best universities, and an efficient and uncorrupt legal system, which safeguards fundamentals of the economy such as contract law. To form a basis for economic growth, the elements of the framework need to be regarded as solid and reliable over the long term. So increased support for improved infrastructure is the obvious answer to the question.
The Scottish Government has made that a priority, as have most other governments in the developed world since the 2008 crash exposed the risk of relying too heavily on abstruse developments in financial infrastructure. That’s the heart of the challenge – how to do what lots of countries are trying to do better than the others. I think the round of City Deals under negotiation at the moment give us a big opportunity to beat the field, if the Scottish Government uses its capacity to bring the threads together and then to join the UK Government in investing on a scale that can make a real difference.
Is North Sea oil finished?
Stephen Boyd: No, but it continues to face an existential threat. If coordinated production cuts can be agreed by major producing nations, it is feasible that the price could rise to $60-$70 by the end of the year, but no credible authority is forecasting a price of $100-plus anytime soon. If cuts can’t be agreed, it is very possible that sub $50 prices are here for the foreseeable future.
The industry’s response to current challenges must be based on collaboration, innovation, common high standards and a mature assessment of why costs in the UKCS continue to be higher than similar jurisdictions. The economic benefits of the industry will not be maximised by undermining safety and job security or allowing the pool of skilled labour to evaporate. Thorough and substantive dialogue between unions, employers and government will be central in determining a positive future for the industry.
Jeremy Peat: Most certainly not. The industry has decades of productive life to look forward to. When I took up a position as senior economic adviser at the (then) Scottish Office as far back as early 1985, I was told that one of my key roles would be to advise on the impact of the expected sharp slowdown in this sector, in particular on Aberdeen and the North East more generally. That input was not required over the subsequent 30 years!
Now that the oil price is lower, effects are being felt within the sector and across a whole host of Scottish sectors and regions. The oil price has come off the floor but (a) nobody knows where it will go next and (b) no business or other expectations should be based on a rapid, substantive and sustained rise in prices. A conservative approach will make sense, with any upside treated as a welcome windfall.
Fortunately, over the years the Scottish oil and gas sector has both developed wide international links and key technical skills. These will be of continuing and widespread value. Employment at home may well continue to fall and Aberdeen may be less of a boom city, but the domestic sector will continue, with some new developments continuing, and the direct and indirect benefits of having such a key sector off our shores will be felt for decades to come.
Do you think Scotland has a well-balanced economy and what areas do you think need to be boosted?
Stephen Boyd: The Scottish economy could be significantly better balanced in industrial, regional and distributional terms, but, as the Chancellor is currently finding out the hard way, such economic rebalancing is a tortuously difficult and uncertain process. Increasing manufacturing’s share of output would help improve resilience and the regional distribution of good jobs, as would increasing the proportion of domestic ownership and control.
A democratisation of the relevant institutions would help engage communities in the process of economic development. However, post-financial crisis, most developed nations share similar goals and there is little sign that current government policy is having the necessary impact.
John Elvidge: We are better balanced sectorally than many economies and we are growing sectors of real long-term strength, particularly tourism, at a time when we have to adjust to the increased vulnerability of our long-term sources of strength, notably the finance sector. One feature of that rebalancing, though, is that it is increasing our reliance on small and medium-sized companies and eroding our large companies, particularly those with a headquarters function.
We are unlikely to attract many large, established companies while our fiscal and constitutional regimes are difficult for companies to predict. So we have to have the conditions in which new companies with substantial growth potential are likely to develop and grow. Probably our key advantage in that is the huge strength of our university sector, which is much more successful in terms of international comparisons than we have a right to expect.
We need to intensify the work that is done to convert the creation of new intellectual property into successful businesses. Successive Scottish governments deserve credit for recognising the importance of the sector consistently in economic strategies, but I find the recent legislation interfering in the governance, including the academic governance, of these successful institutions a surprising departure from the maxim “if it ain’t broke, don’t fix it”.
Can more efficiency savings be made in the public sector?
Stephen Boyd: Possibly, but it really is time for Scotland’s political class to confront the reality that the labour-intensive personal services (especially in health and education) delivered by Scotland’s public sector will never achieve the same rate of productivity growth as the economy as a whole. Pretending this is possible leads to unrealistic expectations and, ultimately, bad or irrelevant policy. Excellent services simply cannot be maintained on the back of ongoing low or negative real wage rises and spending cuts.
John Elvidge: You can cut costs in any organisation. The question is the effect of doing that and whether it constitutes efficiency. In some cases it will but it is lazy to label all cost reduction as an efficiency saving. There are real questions about what we wish to buy through our public sector. I used to estimate that between a quarter and a third of the running costs of the Scottish Government was spent on what I would broadly call servicing democracy, through supporting ministers in their engagement with Parliament and the public and through civil servants responding directly to members of the public and increasing the transparency of the government’s work.
I don’t hear many people saying that they want less transparent and accountable government. On the other hand, I have written, in my work for the Carnegie UK Trust, about the scope for the state to spend less and for citizens to be more satisfied with their lives through building on the many successful examples in Scotland, and elsewhere in the British Isles, of enabling citizens to be more in control of their own lives and those of their communities.
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