I thank the committee for the opportunity to contribute to the investigation into Scotland’s economic performance since 2007 and to look at the divergence in performance between Scotland, the United Kingdom and its regions, and other countries.
I welcome the scope of the committee’s inquiry. I know that the committee has taken evidence that covers a wide range of areas and subjects that relate to Scotland’s economic performance, and I look forward to receiving at the end of the process the recommendations on what further action might be required to make Scotland’s economy even more inclusive, innovative and international.
I will start by setting out Scotland’s recent economic performance before I turn to the broader economic outlook and some of the challenges.
Scotland’s economic performance strengthened in 2017, with four quarters of growth recorded. That was driven by growth in services and—importantly—production, with sector support in the oil and gas sector beginning to return to growth, as the outlook for that sector continues to improve. The aggregate growth for Scotland, albeit that it is still below trend, is important against a backdrop of heightened uncertainty as the UK moves closer to leaving the European Union.
Alongside the growth, Scotland’s labour market remains strong. Over the past year, unemployment has fallen to near record lows, employment has risen, and inactivity has fallen. The labour market in aggregate is performing at near record levels, which is welcome, although we acknowledge an element of underemployment in those figures.
Over the past decade, gross domestic product in Scotland has grown by 6.5 per cent. That equates to an average of just 0.7 per cent growth each year, compared with 1.1 per cent for the UK. Part of the difference in our economic performance compared with that of the UK reflects differences in population growth. When we make comparisons with the UK economy, it is important to note the unbalanced nature of that economy and the fact that some UK economic statistics are skewed by the impact that London has in dominating economic performance. I have heard the UK economy being referred to as flying on one engine because it is so unbalanced. Perhaps it is the most unbalanced developed economy in the world.
Since 2007, Scotland’s economic performance has outperformed that of many of our peers, and productivity growth has been higher than that of any other country or region of the UK, including London. Employment in Scotland is now 66,000 higher than it was at its pre-recession peak, and there has been considerable progress in reducing youth unemployment. Scotland now has one of the lowest rates of youth unemployment in the EU.
The latest figures also show that GDP per head in Scotland is higher than that of anywhere else in the UK outside London and the south-east of England.
Those facts demonstrate the economic progress that has been made under this Government. The past decade covers the period of the global financial crisis and the deepest global recession since the 1930s, of course, so it is not surprising that Scottish GDP growth over that period is below the pre-recession trend of growth of around 2.1 per cent each year. Scotland’s economy is not unlike other advanced economies in that respect. The trend in growth internationally has also been impacted by the financial crisis, with G7 growth averaging 1.1 per cent over the past decade.
There is no question that some of the consequences of the global recession and the UK Government’s subsequent austerity programme have limited economic growth in Scotland. Since the European Union referendum in 2016, there has been on-going uncertainty for businesses and households. The fall in the oil price in 2014 led to a slowdown in the oil and gas supply chain that fed through to the wider Scottish economy, accounting for about two thirds of the slowdown in overall growth between 2014 and 2016.
Another factor that I am well aware has had a limiting effect on growth is the fact that Scotland’s working age population has not grown as quickly as that of other countries. That is a challenge that Scotland has faced for many decades and it has been exacerbated by Brexit, which is why we have repeatedly called for Scotland to have the power to tailor its own migration policy to reflect the challenges that we face.
On the economic outlook, independent forecasts for the Scottish economy suggest that GDP will grow by between 0.7 and 1.4 per cent in 2018, and accelerate in 2019. There is consensus from all independent forecasts that the uncertainty surrounding Brexit is the key risk that is affecting the economic outlook. However, some Brexit deniers continue to deny that Brexit has had an impact on the economic outlook. There is no doubt that risks relating to business and consumer sentiment remain, and that is impacting on expenditure and investment in the economy.
The improved outlook relative to 2017’s reflects, in part, a stronger world economy. In its latest “World Economic Outlook”, the International Monetary Fund was clear that the world economy is enjoying a period of strong economic growth. The IMF has raised its growth forecasts for the world economy for this year and next year by 0.2 per cent above its forecasts in October 2017. The IMF has also upgraded its forecasts for the advanced economies by 0.5 and 0.4 per cent for 2018 and 2019 respectively. The UK is the only member of the group of seven leading countries not to have its growth forecast upgraded. The recent UK data for quarter 1 of 2018 reported growth of 0.1 per cent, which was below market expectations and below the Scottish economy’s growth in the previous quarter of 0.3 per cent.
As I noted in my earlier remarks, there is a more positive outlook for oil and gas and related production activities, which should help to drive productivity growth. However, support is needed to maximise the longevity and success of that dynamic industry, and the UK Government’s industrial strategy failed to mention any new developments in the oil and gas sector.
There is clearly an upside to future prospects for economic growth, but we must be alert to the potential downside from the unpredictable post-Brexit environment. We are just under 12 months away from formally exiting the EU without a clearly agreed path in terms of our on-going access to key EU markets. That remains the biggest uncertainty that will hamper economic growth and investment over the coming years. In fact, I would argue that uncertainty over Brexit has already had an impact on investment. It is virtually universally acknowledged that Brexit will damage our long-term economic growth, productivity, investment and trade. Related to that, with Scotland’s working age population projected to grow only slightly over the next 25 years, a Brexit-induced decline in the number of EU migrants will have a damaging impact on our economy.
The economic outlook is perhaps inevitably uncertain, but I emphasise that the Scottish economy is facing the future from a position of relative economic strength. Despite the uncertainties, we are supporting business and continuing to grow Scotland’s economy by focusing on investment, internationalisation, innovation and inclusive growth, and there have been many positive results from our actions. Scotland has secured more foreign direct investment projects than any other part of the UK outside of London since 2007. Such investments have supported 38,000 jobs in Scotland and are a vote of confidence in the economy. The Scottish Government is clear that we remain open to investment from the rest of the UK, Europe and further afield.
We have established a board of trade and created hubs in Dublin, London and Berlin. Our international goods exports, including oil and gas, grew by 19 per cent last year to £28.8 billion, which was the fastest growth in any of the UK nations. We are investing £48 million in our national manufacturing institute for Scotland in Renfrewshire, with the University of Strathclyde as the anchor university. We have invested more than £6 billion in the higher education sector over the past six years. Business expenditure in research and development exceeded £1 billion for the first time in 2016, and it is up almost 70 per cent in real terms since 2007.
We have also increased free high-quality early learning and childcare to 600 hours a year for all three and four-year-olds, which is up from 475 hours in 2007. On the living wage, Scotland remains the best performing of all four UK countries, with the highest proportion of employees—81.6 per cent—paid the living wage or more.
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We are building on the successes of our enterprise and skills agencies, developing a system of support that is greater than the sum of its parts. A strategic board is now in place that will seek to maximise the impact of the collective investment that we make in enterprise and skills development and create the conditions for delivering inclusive growth. We are creating a new enterprise agency in the south of Scotland, with an economic partnership in place and backed with £10 million of investment. We also have a detailed implementation plan to establish a Scottish national investment bank to be a new cornerstone institution in Scotland’s economic landscape, and we have undertaken to provide initial capitalisation of £340 million from 2019-20.
Having said all that, there are undoubtedly key challenges that the economy will face in the next 10 years and beyond. We are alive not only to the challenges of, for example, automation and technology, but to the opportunities that they will bring. The recent joint report with the Scottish Trades Union Congress on the impact of technological changes on Scottish jobs set out how digitisation, automation and other innovations will affect the Scottish labour market. We share a common objective with the STUC to ensure that automation and digitisation have positive outcomes for all Scotland’s people.
There is one very significant challenge that is self-evident, which is that key economic power remains reserved to the UK Government on things such as the national minimum wage, national insurance and migration powers. Incidentally, the national minimum wage is what stops the Scottish Government from making the living wage a contractual requirement. Under European Union law, if we already have a national minimum wage, we cannot then impose a higher wage for procurement purposes. Having further powers, though, would allow us to invest in Scotland’s economy and infrastructure, rather than be tied to the UK Government’s hard Brexit and austerity policies. Although the UK Secretary of State for Business, Energy and Industrial Strategy recently acknowledged in the House of Commons that he has responsibility for growth in the economies of all the nations of the UK, the UK Government really needs to engage in a meaningful way with the Scottish Government on the industrial strategy.
Those are my views on the central issues in Scotland’s economic performance. I believe that we now have a more resilient economy than we did in 2007, which has been evidenced not least by the way that it has dealt with one of the biggest shocks to any economy for many decades. Our ambition remains with regard to improving our economic, social and environmental outcomes as set out in the national performance framework. I look forward to the committee’s forthcoming recommendations from its inquiry.