Economy, Jobs and Fair Work Committee

Meeting date: Tuesday, November 21, 2017

Official Report 548KB pdf

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Scotland’s Economic Performance

Item 3 is evidence in round-table format, as part of our inquiry into Scotland’s economic performance. In the interests of hearing as much as possible from the witnesses, I ask my fellow committee members to limit the length of their questions. If anyone wants to comment, please indicate by raising your hand, and I will bring you in as the discussion moves along.

I welcome our guests. Professor Catia Montagna has a chair in economics at the University of Aberdeen; Richard Marsh is director of 4-Consulting and I think has appeared before the committee in the past; Dr Tanya Wilson is from the University of Stirling; Dr Alexandros Zangelidis—I am not sure whether I pronounced that correctly, but no doubt you can correct me—is from University of Aberdeen; and Professor Julia Darby is from the University of Strathclyde. I invite each of you to give a brief introduction from the point of view of the work that you and your organisation do.

I am a professor of economics at the University of Aberdeen. My work focuses on issues related to globalisation, international competitiveness and foreign direct investment. I work with a team of people in Aberdeen who work on related areas, in particular the interface between such issues and the labour market.

As you said, convener, I am a director of an independent economic consultancy, which is based in Kirkcaldy. We work across a broad range of clients and sectors, delivering research to help to inform public sector investment decisions and private sector strategy.

I am a lecturer at the University of Stirling. I am a labour economist; I specialise in family economics and the economics of the household, which includes how households make decisions as to when to participate in the labour market and how much labour market activity they want, collectively.

I am a senior lecturer in economics at the University of Aberdeen. My research area is labour economics and health economics, and I work primarily on issues related to wage determination, labour supply and economic and socioeconomic inequalities and their effect on health.

I am the head of the economics department at the University of Strathclyde, which is the home of the Fraser of Allander institute, with which a lot of our work is connected. We look at productivity performance, labour market performance and so on.

I will start with a general question to our guests. What have been the main drivers of growth in the Scottish economy over the past 10 years and how do you see them developing in the next 10 years?

Given that I come from the private sector, I will just venture an opinion. It would be helpful if the inquiry did not focus on asking what is the one driver of the economy or what are the barriers that have been holding us back, because there is no single driver of Scotland’s economy, or any other economy; we need to pull dozens of different levers at different times and in different ways. Projects and programmes need to be delivered by a range of actors in central and local government, the private sector, the public sector, colleges and universities.

You asked what has driven growth in Scotland’s economy. Our exports have performed reasonably well, investment is continuing and we are continuing to educate the workforce. A range of things are nudging the economy forwards.

What could we do better? We will not have identified just one, two or three things, either after today or at the end of the inquiry; we need to tweak and adjust a range of things.

No other interested parties want to comment on that, so I invite John Mason to raise another issue.

This is quite a wide question. How does Scotland’s growth rate compare with the growth rate in the United Kingdom as a whole, other regions of the UK—we realise that London is a bit odd—and other countries and regions in the European Union? Which of those should we compare ourselves with? Richard Marsh suggested that maybe we should just compare ourselves with everywhere. Would that get too complicated? How are we doing and what should we compare ourselves with?

I think that we are all a bit shy about answering questions. [Laughter.]

I found it difficult to structure answers to the questions that we were asked in the sense that they were all pretty interconnected. You asked us how we are doing in comparison with others, how we measure success and what are the sectors and drivers of growth. Those are all interrelated, and they also relate to an extent to the reasons why growth has not been as good as it could have been. It is inevitable that our answers will criss-cross the various questions.

I refer back to what Richard Marsh said. We could say that in the past few years the Scottish economy has not performed as well as it could have performed—or as well as we would have hoped. The key thing to understand is why that has been the case. In some dimensions it has performed better than the UK economy as a whole and in others it has performed worse. For example, there has recently been an increase in growth and a little bit of catching up on productivity with respect to the UK economy as a whole.

The point of reference that you choose is important, because the UK as a whole has not performed that well. If you compare Scotland to countries of a similar size, such as Norway, Sweden or Finland, or eastern European countries, you will see that Scotland has not performed very well against many indicators. The committee should try to understand why there are such differences. I am sure that inequality, productivity and other aspects, under different headings, will come up. Scotland’s performance has not been particularly good.

11:00  

When you say “performance”, are you thinking particularly of gross domestic product and GDP growth, or are you thinking of other things as well?

GDP per capita in Scotland has been stagnant. It has grown by something in the region of 1 per cent over 10 years. GDP is not the best indicator of performance, and GDP per capita is certainly not the best indicator of income distribution, but performance at that level is pretty bad, even in the context of a financial crisis. One thing that emerges when we look at the data is that there is a strong correlation between the degree of inequality in a country and the ability of the country to recover from recession, so countries that have done better in that sense are countries that have a much lower inequality as measured by the Gini coefficient. The Gini coefficient in Britain is very high; I think that it is the worst performer in Europe in that respect after Latvia.

One of the issues that we have to decide on is how to measure performance. There are different dimensions to performance. GDP is important, but it is not the only measure. Inequality is another dimension, but all those things need to be considered in a more connected way.

You have talked about Scotland in comparison to other similar-sized countries. If those countries are performing better than Scotland, what mechanisms do they have in place that we do not that are driving that improvement?

Answering that question involves addressing an issue of causality and it requires analysis of the data. Some of those countries have very different labour market institutions and welfare state systems, and I am a firm believer that those policy dimensions are important in determining both the degree of equality in a country and its ability to adjust and respond to international shocks. The provision of a safety net helps smooth out the response to shocks.

There are significant long-term implications regarding incentives underpinning the acquisition of skills, for example. There is work that shows that certain labour market institutions favour the acquisition of far more industry-specific skills, which are important for productivity and the development of industry, whereas the liberal welfare state that the UK and other countries have favours the acquisition of generic skills. Workers need to self-insure in the face of negative shocks, and the best way to do so is to acquire skills that allow them to recycle themselves and move jobs more easily than if they have industry-specific skills. However, industry-specific skills are important in manufacturing and underpin productivity in those sectors. That is why I say that it is important to take a multidimensional view of performance and of policy, as policy areas are interconnected, and it is important to understand, in an evidence-based manner, what those connections are.

So although some policy decisions can be made in Holyrood, there are certain policy decisions that have an impact on our economy that are made elsewhere.

Absolutely.

There are three points that I want to highlight. I would echo what my colleague Professor Montagna has said. It is important to understand that there is not a single answer. In an ideal world, it would be nice to have one single answer to all those questions, but the situation is more complex than that. We need to understand the history of what the British economy and the Scottish economy went through during the past 10 years, in light of the great recession and the vote for Brexit and its implications for the overall economy, consumer confidence and the labour market.

As Professor Montagna said, we should not look at a single indicator when we talk about productivity or inequality. We need to be very cautious because there is a lot of information hidden behind single measures. For example, unemployment has improved in the past few years, but behind that is the big issue of underemployment—there are many people on part-time, temporary or zero-hours contracts. Therefore, one could say that the situation in the labour market has not necessarily improved. We need to be very cautious about that.

To go back to Ms Martin’s question, I agree with Professor Montagna’s position that the labour market institutions that are in operation are key, as well as the overall regulatory environment and whether there is scope for the Government to intervene further in the goods market, labour market and financial market and take a more active approach.

John Mason, do you want to come back in on that?

I will leave it just now, convener.

I have a two-part question. The population of Scotland has been increasing, but the population of the UK has been increasing at a much higher rate, partly due to immigration. What impact does that have on GDP and the calculation of GDP for each market?

If you have a growing population, it is more likely that your economy will grow more quickly because you will need to spend more money on public services, those people are more likely to have jobs and they will spend their money on the high street, which will create economic activity. Countries in which the population is growing more quickly tend to have a slightly higher rate of economic growth. However, as several witnesses have said, more important measures might be the level of wages, quality of life and GDP per capita. Ideally, you want your economic growth to be slightly ahead of your population growth in order to ensure that you can deliver real growth in wages.

Would it be correct to say that some of the GDP difference is based on population?

Absolutely.

The second part of my question is about future growth. Where do you see future growth coming from in the Scottish economy? Will it be export driven or come from any particular sector in the market? Who is the expert on that?

Professor Darby.

Much of the growth in jobs has been around certain cities. We have quite big differentials in productivity between cities. You talked about London being slightly different. However, both Edinburgh and Glasgow have better headline statistics on gross value added per head than many of the other big cities in the UK. In contrast, Dundee is right at the other end, with poor GVA and a lower-skilled labour force, on average.

At the moment, it looks as though job growth is concentrated in the well-performing cities and the recovery of employment in Glasgow has been quite big. We do not know quite as much as we would like about the nature of the increased number of jobs, but around Glasgow and Edinburgh employment has been stronger than in other parts of Scotland. If you go to North Ayrshire, you will get a very different picture in that there is a lack of a recovery in jobs.

Is that because of the nature of the economic activity in those regions, or does it come down to another factor?

It appears that the concentration of activity has become more city-centric.

What does that hold for the future?

We need to know more about the types of jobs on offer. One of the submissions referred to the mismatch between skills and jobs and those people in graduate and non-graduate jobs and so on. We do not know enough at the moment about the extent to which the new jobs are not bringing out the efficiency of the workers as much as we would like. There is a possibility that we still need to have quite a shakeout from some of the jobs that were available to the jobs that will be high-growth jobs. That push needs more of a recovery.

Does anyone else have a view on that?

Guessing what may happen in the future requires a number of uncertainties that we are facing at the moment to be resolved. There is a big uncertainty, for example, about the price of oil. One of the key sectors that has led growth in Scotland over the past decade or more is the oil sector. Much of the uncertainty is political in nature, so it is difficult to guess. The other big uncertainty is Brexit—the state of play is still undetermined and it is not easy to understand what the impact of Brexit may be on sectors.

The other big factor that will determine the development of the economy is investment. That, in turn, may depend on the outlook of firms, which, in turn, depends on the state of the overall economy. It has been mentioned that what we have observed is consumer-led growth, which has been funded essentially by consumers’ savings.

The country has experienced one of the biggest devaluations in history as a result of the referendum, but that has not translated into an improvement in the trade balance or an increase in exports. There is no evidence of a rebalancing of the economy towards manufacturing and, while there may be many reasons for that, certainly one reason is the fact that investment is flat, if not falling. That requires us to go back to why that is so and what are the drivers of firms’ decisions. We have had a decade of low interest rates and a fairly weak pound, which should favour exports, but the structure of the economy is such that a small percentage of firms export. Some sectors are at the forefront of the technological frontier, but the economy in Scotland, and in the UK, is characterised by a high degree of dualism with small pockets of activity, which are geographically and sectorally concentrated. They are high-productivity sectors, but they employ a small number of people. The majority of employment creation is occurring in low-productivity sectors.

I would like to bring in Dr Zangelidis and Dr Wilson.

I agree with both the previous speakers. Another issue is not only which industry will generate growth in the Scottish economy but what type of business will facilitate that. Small and medium-sized enterprises are a large component of the economy, so we need to think about that. We need to think geographically about how we can facilitate sustainable growth for SMEs. We also need to support innovation and entrepreneurship, and to think about the type of ownership.

Some interesting reports have been submitted to the committee on employee-owned companies or co-operatives. There is a lot of scope for the committee to investigate that further. There is a great deal of literature on co-operatives and the effects that they have on employee behaviour in the context of productivity, turnover and absenteeism. Such firms have many positive effects. That would be one way forward for the committee to explore not only the particular sectors but the business models that can facilitate future growth and alleviate inequalities in the labour market, or at least to deal to some extent with the gender pay gap. Those could provide an opportunity for younger people and women, who were more adversely affected by the recent recession, to get back into the labour market and engage in more meaningful career pathways.

11:15  

I want to return to Professor Darby’s point. In my submission, I did some analysis of employment share across industries; I apologise that the figures are very small and may not be discernible. Within Scotland, the most important sectors for employment are the wholesale and retail trade, but they have been declining over time in Scotland, and in the UK as a whole—the rate of decline seems to be broadly similar.

The other very important sector is human health and social care, which employs up to 15 per cent of the total workforce. Employment in that sector is increasing over time, which I imagine is due to the demographics of Scotland—we have an ageing population. I cannot talk about regional differences, because I have not looked at that.

Looking at the trends in employment by sector, the committee might want to consider whether effort should be focused on declining sectors in order to rejuvenate them. Professor Montagna talked about manufacturing, which has been declining for more than a decade. Is a focus needed on trying to rejuvenate manufacturing and, to a certain extent, construction, or should the focus be on sectors that are already increasing and becoming more important?

Very briefly, to return to Colin Beattie’s original question about who is the expert on which will be the sectors of the future, the answer is no one; there are no experts on which will be the winning sectors. If anyone claims that they are an expert and can tell you what the sectors of the future will be, hurl them on to the streets and do not listen to them.

We have a mixed track record in Scotland in picking the sectors of the future. We have the graveyard of silicon glen and other sectors that have been called the key growth sectors. We chop and change those over time and they tend not to perform as well as we hope they will. Where will the economic growth come from? Take it wherever you can get it; we should welcome whatever growth comes our way. Listen to businesses that decide to come to Scotland to invest and grow here, and let there be growth from sources that we may not have been thinking or talking about in public forums to date.

The comment about the non-existence of economic prophets has raised a bit of interest. Gillian Martin, Professor Darby, Dean Lockhart, Tom Arthur and John Mason all want to come in, so we will hear from them in roughly that order.

What has been said about business models is really important. When Dr Zangelidis mentioned that it informed my next question, which is about policy decisions. I direct the question to Dr Wilson, who mentioned in her introduction that she looks at family economics. Which recent policy decisions, by both the UK and Scottish Governments, have the most potential to improve productivity and the family situation and, conversely, which have the potential to have a negative impact on the family?

A policy decision that is incredibly welcome in Scotland is the increase in childcare provision for young families. We can see in the data that having young children in the household can impact someone’s decision about whether they are able to go to work, or to work the number of hours that they wish to work. There is a gender divide in that regard; the issue generally impacts women more than it impacts men. However, it is an issue across the board. The fairly recent increase in childcare provision will allow individuals who want to return to the workforce to do so earlier and perhaps to work longer than they would previously have been able to do. It is a welcome policy move.

Business models, which Dr Zangelidis mentioned, have to be able to fit around that, to increase productivity in general. It would be good to get an example of a business model that will encourage more people to enter the workforce.

If I have understood your question correctly, I suggest a business model that is built around flexible working and facilitating workers to juggle their many commitments. The data show that a proportion of people would like to work longer hours but cannot do so because of family commitments, which are generally childcare commitments. More flexible working practices in many businesses, for example to allow individuals to start earlier and finish earlier so that they can look after the children, might help.

I think that we all agree with Richard Marsh that it is damned difficult to sit here and try to pick where growth will come from. However, we can get quite a lot from the London School of Economics and Political Science growth commission’s most recent recommendations. The LSE growth commission talks about not concentrating so much on the frontier and looking beneath that at the productivity growth of the second, third and fourth quartiles—if we can move those up, we can do an awful lot to close the gap that has opened up in relation to past trends in productivity.

The LSE growth commission talks quite a lot about how we might go about that. It has done a lot of studies, for a lot of countries, on how efficiency improvements at company level can make big gains. That definitely scratches beneath the surface of the aggregate figures. The commission talks about, for example, matching firms to higher-productivity firms and sharing best practice, and it talks about what might be in it for the best-performing firms, which is that they get an improved supply chain. There might also be something that Government can do to incentivise that.

If we focus on the frontier and try to pick winners, we are almost bound to spend a lot of money and get some of those picks wrong, whereas if we look beneath that and consider how we can move people up towards the frontier and what is stopping them getting there, we can make bigger gains, at the aggregate level.

I want to add to Dr Tanya Wilson’s point about flexible working arrangements. It is important to understand the complexities of trying to keep a work-life balance, especially for women. We also need to acknowledge that there is a bias against such arrangements. Often in the liberal market, individuals who are in part-time or temporary contracts—especially part-time contracts—are regarded as inferior and are not given the same opportunities for training, career development and career progression.

There needs to be a change in culture to accommodate that. It is about not just providing flexible working arrangements but recognising the value of people who take up such arrangements and their contribution to the economy. It is about providing the necessary regulatory framework to support such people, rather than treating them as inferior, as they are currently treated.

I have a question about the role of policy—specifically, the UK industrial strategy. The white paper on that will be published shortly. I do not think that it will look like the 1970s version of an industrial strategy, which was about picking winners; it will be more about sector deals, collaboration, city deals, increasing innovation and so on.

How might the industrial strategy help Scotland? Might it cover business models, for example, given that it is a wide-ranging policy? I ask our guests to identify priority areas for Scotland, where the industrial strategy could help to boost the economy by boosting productivity or innovation.

I will bring in Tom Arthur before I invite our panel to respond.

I have a supplementary question on a point that Richard Marsh made. We probably all agree that picking winners is a risky business, but the corollary to that is what we do about sectors that are in decline. What sectors are particularly exposed to innovation such as artificial intelligence and robotics? Are we overexposed in some sectors? Should we be on our guard and starting to plan ahead for reskilling and retooling?

I am keen to gauge people’s views on the current forecasts, which range from saying that we will muddle along and be fine to being fairly apocalyptic and forecasting 40 per cent unemployment. I am keen to get a sense of where a happy medium might be. Equally, I want to know how we can accommodate the changes that will come through innovation. Can you identify sectors that not only might not be winners but will be losers in the long term?

Again, doing that would require a crystal ball, to some extent.

You have raised a number of issues. A key issue in this context is productivity, which should be at the core of any industrial strategy. It is easy to think in abstract terms about the key factors that determine productivity. Everybody can name them: infrastructure, skills and so on. However, a deep understanding of productivity requires to be evidence based, because there will be different reasons behind the poor or successful productivity performance of different sectors, regions and firms.

Professor Darby talked about the LSE growth commission’s productivity report. The core of that research is really the idea that the profile—the size and productivity distribution—of industries is important in determining aggregate productivity. We discussed that with the committee in the context of your inquiry into economic data.

An interesting stylised fact is that there is a positive correlation between the size, distribution and productivity distribution of firms and aggregate productivity. However, although we know that Scotland is primarily made up of small and medium-sized enterprises, Scotland does not score badly compared to the rest of the UK in that dimension. For example, 64 per cent of new firms in Scotland are zero-employee firms, which is a lower percentage than that in the rest of the UK. The percentage of bigger firms with 250 or more employees is higher in Scotland than it is in the rest of the UK, but productivity performance has been worse in Scotland. It is important to understand why the link that exists in the aggregate breaks down when we compare Scotland with the rest of the UK. What is it that means that the productivity profile of firms does not translate into better aggregate productivity performance?

I am working with a colleague and a PhD student in Aberdeen on the effects of firm characteristics on mismatch. We know that Scotland has a greater problem of skills mismatch, so firms in Scotland have more difficulty than firms in the rest of the UK in finding the right skills. Yet, the profile of firms in Scotland is, if anything, better than that in the rest of the UK.

When I gave evidence to the committee recently, I talked about productivity as a process that is akin to peeling an onion. The key issue is that we need to understand what lies at the core of the onion. What is the root cause of the country’s productivity problems? That requires evidence-based analysis.

There may well be a Scottish factor that is to do with the region, such as the characteristics of industries or the fact that industry in Scotland may not be as large as industry in other parts of the UK—a scale factor that Marshall called external economies. The productivity of individual firms depends on the productivity of the sector and on whether there are industrial clusters, which plays a role in facilitating the growth of individual firms, as we know.

Those factors all require a deep understanding of the issues. A good suggestion would be to set up a productivity commission in Scotland to look at those issues.

11:30  

I will pick up Mr Arthur’s point about the implications of growth in different sectors. The impact of automation has been talked about a lot recently. It is expected to be fantastic for productivity but it may not be as fantastic for employment. There are rumours that the chancellor will talk about it in the budget with regard to investment in driverless cars, for instance. I read this week that we are expected to have our first drive in those cars by 2021. In one way, moving forward sounds fantastic, but more than a million individuals in the UK are employed as drivers. If that change happens incredibly quickly, the questions will be about reskilling and which sectors those individuals can go into.

There have been wild claims, with some papers saying that up to 40 per cent of jobs will disappear within the next 20 years—one said recently that 4 million private sector jobs in the UK will go in the next 10 years. It may be possible to do 4 million current jobs with robotics or automation, but history tells us that jobs in other sectors will arise and become more important. However, that will take time, and it takes time to reskill. For those individuals who are affected by automation, it may be extremely difficult to acquire skills in different areas. Which skills should they acquire in order to get the new jobs? At this point, we do not even know what those jobs will be.

The topics that everyone has touched on are hugely interesting. Tom Arthur’s point is fantastic and chimes with what Professor Darby said at the beginning of the meeting.

Parts of Scotland, such as the big cities of Edinburgh and Glasgow, are doing quite well. Other parts of Scotland, such as North Ayrshire, are not doing so well, as has been mentioned. That chimes with what any economics 101 textbook on Scotland would say in the first few pages about the trade-off between efficiency and equity.

Scotland currently has an economic strategy that talks significantly about equality. At its heart, it says that, if Scotland improves equality, it will increase economic growth in a specific way that will help equality. Although I do not disagree with that point, it almost tries to rewire the basic lesson of economics that there are significant trade-offs in identifying the losers from the trends that are unfolding in Scotland. A stark choice is put in front of us by identifying the big winners, such as Edinburgh and Glasgow, and those areas that are struggling, such as North Ayrshire. If we want to focus our resources where we will generate more growth, we might focus on the cities of Edinburgh and Glasgow; if we want to mitigate the negative consequences of those trends, we might focus a bit more on North Ayrshire. Alternatively, we might identify areas that might lose out because of the trends that are unfolding and ask what support mechanisms we can put in place, as has been suggested.

We could try to do both. We could try to generate economic growth and mitigate some of the negative consequences of the trends that are unfolding in Scotland, but there are choices to be made. We have limited resources and we need to focus them on where we can generate growth and improve equality.

It would make me slightly nervous if we were to go down the track of saying that doing all these things will naturally raise economic growth. We have stark choices to make about where we put resources. Enterprise agencies’ mission to raise economic growth has sometimes been muddled.

Muddled in what way?

Professor Richard Harris produced a good paper on the evaluation of regional selective assistance, which said that it is a good tool for safeguarding employment but less effective at raising productivity. That goes back to the point that we were making. We know that certain sectors in Scotland will struggle in the face of global movements and we might want to safeguard jobs or move them into more deprived areas, although that might come at a slightly higher cost than the cost of moving them into slightly more affluent parts of Scotland. We have to think very carefully about that choice.

I understand where Richard Marsh is coming from, but we are talking about sustainable and balanced growth. Focusing on single indicators and looking at the average of what is happening in Scotland can hide a lot of heterogeneity, so we should be cautious. I would adopt a different approach of promoting more balanced growth.

We have previously seen that there are areas that can drive growth, but we should be careful about investing in those, because that should not be done at the expense of more remote areas or urban areas. We need to think about how Scotland will evolve, given its geography and its socioeconomic and demographic composition, in the next 10, 15 or 20 years and what we want to happen.

We need to be cautious and not look at single indicators or what happens on average. We need to look at different segments of society in different areas and how sustainable growth will be for them.

Andy Wightman and Jamie Halcro Johnston have questions on the areas that some of our witnesses have just covered.

I have three questions to throw into the mix. First, there has been some talk about not picking winners, and most politicians agree that that is not a valid strategy. There are sectors that we will always need—food, health, shelter, warmth and energy—and there are broad sectors that we need to move away from, such as fossil fuels, because we need to decarbonise the economy. There are therefore clear drivers as to which sectors we need to ensure are at least going to be in a good place in the future. That is my first point.

Secondly, how important are savings and debt ratios? Britain has high levels of personal debt, a lot of which goes into consumption and is behind a lot of the GDP growth. What is the importance of that?

I will come back to my third question.

John Mason wants to add a top-up question, and I will throw it open to the panel before we come to Jamie Halcro Johnston.

It is a follow-up question in response to what Andy Wightman just asked and what Richard Marsh said earlier. We seem to accept that we cannot pick winners, but Andy just made the point that we will always need certain sectors. We appear to have missed the boat, or we are behind the curve, on the decommissioning of oil rigs and such, especially compared to other countries. Surely, we should have seen that coming. I do not know why we did not see it coming, although perhaps I have misunderstood it and we did. All the oil rigs seem to be going somewhere else. Taking that as an example, are we just not good at picking winners? Was that opportunity not predictable?

In a knowledge economy, comparative advantage is man-made—it does not necessarily rely on natural resources—and the role of policy in facilitating the emergence of industry and new sectors could be important. I agree that much can be done in the clean energy sector and that Scotland is already in a good position, but we could do better.

Savings and debt are a big issue. The financial crisis has resulted in an aggregate demand deficiency, and the little growth that the UK has experienced in the past 10 years has been led by consumption. That is a problem. I go back to the big issue of productivity. We need to address investment, as that would facilitate more export-oriented growth, which we do not have because of a lack of productivity. I will stop there.

I will pick up on the specific points raised by John Mason and Andy Wightman about decommissioning and the renewables industry. You are probably right. In the past we have been lousy at making specific projections about where we are going to be in 20 or 30 years’ time. We are not terribly great at that, but no one is. However, I fully agree that we can make broad assumptions about where things are going and consider what would happen if household debt moved in certain ways or if we moved away from fossil fuels more quickly. We can make those broad projections.

So far, we have talked in a rather abstract way about the issues, but I share your concerns about decommissioning and whether we have missed the boat. Given the resources and assets that we had at our command, we probably should have been better positioned than we were. Think about the recent issues around Burntisland Fabrications, which is close to where I am based, so I am reasonably familiar with it. BiFab is a company that is involved in the kind of industry that we have just been discussing, and within an hour’s drive of its Burntisland location there are five docks. The Tay plan sets out that Dundee and Montrose harbours will be invested in to take advantage of the renewables industry and decommissioning; the City of Edinburgh Council’s economic strategy says that it will develop Leith docks to take into account renewables; and Fife Council developed the energy park at Methil to deal with renewables. However, we have a company in Burntisland that is involved in the renewables industry and is struggling.

We are not so great at the execution of those plans, particularly in local areas. Within an hour’s drive of that struggling company, we have five locations that are all trying to do the same thing and that are all supported by public money. Too much of that is going on at a local level. We are not competing internationally; rather, we are competing with one another.

In the enterprise networks and at a local level, we often talk about how we can come together as Scotland plc, but there is no Scotland plc in that sense. If there were such a thing and Burntisland was an arm of the company—a struggling one—and we had five sites all doing similar things, we would be asking which sites we should close, where we should concentrate our resources and how we could collaborate more. We do not have those conversations.

We must make those sensible assumptions about where we are going and implement that knowledge in a far more focused way at a local level.

11:45  

As I understand it, Mr Wightman was making the point that, although we may gaze into our crystal balls to try to identify those sectors that will become more important, we already know that some sectors will always be important, such as the food, health, and shelter sectors.

We can learn from the international context. I recently read that the Netherlands has overtaken Spain as the largest producer of tomatoes in the European Union. The technological focus is on producing energy to create artificial sunlight and a lot of water. Scotland has a lot of water, and we have the ability to generate fossil-free fuel and energy. I do not know enough about the situation in the Netherlands, but we can look at that example and consider that Scotland would, given its geography and tech, have an advantage in comparison to other countries, so we could work in that sector.

Andy Wightman also mentioned the importance of savings and debt and the extent to which demand is driven by consumer choices in a debt-driven environment. That is an important question. If consumption is driven through debts rather than through incomes, the economy is open to more adverse shocks. When there is a global shock, people tighten their belts and stop spending, which is exactly what happened in the previous recession. The movement should be towards increased growth through increased incomes and spending rather than through increased debt collection.

My third question is about household income, which is important to the economy. Historically in Britain, there have been very high house prices and very high housing costs both in debt and in rent. What role does reducing household costs play in improving the performance of an economy, or is it just swings and roundabouts? For example, if there were a target to keep housing costs down to 20 per cent of average incomes, would that be good for the economy, or would it not be good for the economy because the people who receive those flows of funds from high levels of housing costs would no longer be receiving them? What role does reducing household costs and increasing disposable income play in improving economic performance?

In a situation in which household incomes have been falling, reducing household costs is helpful. The key point about the saving issue is not simply that people are spending money because they want to; they are dissaving because they do not have incomes. Increasingly, finding a job is not necessarily a way out of poverty. I return to the point about the great degree of economic insecurity that characterises current labour markets. The majority of the jobs that have been created in the past few years are either self-employed jobs—and we are talking not about Rockefeller self-employed but about zero-employee firms and people not making much of their enterprise—or temporary jobs. It is true that some people opt for a temporary job because it gives them flexibility, but the evidence also suggests that about 30 per cent of those people would like to work longer hours. Therefore, those people are technically underemployed. Furthermore, some full-time workers are on very uncertain terms. That links up again to automation, which is often used as an excuse to justify such contracts.

However, it is important that we understand that we need to take a general equilibrium view of the economy. If incomes are too low, there is not enough aggregate demand and there is no market for firms, so nobody wins.

That is why it is important to address the problem with the way in which the labour market works. Flexible labour markets do not necessarily lead to a better allocation of resources if they underpin a deficiency in aggregate demand. That is where institutional arrangements and, perhaps, business models such as the co-operative model are important. We are now observing a situation in which, as never before in the modern history of the capitalist world, there has been a reallocation of risk away from firms towards workers. That is a key point that needs to be addressed.

The increase in in-work poverty means that housing affordability is a huge issue for some parts of the population. There is also a generational thing going on. We have now had a decade of slow income growth and people entering the labour market have just not had the income to be able to save in the way people were in the past. Also, optimism about where future earnings will go is very different for people who have not experienced that kind of growth in the past. The increase in unsecured consumer credit that is concentrated among the relatively young and people who are in work and in poverty is a worrying feature. Action that can help those people with the affordability of housing, for example, is worth while.

It is a mixed picture: there are people who are doing okay and people who are really struggling.

I agree with both the previous speakers, who highlight some important issues. Reducing housing costs would definitely help, but increasing household income would help even more. Over the past 10 years, we have seen an increase in in-work poverty, involuntary flexible contracts and part-time arrangements. There has also been a reduction in real wages and household income has been reduced.

There has also been an impact on the returns from education. Education still pays a premium, but it has almost halved if we look at the returns relative to years of education. The same goes if we consider qualifications. The qualificational premium—the premium of having a university degree—has reduced in the past 10 years. That has implications for household income and for future growth. It has implications for how competitive the Scottish labour market will be in the years to come, especially in light of the labour market uncertainties that the great recession has created, the prospect of Brexit and whatever the new working arrangements will be.

We need to look at those issues and see not only how they have affected income inequality and the average household but the projections for how competitive the Scottish economy will be and how equitable the distribution of income in Scotland will be in future.

If, 30 years ago, only 5 per cent of the Scottish population went to university and had a university degree but that has now increased exponentially—I do not know what the current Scottish figure is but let us suppose for argument’s sake that it went from 5 per cent to 50 per cent—simply having a university degree surely does not mean that someone is guaranteed a higher income in the real economy. Has the wrong approach been taken to education and technical training in Scotland over the past 30 years? That is a common theme in other countries, so the development is not limited to Scotland by any means. What comments do you have on that?

That is a valid point, but the counterargument to that would be that the distribution of occupations and the type of jobs have changed in the past 20 or 30 years, so we have moved from an industrial economy to a knowledge economy. The figures in my report suggest that the number of professional occupations has almost doubled in the past 10 years, going from 14 per cent to almost 25 per cent, and the distribution of occupations in the Scottish economy has changed as well. We should not necessarily expect that because we have more highly educated individuals the returns will go down, because the requirements and the nature of jobs have changed.

Before Richard March comes in, there is another issue that Jamie Halcro Johnston wanted to ask about.

I was going to ask about skills, but some of that has been covered. I want to go back briefly to some of the comments that Richard Marsh made about identifying new sectors. One of the key sectors in the Highlands and Islands, which I represent, is renewables, which has provided new opportunities. You talked about Burntisland Fabrications and the number of ports and harbours looking to that sector in Fife, and that activity is magnified again in the Highlands and Islands. Has there been a lack of focus or co-ordination over the past few years by the Government and Government agencies in where investment has been made in particular sectors? Have other countries co-ordinated or focused their efforts better, perhaps by identifying one or two key areas of expertise? How can we do that better? I know that some of that has been covered, but it would be interesting to hear your views.

The point that I was going to make was in response to Andy Wightman’s question about how housing costs would affect economic growth. I thought that it was a trick question, so I let the other macroeconomists answer first. If you lowered housing costs, the economy would grow more quickly, simply because people would have more money to spend. If you put 20 economists in this room, 19 out of 20 of them would say the same thing. I think that we all agree broadly on that point. The only people who talk about a healthy housing market with prices going up are estate agents. The poorest people in Scottish society, particularly in areas where housing costs have risen more quickly, tend to spend all the money they get, and the multiplying knock-on effect on generating further economic activity would be greater if they were able to spend more. Everyone here has said pretty much the same thing.

To answer your questions, since devolution we have had eight different economic strategies, plans and frameworks. We have had a different economic plan almost every other year. We have had more economic plans than we have had Scotland managers since devolution. We have talked about focusing our efforts on different sectors. Someone mentioned clusters, and the cluster approach used to be really popular in Scotland. That is what we used to base a lot of Scottish Enterprise activities around, but we simply decided to move away from it. It is not that clusters have gone away; they are still there, but that is not how we have chosen to approach it.

The kind of changes that most of us have suggested here today, such as providing additional childcare and looking at city structures, are things that take 10, 20 or 30 years to come through. We cannot be in a position where we are changing the strategic direction of travel for economic development every second or third year. We have to pick a way to go, keep it broad and talk about the broad trends that we have highlighted, but put our shoulder behind it and move forward.

The Highlands and Islands are an interesting area where there is that kind of concerted effort and collective ambition to develop things more collaboratively, so things are probably done slightly better there than in other parts of Scotland, but there are renewables sites in the Highlands that are competing with a number of different locations across Scotland. There needs to be a choice and we need to decide where to focus our efforts.

Parts of the Highlands will compete with other parts of the Highlands, which is again part of the issue. Decommissioning is interesting, because that presents a huge opportunity, but there are very few facilities in the Highlands and Islands, or anywhere in Scotland, that are capable of doing it. Why have we been bad at taking opportunities that seem obvious and could be timescaled in?

12:00  

Does anyone have a comment on that? Does everyone agree on the housing point? Some of our guests reacted to that.

As one of the conveners of the oil and gas cross-party group, I should point out that the majority of decommissioning happens offshore and we have not missed the boat on that. We have been active on that. The break-up of installations onshore is a small part of decommissioning, so I would not lose too much faith.

Does anyone have a comment on the point that the economy will grow if we have cheaper housing?

We have highlighted a few times that the average figure can hide what is happening through the entire distribution. The issue that has been brought up a few times is that a particular sector in the economy is being adversely affected. Making cheaper housing available for low-income individuals seems to be an absolute priority because a large proportion of their income goes on housing costs. However, if housing costs are reduced by 20 per cent across the board, that will not have the same effect on people at the top end of the income distribution. Targeting low-income individuals would have an incredibly important impact on their lives, but if household costs were reduced by 20 per cent, it would mean higher savings for other individuals.

I agree with Richard Marsh that the people who have the least income will benefit by having more disposable income as a result of lower housing costs and they are bound to spend more of that. They have little ability to save on low incomes. Their disposable income will be spent, so it will feed through to the economy. The people at the top end benefit from higher house prices through their wealth. Their propensity to spend out of their wealth is much smaller than the propensity of low-income individuals to spend out of their income. Every macroeconomist would agree that that has a spending effect. Low-income people or people in key jobs might need to be brought into places where accommodation is expensive. The key-jobs argument for subsidising housing for particular groups is also relevant, but high housing costs can certainly be a drag on growth.

Housing is a sector that contributes to the overall economy, so there is probably a balance to be struck. I would like to focus on something that Richard Marsh said. I am not sure that there have been eight strategies, but I defer to his ability to count. Is it not true that all those strategies are the same at a high level? They say roughly the same thing—“We want the economy to grow and we want it to be inclusive.” If you strip it down, there is broad agreement on what we need to do, but the flexibility to spot opportunities and go after them consistently, which lies beneath that, may be where we struggle.

Does our economic strategy need to line up absolutely with other Government policies? I will give you two examples. First, if we go for astonishing increases in productivity, that is often at the expense of jobs and therefore we ignore inclusive growth, so is the ambition to get productivity up in and of itself the right ambition? Secondly, we have signed up to a fiscal framework that focuses entirely on economic growth by way of increasing taxation as the fiscal measure. It does not look at inclusive growth. Are we pulling in two very different directions? At a strategic level, it is important for us to consider that if we are going to get this next piece of work right.

You seem to suggest that there is a trade-off between productivity and jobs. I would tend to disagree, as productivity is a necessary condition for growth and growth is a necessary condition for the creation of jobs.

If productivity growth is driven by new technology adoption, for example, there may be some displacement of work but, again, I would be careful about thinking that all technology adoption is necessarily bad for jobs, because there is what is known as technology and skill complementarity. A development in a certain direction may generate different jobs.

However, we then go back to the issue of fairness in the model of distribution that we have in society. Ten years ago, everybody was talking about globalisation and now we talk about the fourth industrial revolution. The point is the same—dislocations are bound to happen to certain segments of the labour market; the only way to deal with those is to realise that they are happening and not to shift all the economic risk to those segments of the labour market. That is why it is important to use a holistic approach to policy.

I do not think that you should be afraid of stimulating productivity because it may damage jobs; I think that we should go for it but be aware that there are transitional periods that may require retraining, support and so on. The debate is open as to what to do. Some people talk about a universal basic income; others talk about public jobs being guaranteed jobs. These are all things that need to be explored. There are not any easy answers; they are certainly very complex issues, which require joint thinking from all the stakeholders in society.

I agree with Professor Montagna that there is not necessarily a trade-off and there are no clear winners or losers in this case. As she said, there is bound to be some reallocation of the workforce—that is expected. However, exactly because it is expected, the question then is what we do to facilitate that transition from one job to another. It is about the mechanisms that we put in place and whether the welfare safety net works. What proactive policies can we adopt on training to make sure that there will be a smooth transition to a new career pathway? There are alternative career pathways. The question is how efficient the labour market is in identifying those alternative pathways and making those transitions as smooth as possible.

It goes back to the mismatch issue. Sometimes, the policy agenda has overlooked that significant mismatch in the labour market. How well jobs are matched with individuals and the portfolio of skills that individuals have is a key metric for how efficiently the labour market is operating. Again, there can be policies in relation to the issue of productivity. We can identify the issues in the labour market and ask how we can make the pairing between the worker and the job as efficient as possible and make that match good. In Scotland, the skills mismatch is around 56 per cent.

By which we mean that a lot of people are overeducated for what they are doing. The investment in their education has not translated into an increase in productivity. We need to understand why that is the case. Is it the case that people are acquiring the wrong type of skills or is it the case that firms are not making the most of the skills that they potentially have at their disposal, because of underinvestment, for example?

The fact that the number of overeducated people in Scotland is greater than the number of undereducated people has implications for productivity, for wages—there is a wage penalty—and for job turnover. It has many implications for the economy overall and for the movement of the labour force across jobs.

I can clarify that there have been eight strategies, frameworks or plans. As well as parts 1 and 2 of the framework for economic development in Scotland, there have been recovery plans, Government economic strategies and strategies for Scotland.

I suppose that Jackie Baillie’s point is probably right, in the sense that there is a core theme running through all the strategies. Scottish Enterprise and Highlands and Islands Enterprise are given responsibility for a lot of the heavy lifting. However, I think that the strategies matter, because they have made it possible to have quite regular shifts in emphasis. When the Government economic strategy was introduced, public sector agencies in Scotland talked about GES-ifying their strategies. They would look at the Government economic strategy, identify the buzzwords in it and say, “Right—that’s our strategy done.”

In some senses, the strategies matter, because they say things like, “We want to be like the arc of prosperity countries; here are the characteristics that are displayed by those countries.” The enterprise agencies, the local authorities and the other agencies across Scotland listen to that and take it on board; they think, “What does that mean for us?” If we were to suddenly say, “Actually, we didn’t mean that; we’re going in a different direction,” that would put them in an awkward position, because we would be marching our men up to the top of the hill and telling them to go down the other side in quite a short space of time. If we were to do that, we would not have the policies in place for a sufficient length of time—10 or 20 years—to be sure that they were the right policies that worked well, or to find out that they did not work, in which case we could move on to something else.

On the point about a trade-off, I get what most of the other witnesses have said. One thing that we tend to fall down on in Scotland is that we tend to look at policies quite narrowly. We tend to look at them from the point of view of whether they will grow the economy, improve productivity, tackle inequality or help the environment. The discussion on air passenger duty is a good example of that. Every year, the Scottish Government produces a carbon budget, which shows the impact on the economy of the various measures that it spends its money on and how much pollution they produce. Those figures clearly show that, with the exception of coal mining, aviation is possibly the worst area in which to make a trade-off in terms of GDP per unit of pollution.

When the Parliament debates what to do on an issue such as APD, it is important for it to consider a series of questions. If APD were cut, would that boost the economy? Yes. Would it increase pollution? Yes. Would reducing the cost of airplane tickets benefit more affluent households? Probably. It is important to make it clear that there are real choices to be made about the policies in front of us that might do some of the things that we want, but which could also have significant side-effects that we do not want. We need to have a more open, evidence-based debate.

Thank you.

The session is coming to an end. Do you have a final follow-up, Ms Baillie?

There are further points of detail to explore, but I am happy to leave it there.

In that case, I thank all our witnesses for coming in.

12:14 Meeting suspended.  

12:18 On resuming—