Finance and Constitution Committee

Meeting date: Wednesday, November 29, 2017

Official Report 594KB pdf

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Budget (Impact of Brexit)

Item 2 is to discuss the impact of Brexit on the Scottish budget. We are joined for this item by Dr Jim Campbell, reader in economics at the women in Scotland’s economy research centre at Glasgow Caledonian University; Jonathan Hall, director of policy and member services at NFU Scotland; and Naomi Clayton, policy and research manager at the Centre for Cities. I thank the witnesses for coming along today and for their written submissions. Adam Tomkins will ask the first question.

Good morning, everyone. My question is really about cities so I direct it at Naomi Clayton in the first instance—the other witnesses can chip in, by all means.

I am an MSP for the Glasgow region so I have a particular interest in the impact of Brexit on the Glasgow economy. A paper on that was published in October 2016 by Glasgow City Council, Glasgow economic leadership board and Glasgow Chamber of Commerce. On the publication of that document, the then leader of Glasgow City Council, Councillor Frank McAveety, said:

“Brexit will confront Glasgow with major economic challenges”

but

“these can be overcome if special action is taken by the Scottish and UK governments. If that happens then the problems associated with Brexit can become an opportunity for economic growth”.

What are the opportunities for economic growth for Scotland’s cities, including Glasgow, that Brexit represents, and how can we ensure that we take those opportunities?

In our work on the potential impacts of Brexit in terms of the change in the UK’s trading relationships, we found that every part of the UK, including every city, is likely to be impacted by exiting the EU, whether that is under a hard Brexit or a soft Brexit. Therefore, we definitely need to look at ways of mitigating the impacts of Brexit.

10:15  

First, we must ensure that we secure the best trade deal with the EU for the UK, so that our cities and the businesses in them are able to continue to trade with their main trading partners. We also need to look at ways of supporting businesses, by ensuring that they are able to access the skills that they need. There is a key need for cities and city regions to understand the role of business and businesses’ skills needs, and to ensure that education and training providers respond to those needs. It is absolutely vital that we mitigate the impacts on migration through education and training providers, and that we continue to ensure, at a city level, that businesses are able to thrive through investment in infrastructure and skills.

There are still opportunities, as regards how we ensure that our businesses are able to trade not just with the EU but around the world. However, there are key ways in which our cities can support businesses to do that.

Is it your sense that the Scottish Government and the UK Government are doing enough to help cities in Scotland and in the rest of the UK to mitigate—as you put it—the effects or impacts of Brexit? Councillor McAveety said that he was calling for assistance from both levels of Government in Scotland—from both the Scottish Government and the UK Government—to assist Scottish cities to do exactly what you describe, which is boost infrastructure and investment and invest in skills training.

The two city region deals for Glasgow and Edinburgh represent fairly significant funding agreements. What they do not represent is any devolution of powers and responsibilities or any fiscal autonomy. It will be important that the UK and Scottish Governments work with our city authorities and city regions to look at the powers and responsibilities that they need to be able to respond to their unique challenges.

You are the expert on that. What is your view on the powers that cities in Scotland need, but do not currently have, to mitigate the effects of Brexit? I am glad that you mentioned the Glasgow and Edinburgh city deals. The interesting thing about those is that the Glasgow city deal is pre-Brexit and the Edinburgh city deal is post-Brexit. In your judgment, do the most recent, new-generation city deals adequately reflect the fact that we are going to leave the EU?

There is always an argument for more investment in areas such as skills and education. There is also an argument for looking at ways in which Scottish cities can gain more fiscal autonomy and the ability to gain from land value uplift in their cities—for example, from planning permissions and housing developments. If they are able to retain and capture more of that value, that will enable them to invest further in infrastructure and initiatives that help to support better economic and social outcomes in those cities.

Thank you.

Neil Bibby has a question on a wider issue around Glasgow. Perhaps he could deal with that just now.

I am an MSP for the West Scotland region, which borders Glasgow and covers a number of the local authorities around the city. I note that the Centre for Cities report said that non-urban areas would not be as badly affected as urban areas by the Brexit impact. A number of local authorities are not in cities but have densely urban areas. It appears from the map that came with the report that local authorities such as Renfrewshire, Inverclyde and East Renfrewshire would be as badly affected as Glasgow by Brexit, whether it is hard or soft. What would be the impact on employment and living standards in and around Glasgow? Would the same policy solutions that you outlined to mitigate the effects of Brexit and make a difference in Glasgow also work in the neighbouring local authorities, such as those that I mentioned?

Those areas are obviously important parts of the wider city region and although our report finds that the cities and primary urban areas in Scotland would be likely to be hit hardest, we predict that every local authority would see a loss of economic output as a result of Brexit, relative to the what the position would be if we stayed in the EU. That means that jobs may be lost and wages could continue to stagnate, which would obviously impact on living standards. The impacts are not just confined to cities, but we need to look at how we can support cities to continue to drive economic growth through the policy initiatives to which I referred. We also need to look at how the Scottish Government and cities can continue to support inclusive growth, so that people in the wider areas surrounding our main economic growth poles are able to access employment opportunities in those areas.

Before we move on to other questions, I will bring in the other two witnesses. I noticed that Dr Campbell’s paper talks about areas where the Scottish Government would need to concentrate some of its activity and spending. It says that, for small to medium-sized enterprises in Scotland,

“the Scottish Government should be looking at ways in which their spending can contribute to faster growth in the short term and medium term”.

Obviously, that is also true for cities. I ask Dr Campbell to expand on how that approach might help activity in the cities. At the moment, the questions are concentrating on Naomi Clayton and, to be frank, I want the other two witnesses to take up the burden.

The point that my paper was trying to make is that we do not really know what Brexit will look like—whether it will be a hard Brexit, a soft Brexit or something in between. Trading relations between us and the EU will be different from what they are now. There is no doubt that there will be barriers, which will be much more of an issue for small and medium-sized firms to deal with. The Scottish Government needs to provide support for companies that already export to mainland Europe so that they can continue to do so after Brexit.

What might that support look like? Your ideas would help members to formulate our response.

At a practical level, it is about filling in the forms. After Brexit, we will have border controls and goods will be checked as they enter and leave the country.

In the question that Mr Tomkins posed and in Naomi Clayton’s response, there is a striking parallel. There are major economic challenges from Brexit, but then again there are significant opportunities and potential for growth. That applies equally to cities and rural areas—particularly rural areas that are driven by an agricultural industry that underpins the food and drink sector, which is so vital to the wider Scottish economy. There is a huge parallel there.

I was struck by Naomi Clayton’s comments about trade, labour and migration issues being to the fore of her thinking because they are very much to the fore of our thinking. The added dimension from an agriculture and rural development point of view is the role that current European support plays. I am sure that we will come on to that. I was intrigued by the comment on non-urban areas. Does non-urban mean rural? Define, please. Of course, the definitions are very academic, but they are also very interesting.

We are in danger of falling into the trap of looking at issues as being particular to cities, small and medium-sized enterprises or a more industrial base and then considering agricultural and rural issues separately. We need to bring those things together.

Do not worry, you will get to say your bit about your particular area. Several committee members represent rural constituencies—in the widest sense.

I thank the panel for coming to talk to us this morning. I want to lift the discussion to take an overview. My question follows on from Adam Tomkins’s question about opportunities, because Naomi Clayton’s answer was very illuminating.

Having read the your submissions and all the data that they include, we see a gross value added impact that ranges from bad in the case of a soft Brexit to very bad in the case of a hard Brexit—we see a public sector finance impact, an EU funding impact and a whole bunch of negative impacts. The narrative is all about how we mitigate, rather than maximise, the impacts of Brexit. There seems to be no upside. It has been described as the first time in history that two sides have sat down to do a trade deal that will make them both worse off. Can you comment on that? Do you see any silver linings, or do you think that, based on the economic analyses, everything will range from worse to a lot worse?

Who wants to take that on?

I will. You are right, Mr McKee: the economy would be better if we did not leave the EU. There is a consensus on that among most economists—the disagreement is about how much worse off we will be and whether it will be to a significant degree. That is up for debate—it relies on forecasts, so it all needs to be taken with a pinch of salt.

If you are looking for a silver lining, you may find it in public procurement. At the moment, that area is heavily regulated by European directives. For example, when the Scottish Government wants to give out the contract for the island ferries, it has to go through a whole procedure, which involves inviting tenders from across Europe and ends up with only one tender, which is from CalMac Ferries. That means that an awful lot of time and money is spent on something that is perhaps unnecessary. The Government might be able to take more control of public procurement, which it can then use to mitigate some of the problems that will result from Brexit. That is one upside.

I support that point. Public procurement has a huge impact on the sourcing of food and food products. We have pushed hard on that issue for a number of years. There is an opportunity to look at that and at how local authorities, schools, hospitals, prisons and so on can be enabled to source local food from Scotland, which would be a boost to local producers, rather than that all being based on price, contracts and so on.

There are huge challenges; I am sure that we will come on to those and—do not get me wrong—we are very concerned about them. However, there may be a silver lining, given the way in which the common agricultural policy has operated in Scotland. To be brutally honest, although the CAP may have provided a degree of certainty and security for the past 43 years, it has not necessarily done Scottish agriculture and rural areas any great favours. There is a clear opportunity right now to recast how we support rural areas and agricultural businesses to deliver more of what we want in terms of quality food production, protection of the environment and sustaining rural communities. That opportunity will revolve around funding—I am sure that we will come on to that—and, equally, how the Scottish Government delivers in that regard.

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Murdo Fraser will ask about that. We will get on to the area.

I am just being impatient.

No, no—we are all impatient in this Brexit world, I assure you.

There is also a chance to look at the funds that will replace European structural funds, which provide important support to different parts of the country. There is a chance to improve the process, so that any replacement funds are managed and distributed in a way that reduces bureaucracy for local partners and improves outcomes.

On procurement, surely that is fine until we do a free-trade deal with another country, because the first thing that the other country will say is, “If you want to trade with us, we will have to have some rules about access to markets”, which means that we will be back to square one again.

I think that you are right. It is all in the detail—which we do not know.

I am sorry to put Naomi Clayton back on the spot about the Centre for Cities’ report, but as the member for Aberdeenshire West it would be remiss of me not to ask about the finding that Aberdeen is an outlier. I think that there are three reasons for that. First, in the north-east we probably consider ourselves to be linked less to economic performance in the EU and even the UK, and more to economic performance in the oil sector. Secondly, when you mentioned the city deals you missed out the Aberdeen deal. Thirdly, in the summary of your findings you say:

“Cities predicted to be most negatively affected tend to be more productive and have highly skilled workforces, which means they may find it easier to adapt in the longer term.”

Given those three points, how accurate do you think your methodology is in relation to Aberdeen?

Our work is very much a first look at the potential local impacts of a change in the UK’s international trade relationships. There are a number of caveats, the first being that we are looking just at the impact on trade and are not factoring in the impacts of changes to migration or the impact on foreign direct investment, for example. Once we start to add in other factors, we find that the impacts at national level are likely in some cases to triple. That is my first point.

My second point is that the report is a static analysis. We have not, to date, been able to model how different areas are likely to respond to the economic shocks that Brexit is likely to bring. We know from the experience of the 2008 financial crisis that parts of the country that had higher wages and more productive and highly skilled workforces were better placed to adapt over the slightly longer term, and recovered much more strongly as we came out of the recession. To some extent, we expect that to be the case again. Cities such as Aberdeen and Edinburgh, which have highly skilled workforces and very productive economies, are better placed to adapt to changes.

A particular challenge for Aberdeen is its dependence on oil and gas and the potential impacts of Brexit on the sector.

I want to ask whether something that Naomi Clayton just said has a connection to a point in Jim Campbell’s paper. Page 12 of the Centre for Cities’ key findings says:

“Even though the immediate negative impacts are predicted to be smaller in poorer regions, households in those areas start off poorer and may experience considerably more difficulty in adapting to those negative changes.”

Jim Campbell’s paper talks about the role of the care sector—social care and childcare. We have heard evidence from others that there is a multiplier effect—that there is an additional economic benefit from investing in that social infrastructure. Is it fair to say that it is likely that in poorer areas—where dependence on the care sector is perhaps higher—the multiplier effects will be stronger and investment in social infrastructure might have the potential to mitigate the effect that the Centre for Cities mentioned in relation to poorer regions, where households that start off poorer will be less able to adapt?

The levels of disparity between different parts of the country represent a long-term challenge in the UK. As I have said, our research found that it is likely that everywhere will be impacted by Brexit. Although the initial shocks may be smaller in less-affluent parts of the country, we know that unemployment rates tend to be much higher and wages tend to be much lower in those areas, so the initial shocks might have longer-term impacts on those economies, which are likely to be less able to adapt in the way that some of the stronger-performing parts of the country will be able to adapt.

Investing in social infrastructure—education, ways to improve school performance, retraining schemes and other ways of supporting individuals in the less-affluent communities to access employment opportunities and to progress—is a fundamentally important part of helping those places to adapt to the changes that Brexit is likely to bring.

If you are looking to generate employment, investing in the social economy will create more employment than will investment in construction, for example. All the evidence tells you that. The one caveat to that, of course, is that employment in the care sector is low paid, both in childcare and in social care in general, so there also needs to be a move towards professionalisation of the care sector through education, qualifications or whatever. Its wages need to go up: childcare and social care are very important, but the market economy does not value them as they should be valued.

Does the investment need to be in raising quality, and to be not just about scale?

Absolutely. All the studies on the social and economic benefits of childcare include the caveat that it needs to be high-quality childcare: it is not just about sticking a kid in front of a video for a couple of hours and thinking that that is them being looked after. Childcare has to be stimulating and in some sense educational.

It seems to be the trend this morning for members to say where they represent, so I will stick to that. I am an Edinburgh MSP, so I will ask a question about Edinburgh. Naomi Clayton’s paper states that

“Cities with large shares of employment in private-sector knowledge-intensive services”

are likely to be particularly impacted by Brexit. Obviously, that includes Edinburgh because it has a large financial services sector. One impact there could be reduced employment, which I think you said in your paper.

For the first time, Scotland is going to be responsible for income tax. If there is reduction in employment, particularly in well-paid jobs—of which there are quite a lot in Edinburgh—that would affect the Scottish tax take, which would affect public services in the future. Is that what the Scottish Government should be preparing for? Are you able to put any numbers on that, or to say what the scale of the impact would be?

I repeat the earlier point about caveats that we highlight in the paper: it really does represent a first look at the potential impacts of Brexit under different scenarios. Also, the paper is based on very detailed models of trade flows and impacts on various sectors. We find that financial and business services are likely to be particularly hard hit under a hard Brexit because of the impact that the increase in non-tariff barriers will have on those sectors. If those impacts play out in loss of employment and earnings, of course that will impact on tax take. That is particularly significant, given that per capita levels of tax take in Edinburgh and Aberdeen are among the highest, so that might well have an impact on Scottish finances overall.

However at this point, there are so many uncertainties with regard to the nature of the deal that will be agreed with the EU. Therefore, in terms of the reality post-Brexit, and the elements that we have not been able to model as yet that will show us how places are likely to adapt, it is difficult to put firm numbers on the overall economic impacts, and therefore on the impacts on tax take.

I have one additional point to make. Naomi Clayton is right that the biggest impact will be seen over time. On the impacts of our membership of the EU, the biggest impact occurred not when we joined, but as businesses changed how they behaved because of the change in the environment: they had access to a much bigger market, which encouraged investment and so on.

It is to be expected that if we leave, it will be another massive change to the business environment and businesses will react. The financial sector might react by leaving the UK because companies will not have the access to the European market that they currently have.

I have a couple of quick questions on cities and then I want to ask about agriculture.

I am curious as to why the Centre for Cities’ report covers only four Scottish cities in its analysis. There are seven, as I am sure you know.

The Centre for Cities looks at the 63 largest urban areas in the UK, which includes the four largest urban areas in Scotland.

Is it not a slight to Inverness, Stirling or Perth that they are not included?

No, but we have produced figures for every local authority in the UK, including those authorities.

My second point follows the question that Alexander Burnett asked about Aberdeen. I was quite surprised to see Aberdeen at the top of the table of cities that are most likely to be impacted. Most people’s understanding of the Aberdeen economy is that, because of its connection to oil and gas, it is connected more to the dollar economy and to oil-producing countries around the world than to the Eurozone, and that those connections impact much more on Aberdeen’s economic performance than the Eurozone does, with which it trades much less. Is that because you have looked at the question of shares of employment in private sector knowledge-intensive services as a generality, rather than digging below that headline to look at local economies?

In our method we took the national model, which looks at all the imports and exports for all the industries in the UK, and applied it downwards using employment shares for local authorities and cities. Aberdeen stands out as the city where the initial impacts of Brexit are likely to be largest, partly because of the oil and gas industry and partly because of employment in the business services that support that industry. The model predicts that the oil and gas and business service sectors are likely to be hardest hit, which is why Aberdeen stands out as being one of the hardest-hit areas.

10:45  

Thank you. I take it from that that you applied a general model rather than specifically examining the make-up in individual cities.

We examined the employment profiles of individual cities.

Thank you.

I will move on to questions on agriculture for Jonathan Hall. I was interested in what you had to say about the common agricultural policy’s impact in Scotland and the opportunity that presents itself to devise a system of agricultural support that is tailored to the needs of Scottish agriculture rather than its being handed down from Brussels. As things stand, we are due to leave the EU 16 months from now. What is your sense of the work that is being done in Government to devise that new system of agricultural support, which will need to be in place when we leave the EU?

I will have to choose my words carefully—“sluggish” might be an appropriate word.

You see 2019 as being the point of departure: to be honest, it needs to be further ahead than that—say, 2021. We will need some sort of transition. On the day of departure, we need to continue to operate under a system that looks, tastes and smells very much like the CAP. We cannot afford to go off any sort of cliff edge. People talk about cliff edges all the time in relation to Brexit; if we go over the cliff edge in March 2019, Scottish agriculture and the food and drink sector that it supports would be in a difficult position because there are still some huge outstanding questions around the operating environment that we will find ourselves in on trade with Europe and non-European countries. It is anybody’s guess how long it will take for those trade deals to emerge and solidify.

In the short to medium term, we will continue to need the CAP, whether we like it or loathe it. That said, between now and 2019 and in any transition period, we must work very hard with the UK Government and the Scottish Government to secure the right framework for an agricultural policy throughout the United Kingdom that will cover the regulatory elements. There is clearly a need to maintain something of a level playing field within the UK if we are going to have intra-UK trade, movement of animals, pesticide use and environmental standards. Thereafter, the ability to deliver a new system of support that is tailored to Scottish circumstances must be devolved to the Scottish Government.

There are one or two clear and important landmarks or milestones on the near horizon. A UK Government white paper on agriculture will emerge in the near future and there will be a UK agriculture bill sometime in the spring. Our main focus right now when we talk to the Department for Environment, Food and Rural Affairs is on ensuring that the toolbox has the tools that will enable the measures that will be required to support agriculture and rural development in Scotland to be put in place. Today, we have four devolved applications of the common agricultural policy—four different delivery mechanisms—and we need to ensure that that approach continues in the future.

We also need the funding to underpin that. Any significant reduction in funding would be catastrophic: as well as needing to be able to do the right thing for Scotland, we need the funding to deliver that.

Thank you. I will summarise what you have said to me. You expect a transition period so, come 2019, we will not have a new system. We will mirror the CAP support, whether we are in it or not, for two years, maybe. I am sorry, I am putting words in your mouth; I am surmising.

No—that is fine.

Thereafter, we will need to move to a new system. There will be something of a common framework in the UK, but most of the system will actually be devolved to the Scottish Government. What I am trying to get at is whether you are aware of any work that the Scottish Government is currently doing to create the new system of agricultural support that we need to have in place and that your members want.

I do not think that anything concrete is being constructed on what that system might look like, either at Westminster or by the Scottish Government. There is a lot of rhetoric about where we might want to get to, but we are still lacking action on the steps that will take us there. We have set out the NFU Scotland’s position very clearly, which is that we want ultimately to move away from an area-based payments system, whereby occupation of land is pretty much all that one needs to unlock a support payment. We want to move to an activity-based approach in which action is supported—whether that is action to enhance environmental qualities or action to invest in agricultural businesses that can focus on new market opportunities. That is where we want to be. We are pushing both the Scottish and UK Governments hard and saying that that might be the vision that everybody keeps talking about, but asking how we will get there.

At the moment not much is happening, but the NFUS and its members are bringing forward ideas.

Absolutely. There is an increasing sense of frustration across the industry. The Scottish Government has recently produced a report from its so-called agricultural champions, and we have been quick to highlight what we would like—there is a lot of overlap—so there are lots of thought lots of and ideas about where want to get to, but we still need to work very hard at the mechanics of moving away from the common agricultural policy and how we will deliver what we all aspire to deliver. That is where it gets really difficult, because we have to take into account the fact that we still want to trade with Europe and other requirements and legislative issues. It becomes a very tricky road to walk, but we need to start taking some steps in that direction pretty quickly.

What comes first: the agricultural bill and a framework, or the policy?

That is a very good question.

Of course it is. We need to get some priorities about what has to be tackled first.

The agriculture bill setting out the broad framework should come first, but that bill has to include the scope to enable Scotland to do what is right for Scotland.

Agreed.

That is the danger at the moment. If it is too narrow—I will be slightly cheeky here and say, if the view of the world is that everything looks like Cambridgeshire—it is not going to do us any great favours. We need the scope of that bill to enable the Scottish Government to put in place measures that will work for Scottish agriculture and everything that it underpins.

Although “sluggish” was the term that you used to describe policy development, it is a bit difficult for a Government to develop policy until it knows where the starting point is.

I agree. There are definitely things that we can start to think about and plan for, but it is difficult if we do not know the parameters within which we have to work. The focus has to be on DEFRA at the moment, to ensure that the parameters are set in such a way that Scotland can be accommodated within the UK approach and that delivery is within the gift of the Scottish Government.

We can have a great policy, but unless we have money to support it, delivering it will be even more challenging. In your written submission you say that you have had some assurances on the situation up to 2019. However, at paragraph 7 you say:

“Post-2022, the amount of money the UK decides to spend on farming and farming-related matters will have major consequences for Scotland. NFUS is clear that agriculture must continue to receive the same quantum of funding as it currently does under the CAP post-2022. This budget must be ringfenced to agriculture and rural support.”

What assurance have you had from the UK Government?

We have had only the assurance of the Tory party manifesto of May this year. We have sought further assurances as to what that commitment to funding of farm support to 2022 or for the lifetime of the Parliament actually means. We have written to Mr Gove, as has the Scottish Government. We have not yet received a reply, although we wrote to him some months ago. We need clarification on what that commitment means.

I would go further than we do in our submission and say that we need at least the same quantum of money as we currently receive under the CAP, given that Scotland already has a budget disadvantage, in terms of the amount of money coming to Scotland via the CAP compared to the amount that goes to rest of the UK and to other EU member states, and that Scotland’s reliance on that funding is critical.

The important point to note is how effective that money is once it comes to Scotland. Once it is channelled into Scottish agriculture, farms and crofts, it generates and drives the rural economy to an extent that is very difficult to quantify, although our calculations suggest that for every £1 that Scottish agriculture receives via the CAP, Scottish agriculture spends about £5.30. That supports a host of allied industries and enables the primary product that is going into the fastest growing part of the economy, which is food and drink.

The purpose of today’s meeting is to gather evidence on Brexit and the budget. In paragraph 10 of your submission, you mention the funding streams that might be used to support agriculture in Scotland in the future. You have some concerns about future funding going through the Barnett formula. Would you like to tell us about those concerns?

Under the current CAP arrangements, Scotland receives about 16.3 per cent of the UK’s allocation. That is based on historical production across the United Kingdom. If we were to move to a simple Barnett formula approach, potentially we would be looking at 8 or 9 per cent of any budget that the Treasury might find in the future, instead of 16.3 per cent. That would immediately put us in a difficult position. Even if the budget was maintained in total and the Treasury committed to the same funding as the CAP, if Scotland were to receive only 8 or 9 per cent of that, it would effectively be a 50 per cent reduction.

That would be extraordinarily challenging for Scottish agriculture as a whole, but particularly for areas and regions that are more reliant on support, such as our uplands, and our more disadvantaged areas, which are heavily reliant on sheep and cattle, because those businesses are the most reliant on support payments through the CAP. The socioeconomic consequences of knocking that out of the system might be unquantifiable, but nevertheless extremely damaging.

You mentioned the different parts of our less favoured areas, but 85 per cent of our land in Scotland is less favoured areas. I am reading here that there are 52,000 farm holdings in Scotland. What we are talking about is massive, with current funding of £520 million potentially being reduced to £253 million.

Scott Walker expressed a “desperate need” for progress, rather than saying that it was “sluggish”.

I was being polite when I said that.

We need to make progress and there are only 485 days to go. I am really concerned. How do we express those concerns to rural farming businesses and convey them to the UK Government?

That is partly our job and partly your job. In a way, it is everyone’s job to highlight how important it is that we get it right. Places such as Dumfries and Galloway, which is in your region, are highly reliant on a productive agricultural industry in so many ways. As you say, if that funding is stripped out, the damage could be untold. We must all make that case.

Scotland’s agricultural profile is fundamentally different from the rest of the United Kingdom’s. You have highlighted the fact that we are 85 per cent less favoured areas. It is the mirror image in England, which is 15 per cent less favoured areas. In many ways, we will always be at the margin of agricultural production and financial viability. That is why that support remains critical. It is not just about underpinning farmers and crofters; it is also about underpinning everything that they deliver. The key message that we must get through—to the Treasury, in particular—is that investing in agriculture and rural areas is money well spent in the public interest. It is about return on those pounds through what agriculture then does.

11:00  

I want to clarify something that you said in response to a question from Bruce Crawford about money. You talked about ring fencing agricultural support. Will you elaborate on what you mean by that? Do you mean ring fencing it within the devolution settlement?

Ideally, that is exactly what we would like, because right now CAP money is allocated to the UK by Europe. The UK Government cannot touch that and neither can the Scottish Government. If it is a pillar 1 payment, it has to be channelled into agricultural support payments. If it is a pillar 2 payment, that funding from Europe is then co-financed by the Scottish Government. Therefore, if it is coming into Scotland, it has to be channelled into agriculture or wider rural development measures. We want a ring fence to be put around a budget that protects it from being eroded. Otherwise, there might be a notional, nominal allocation for rural development spend, or whatever it might be, but by the time it percolates down to actual spend on the ground, it could go in any direction.

Dr Campbell, in your submission you mention issues around the CAP, and you rightly tie them to EU structural funds. On the last page, you say:

“However, one of the most important impacts of EU Structural Funds has been its promotion of gender mainstreaming.”

You then look at the issue of EU leadership and the dangers that might arise without that. Will you expand on that, please, for the record?

One thing that European regional policy tried to do was to support other actions, which included equal opportunities and particularly gender mainstreaming. If someone received funding through the European regional development fund or the European social fund, they had to show how the project would contribute to gender mainstreaming or to equal opportunities. For a lot of the time, that was a tick-box exercise in which people said, “Yeah, of course it is,” and carried on. However, there is evidence to suggest that that requirement might have had an impact on the type of economic development policies that have been pursued in Scotland.

When people invest in projects, we assume that the economic activity will be shared equally between men and women. However, without that requirement that will not necessarily be the case, so we need to think about what the gender impact of the spend will be. I am not saying that it happens all the time, but the requirement has made projects and funders think about the gender consequences of economic policy, which they had not really done before.

What procedural and legal frameworks do we need to put in place to help to achieve that?

One of the problems with gender mainstreaming is in its name. The requirement was put in place in the period of European regional funding from 2000 to 2006. Thereafter, it was assumed that gender mainstreaming was happening and that projects would automatically think about the gender consequences. I am not sure that that has been the case.

There may well be an opportunity now for economic development policies that include such a requirement. Earlier, we mentioned public procurement. We could use that approach in public procurement policy to ask, “What will the gender impact of this spend be?”

Thank you. That is helpful.

Willie Coffey wants to touch on matters of technology.

I am hoping to broaden the discussion to talk about digital and technology issues. Jim Campbell, in your submission you mention the potential impacts on research and technological development. Naomi Clayton touched on the issue that Ash Denham raised about the knowledge economy and knowledge-based services, particularly in cities. What effect would it have on the Scottish economy if there were to be a serious impact on the free movement of people with such skills working in the UK or, indeed, in Scotland?

It could have quite a serious impact, particularly in the university sector. The UK has done really well in the various European research and development frameworks, and we currently have horizon 2020, through which universities get funding and work with colleagues in other European countries. My own institution has received a number of research contracts in that way. However, that avenue is now going to be cut off, and we do not know whether it will be replaced by a Scottish or a UK version, because the loss of CAP and structural funds will be a problem. There will be lots of competition for limited resources, given the latest forecasts about where the economy is going.

You mentioned the digital economy. A lot of interesting developments are taking place at the European level in relation to regulation to open up the digital market. At the moment, many business use geo-blocking. If you try to book a hotel or an airline ticket in another EU country, the price will differ depending on where you are booking that service from. There are currently discussions about removing geo-blocking so that the prices will be the same irrespective of where someone buys the service, which will mean a single online market such as we do not have currently. British businesses and consumers will lose out as a result of that market once we leave.

That is an interesting point. On the one hand, we will leave the single market but, on the other hand, we will stay in the digital market.

Not really.

It will be like being in and out at the same time.

We cannot turn back the clock on technology and say, “Let’s not invent the internet.”

Naomi Clayton made a point about knowledge services and specialist skills, in particular. What will be the likely impact if we lose lots of those skills in Scotland through restrictions on freedom of movement?

The migration element is an important consideration. We do not yet know what migration policy will look like post-Brexit, but we know that, as a result of the impact of policy change and the economic impact, the flow of migrants into the UK is likely to reduce and there will be implications for businesses’ access to the specialist skills that they require. It is a fundamentally important consideration, particularly at a time when a great deal of investment is going into supporting the digital and technology sectors in the UK and Scotland.

It is important that we think about how we can maximise the impact of that investment to support the wider economic and social infrastructure. Migration and businesses’ ability to continue to attract and retain international talent are an essential part of that. Some of the impacts of migration are starting to play out. For example, over the past year, there has been a significant reduction in the number of national insurance registrations by EU citizens in the UK. It is difficult to attribute that specifically to the referendum and Brexit, because a number of factors are at play, but that marks a trend change rather than just normal fluctuation.

Does the soft Brexit model in your paper assume that freedom of movement is gone? Does that account for the biggest impact on those negative figures in the model?

We looked primarily at the trade impacts. In a soft Brexit scenario, the UK would join a free-trade area. We looked at the impacts of tariff and non-tariff barriers rather than freedom of movement within that.

If freedom of movement does go under a soft Brexit, that would make your soft Brexit forecast even worse.

Yes, if you start to factor migration into the model.

I am not sure whether Jonathan Hall wants to touch on that. We did not get much of an opportunity to talk about migration issues in agriculture.

I echo what has been said. The movement of people and migration issues are hugely important to agriculture and, downstream, to the food processing sector. We are very concerned about losing seasonal and permanent workers—on farm and off farm—and their skills and competence. Without those folk coming to Scotland to underpin agricultural production and the processing thereof, we will be in a bad place.

That issue has some low-hanging fruit for the UK Government, because we could reinvigorate or reignite the seasonal agricultural workers scheme that existed a few years ago, when Bulgaria and Romania were not full member states. We have already seen an impact in some sectors, with vegetable and soft fruit growers on Scotland’s east coast having struggled to access labour for the season just gone and struggling to access labour for next year. For some workers, the problem is exchange rates and the value of coming here on a seasonal basis, but they also have less inclination because of the messages that the EU referendum outcome has delivered to them.

I genuinely do not know the NFUS’s position on the customs union. Given the issues around trade and the export of quality Scots beef, lamb and so on, and given the issues around the freedom of movement of people, what sort of Brexit would the NFUS like to see, if it goes ahead?

We are probably being overambitious, but we still argue for access to the single market and retention of the customs union to provide protection.

You are right to identify that our red meat sector—sheep meat and beef products—would be massively exposed if we were not covered by the customs union. That sector is extremely vulnerable in many new trade outcomes. It is massively important to Scotland but it is heavily reliant on agricultural support. That situation would expose Scotland in ways in which the rest of the United Kingdom may not be exposed. We have a far greater interest in those products, because of their importance to our agricultural economy.

Dr Campbell, your paper addresses the issue of inflation post-Brexit. Where are the pressure points in the forthcoming Scottish budget as a result of the recent changes to inflation, and what options are open to the Scottish Government to address those pressure points?

Last week’s UK budget forecast that inflation would not get below 2 per cent for the next few years, so it will potentially be above that level and could rise further depending on what happens in the Brexit negotiations. If it looks as though it will be a hard Brexit, without continued membership of the single market and the customs union, the pound could depreciate further, which would cause more inflationary pressure.

That would mean that the Scottish Government’s budget would buy a lot less and it would have to make tough decisions, especially given the pressure on public sector wages, which have been flat—or declining in real terms—over the past 10 years. There is now pressure to increase public sector wages, but the Government’s ability to do that would be constrained because services would have to be cut. By 2021-22, given the pressures that there could be on budgets, would the Government be able to afford to subsidise agriculture in the way that it has been subsidised in the past? The outlook for the economy, at both UK and Scottish levels, is not particularly good, to put it mildly.

Do you think that the Government will have to look seriously at taxation options to alleviate those pressures?

A problem for the Scottish Government is that it does not have access to all the fiscal tools that the UK Government has. To raise revenue significantly, it has only income tax, and I think that it is looking at whether income tax rates should increase in Scotland. If the Government wants to continue to provide the same level of services, the bottom line is that it will probably need to raise income tax. Whether it does that for high earners or across the board is a political decision.

I thank our witnesses for coming along today. We are very grateful. I suspend the meeting for a couple of minutes to allow a changeover of witnesses.

11:15 Meeting suspended.  

11:20 On resuming—