Official Report 567KB pdf
10:01
Agenda item 5 is an evidence session on the state of the Scottish economy and the labour market. I refer members to papers 3 and 4. I welcome to the meeting our witnesses: Professor Stuart McIntyre is from the Fraser of Allander Institute, and Stephen Boyd is from the Institute for Public Policy Research Scotland. I ask them to introduce themselves and to make some opening remarks, after which we will move to questions.
Thank you, convener. I thank the committee for the opportunity to appear before it today.
I am professor of economics at the University of Strathclyde and, as of this year, head of the department of economics. The Fraser of Allander Institute sits within the department of economics at Strathclyde, so we are all together and all one.
I will kick off the session by trying to draw a distinction between the immediate economic picture and the longer-term challenges. That is an important distinction to make at the outset. In the short run, the picture is relatively mixed. The Scottish economy has continued to grow over the past few years, but business conditions remain difficult. The labour market is starting to soften on key metrics.
In addition, as members of the committee will be aware, for the past few years, there have been a series of challenges around labour market measurement. As a result, we are increasingly having to triangulate across different metrics to understand what is happening. That means that—this has been wise advice for a long time—it is important to look at a broader range of statistics to understand what is happening, but also to look over the longer run and not focus too much on any single data point.
Beyond those short-term movements, which often get a lot of attention, what is more important for the Scottish economy, and more important for the committee to think about, is the longer-term challenges and some of the more structural challenges. Like the UK, Scotland has faced a prolonged period of weak productivity growth. The Office for National Statistics has recently done some work, which I am sure that SPICe colleagues will be able to share with the committee, that slightly revises that assessment as a result of improvements in data quality and measurement. However, fundamentally, that picture remains the same. The situation with regard to productivity growth is not as bad as we thought it was, but it is still an issue.
At the same time, there is a series of issues around labour market participation, especially in relation to economic activity. Those changes are predominantly driven by poor health. Alongside those issues are long-standing challenges to do with demographic and workforce pressures and so on, which several members of the committee will have looked at in the past.
Ultimately, those elements matter because they are the key drivers of improvements in living standards and growth in the tax base, and hence have a direct link with the budget. I know that this is a new committee in a new parliamentary session, but I think that focusing on the fundamental constraints on growth and judging policies on whether they contribute to alleviating those pressures would be key.
We have not lacked economic strategies over the period of devolution. The Fraser of Allander Institute got into a bit of trouble at one point for describing the cluttered landscape of economic strategies; I do not think that we were wrong or that it has gotten particularly better. Reflecting on that period, I think that the 2007 economic strategy was probably one of the best ones—Stephen Boyd might have a different view—because it explicitly was not an invitation to a plethora of different initiatives but instead wanted to focus on the key structural challenges in the economy in order for policies to be judged against them. Whatever views members might have about those policies, the principles were sensible ones for governing an economic strategy. Focusing attention on how particular interventions and policies affect those key underlying structural changes and issues in the economy is much more sensible than thinking about what they mean for next quarter’s gross domestic product.
As Stephen Boyd and I have discussed, and as we have mentioned to the convener privately, that connects to the much broader agenda around public tax reform that is at the heart of this session of Parliament. Fifteen years ago, the Christie commission identified a whole series of issues and priorities; looking back at it ahead of this parliamentary session, I see that they are as relevant today, if not more so, than they were then. I do not think that there would be much disagreement about what those issues are; the question is, what will we do to try to address them? For me, the focus of attention in the Scottish economy really needs to be on what those longer-term challenges are and how we address them.
Thanks for the invitation. I am delighted to be here today.
I have been the director of the Institute for Public Policy Research Scotland since the summer of 2024. Before that, I worked for the Scottish Government for seven years in a variety of economic and labour market policy roles, and between 2003 and 2016 I led on economic and industrial strategy for the Scottish Trades Union Congress.
Stuart McIntyre and I might disagree at some point, but I agreed with pretty much all his opening comments. I will zoom out a bit and make some initial comments. Scotland is doing okay in terms of the economy; I think that it faces similar challenges to all Organisation for Economic Co-operation and Development countries at this moment in time. My concern is that other countries are much better positioned than Scotland is to navigate the great technological, demographic, environmental and distributional challenges of the 21st century—that relates to some of what Stuart has said.
There is currently no credible, coherent economic strategy in Scotland that stakeholders can unite behind. I believe that the current national strategy for economic transformation is not fit for purpose in that respect. There is no clarity around the specialisms and capabilities that the Scottish Government should prioritise, nor around where Scotland would be most effectively positioned in global supply chains.
As Stuart has said, there was quite a bit of clarity and consistency through the economic strategies of 2003, 2007 and 2011, but a lot of that has been lost in the past couple of strategies. This is not a criticism of just the Scottish Government; within the wider debate, there is at times an almost comical failure to connect Scotland’s economic challenges to secular global trends and constraints. For instance, what does China’s ever-growing dominance of global manufacturing mean for Scotland and for Scottish Government policy with regard to what industries Scotland chooses to support?
Stuart is right to highlight the fiscal challenge that will, I think, dominate this parliamentary session. However, we must be careful about believing that growth will ride to the rescue of that fiscal challenge over the next few years. As you will see on a daily basis, global geopolitics is not conducive to much more rapid growth. We must be frank in understanding that Scotland’s devolved powers are important to the country’s long-term economic health but can do little in the short term to boost growth.
My final point is that current economic debate is being dominated by artificial intelligence, and we are being fed a daily diet of very exciting stories about what it will mean for the future. Again, I would caution against assuming that AI will ride to the rescue or that there will be an AI-induced productivity surge any time soon. One of my favourite quotes from recent times comes from a 2018 research paper that looked at the impact of AI on economic growth. It concluded that
“growth may be constrained not by what we are good at but rather by what is essential and yet hard to improve.”
That is very much the situation that we are in at the moment.
Thank you very much for that great introduction. It sounds like you are trying to get us to go back and read some papers from 2007—we will maybe add that to our homework. Colleagues, do you want to come in first?
Just yesterday, the Scottish Government published a paper on regional structures and local government reform. It made me think about Stuart McIntyre’s paper on Scottish city regions that was published by the University of Glasgow. I wondered what you made of that Government paper, Stuart, because my reflection is that it looks a bit different from what we might have expected. Would a fair summary of the paper that you published in conjunction with other academics be that it is about collaborating within existing structures rather than creating new, bigger regional structures, or is that an unfair characterisation?
For that piece of work, we went round and spoke with the Edinburgh, Aberdeen, Tay Cities, and Glasgow city region and growth deal groups, teams and partnerships, and carried out a number of sessions with them. I will come to the specifics of that.
One of the key takeaways was that each, in its own way, had done a lot to develop a local partnership spanning local authorities, agencies, higher education, further education and the private sector, which gave them some real strengths on which they were then able to build. The key point was that, rather than starting afresh with a blank sheet of paper, there was recognition that the investment had already been made, the relationships were already in place and—this is a crucial and perhaps underappreciated point—there were also lots of ideas. I do not think that there is always appreciation of the strength of local actors’ views on how to develop their own economy. That ought to be reflected in some of those more national policies.
I saw yesterday’s announcement. I was looking for lots of detail that did not appear to be there, which was surprising, given the scale of the reorganisation. However, I imagine that it will come. The principle of trying to empower more regional bodies in economic development is a good one, and the right one, given that the economy does not stop at administrative boundaries. Take Edinburgh and south-east Scotland, for example. East Lothian benefits hugely from its proximity to Edinburgh in economic terms. The spillover effects across those boundaries are really important, and we do not want to lose sight of that in our economic decision making.
The reason I am interested in this is that, if you are looking to have a plan for growing the economy, the regional level is a much more sensible and manageable level at which to plan. Certainly, when it comes to things such as infrastructure investment and strategic planning, it makes a lot more sense to do that at a regional level than at a national level, because you can take a more joined-up approach. Would you agree with that? Should the regional level become the primary level as we look towards implementing economic plans that generate real and beneficial growth for the people of Scotland?
10:15
It depends. The principle of asking about the appropriate spatial level at which policies should sit is right, but the conclusion across particular policy areas is a separate thing. I concede that we must think clearly about the appropriate spatial scale at which policies are exercised, as was perhaps nodded to, or reflected, in yesterday’s document.
I will give an example that is popular in debates about English devolution. There is a suggestion that fiscal powers should be devolved to mayoral authorities in England, but what would the implications be? A couple of years ago, I worked with Graeme Roy and James Mitchell to write a paper about risk and reward. Politicians often focus on potential rewards without recognising the potential risks. It is easy for local leaders to say that they want those powers, but we need a conversation about why. What are they going to do with those powers? We must also accept that devolving further powers to Scotland brings risks as well as rewards.
There is a lot there. Stephen, do you have any views on that regional question? Did yesterday’s paper put us on the right track?
I spent yesterday on a horrendous 14-hour train journey from Penzance to Glasgow and got no chance to read the paper, so I will have to sit that one out.
It does not take long.
In general, we could do regional development better, and the local aspect is another economic component. In other European countries, where the units of democracy are far smaller than ours, there is also a far broader spread of economic activity. I have been searching for years for serious research that tries to connect those two things, because there is a relationship there that I am not sure we can explain.
The Scottish Government is seeking to reconcile having both stronger regional government and stronger local government, but that is a tough task and the timescale for trying to do it is optimistic. We have been falling out about these things for 27 years, so I am not sure how we will reach a workable consensus within three months, but I am glad that we are having the debate.
My other question for you both is about the labour market and skills policy. Stuart McIntyre spoke about economic inactivity and demographics. We need to get much better at upskilling and reskilling, so that we constantly maximise talent and match that to the requirements of the labour market and industry. We are not good at that. To characterise it bluntly, the skill system focuses on young people who are entering the labour market for the first time rather than ensuring that people constantly maximise their skills and talent throughout their working lives.
What should we do to maximise engagement in the labour market and to maximise people’s potential? Will creating a single agency within the Scottish Funding Council put us on the right track or do we need to go further?
I put that question to Stephen Boyd first, given his STUC background.
You asked whether there should be more focus on upskilling and retraining. In my introductory comments, I spoke about real challenges, particularly because of our ageing society and technological change, so I think that there will have to be that focus. One reason why the current debate about AI is so unhelpful is that there is an underlying assumption that we have too many people, when we actually do not have enough people in many sectors of the labour market. We must be clear about that.
You could argue that that is not just a Scottish issue but a UK-wide one. We have never done vocational training particularly well and there are many reasons for that. Yes, we probably have not got the public sector support right, but we also have to be clear that employers in Scotland and the UK are not engaged in vocational training in the way that happens routinely in other European countries. In those countries, employers feel an obligation to train young people, whereas such an obligation just does not seem to exist in Scotland.
Looking back through history, there have been a range of attempts to change the institutional framework, but they have all floundered. We have tried to copy institutions and qualifications frameworks from other countries, but employers here do not play ball. We should look at how the public sector in Scotland organises its support, but we also have to be much more demanding with regard to how employers engage with the system.
Again, I do not have a strong view on what the institutional framework in the area looks like. There are some basics—for example, over time, more funding will have to be shifted to support workplace training. That is very difficult, given how stretched budgets currently are. However, we believe that employees will, through the course of their careers, have to upskill and retrain, and funding will have to recognise that.
There is a lot in that question, so I will jump in on a couple of bits.
Stephen Boyd touched on an important point. The data on training in the workplace—I think that it was set out in the committee papers—shows that the trend over time is uniformly heading down. Even within that, a lot of the training is not on new skills that will prepare workers for the future; it is more routine workplace training. That is a big challenge, and Stephen Boyd is right that funding is a big driver in that regard.
On the point about the SFC taking over apprenticeships from Skills Development Scotland, let us see. It is an idea—it might improve the situation, or it might not, but it is going to happen, so let us see what impact it has. There is a huge demand for apprenticeships in manufacturing in particular, and that is one of the things that we should invest in a lot more.
To go back to what was said about regional partnerships, I would be slightly critical of some of those partnerships. They have fallen somewhat into the trap of talking about artificial intelligence and the frontier economy and, around that, about higher education, whereas there is not enough about vocational training and further education. I understand entirely why, and it is not only those partnerships that do that. Nevertheless, it is important to keep reiterating the importance of vocational training and further education.
I have a quick general point about institutional change in the realm of economic development and skills policy. Very often, politicians want to make a quick impact, and one of the ways in which they can be seen to do that is to create institutional change of one form or another.
The problem is that economic development and skills policy is a people business, and the tacit knowledge that exists is hugely important. I think back to the abolition of the local enterprise companies back in 2008. When LECs were abolished, we lost a whole tier of economic development specialists who were embedded in their areas and able to build links between the public and private sector and between different firms in the private sector. When we speak about institutional change in the area, we have to be cautious because, when we do it, we risk losing those people and the tacit knowledge that resides with them.
I have one final follow-up question, based on what Stuart McIntyre just said. You talked about focusing on the frontier economy. I was recently told of another statistic, which is that 40 per cent of Scottish businesses have never accessed any form of formal finance.
Is there a risk that, when we look at economic policy, we are constantly looking at the frontier rather than the everyday, whether that is skills, investment or enterprise support. With all those things, should we be looking at the 80 per cent rather than the 20 per cent—maybe even looking at the 20 per cent would be an improvement, rather than solely at the absolute cutting edge—in order to see growth across the wider economy?
Most of the bandwidth is probably taken up by thinking about those frontier firms, which are competing globally. I know from talking to such firms that they are used to working in different jurisdictions with different policies, and they do not react particularly strongly to any specific policies. Let us consider the Scottish business base. About 4 per cent of businesses in Scotland are owned outside of Scotland. They are responsible for more than half of turnover and more than a third of employment. It depends on the question whether you want to focus on that 4 per cent or on the 96 per cent. In different contexts, you might wish to focus on one group rather than the other.
I agree with that. For delivering clear economic policies, focusing on the 4 per cent is much easier, as those businesses are easier to identify. As Stuart McIntyre will know, there is a great deal of literature in the UK about the long tail of low-productivity firms. There have been myriad policy interventions over the years to try to deal with that, with very limited success.
One that I was involved in, with the Scottish Government, was the productivity clubs initiative, which was launched by Ivan McKee just before Covid, in 2019 or 2020. The purpose of that initiative was to get clubs of small businesses working with and learning from each other about how to introduce new technologies into the workplace and how to use them efficiently. I have not seen any up-to-date evaluation of that initiative, but you might want to pursue that with Prosper colleagues.
I am new to the committee, and I am getting my head round the sheer scale of what we need to look at. I have a fishing sort of question, which is for both of you. The programme for government has been published, and we are now starting to look at it. Which area of the programme for government is most likely to improve our economic productivity? Equally, which area would have the weakest impact?
I will kick off on the first part of that. Stephen Boyd has been talking about the importance of institutions. One of the real gains of the past 10 years or so has been the advent of the Scottish Fiscal Commission and its work to shine a light on factors affecting long-term fiscal sustainability. The commission’s recent report, which came out earlier this year, before the election, puts down a challenge around public sector reform. I do not think that anyone fundamentally disagrees with the conclusions of the Christie commission in 2011, but it has not had momentum. If the PFG puts proper momentum around public sector reform—given what the Fiscal Commission set out as the implications for the budget of not engaging with it—that is undoubtedly welcome.
It is a great question, and I feel unprepared to answer it, to be honest. Our analysis of the PFG was that it focused heavily on public service reform. We have published extensively on that over the past few months, and we are sceptical about the Government’s ability to deliver its objectives over the course of this parliamentary session. As Stuart McIntyre says, it is an appropriate and laudable objective in many respects but, given the nature of the services that the public sector delivers in Scotland and our ability to shift the rate of productivity growth within those services over the short term, it is a massive challenge. Indeed, the scale of the challenge is generally underappreciated.
There is also a question about how we think about productivity growth in Scotland. It has been structurally low for a very long time. At times, it has been low compared with that of the United Kingdom, and it has been very low compared with productivity growth in some of the countries in Europe that the Scottish Government often wants to compare itself against. Why is productivity growth here structurally lower than in those other countries? The answer to that covers a range of areas, and we would be here for the rest of the morning if we tried to discuss that.
It is generally unhelpful to think in terms of specific policies. Productivity growth is about how the whole ecosystem is functioning—how labour market policies, fiscal policies and business growth policies are functioning. One real problem, which I think is also underappreciated, is the inability to grow companies of scale within Scotland. The PFG’s commitment to establish a business growth unit is interesting. In and of itself, establishing the unit is unlikely to achieve much, but it will be interesting to see how that is developed, what it looks like and what agenda is in place.
10:30
We have so many different enterprise agencies and, to borrow your expression, a cluttered environment. How should we get those agencies to demonstrate the additional economic activity that they create, so that we can monitor and evaluate it?
We come at that in two ways. Daniel Johnson mentioned the work that I have done on city region deals; one of the interesting elements of that work is considering how to make some of those national agencies accountable at a more regional level.
The second way is through the role of the committee. To draw on work that I did on fiscal sustainability and scrutiny, when we talked to former committee members, someone said—this is not the most polished language—that the committee is most effective when it hunts in a pack. Instead of asking an agency such as the Scottish National Investment Bank to say what it has invested in, you could ask it why, and to explain the thought process. Although it could not show you all the confidential documents, you could ask it to explain its rationale.
You could ask the enterprise agencies, SNIB, the SFC and so on to talk you through their thinking. They will not get everything right and they will make mistakes, which you will learn from but, fundamentally, it is about asking them to explain why they think that something is the right thing to do. Then, instead of telling them, “You invested in this business that failed,” you can have a conversation about whether their rationale stood the test of time. In SNIB’s case, given what it is trying to do, that is kind of inevitable, so assessing its rationale would be a much more useful focus of scrutiny, and the same applies to other agencies.
I would challenge your premise a wee bit, Mr Day. I agree with Stuart McIntyre’s introductory remarks that the landscape of strategies is cluttered—that is undeniable, and it has been generally unhelpful for economic development. However, I have never been convinced that there is a cluttered landscape in relation to agencies and various institutions. We have three economic development agencies with clear geographical remits. We need to remember that South of Scotland Enterprise was established as a product of a review in 2016-17 that had been designed to consolidate things, so we have to imagine some kind of coherent rationale for establishing that agency.
I have done a lot of work over the years with Highlands and Islands Enterprise, which pursues a slightly different remit from Scottish Enterprise, for very sound social and economic reasons. Then you have SNIB, which does what it does, and Skills Development Scotland, which does what it does. You often hear that that is a difficult landscape for firms to navigate but I do not think so. I have spent 20 years speaking to firms that have received crucial support from the networks at various points in their journey. They tend to draw on those networks for support with internationalisation and technology development, and then they do not need the agencies any more and move on. That is as it should be, even if part of the consequence is that the agencies do not derive the credit for that support that they perhaps should.
The whole landscape suffers from the lack of strategy to unite around, which I mentioned at the start. The pre-2015 strategies were all based on traditional comparative advantage—they asked what Scotland did best and how we could become better in those areas, and the networks were formed around delivering on those objectives. The lack of clarity around a national strategy has fed into uncertainty and lack of understanding about what the agencies are trying to deliver. We should remember that it is the Scottish Government that directs the agencies to do what they do; they do not have carte blanche in that respect.
My last area of questions has to do with the international aspect. Why has Scotland not been able to get more international exports? We seem to be stuck at around 20 per cent of GDP.
Some of that is down to industrial structure—we specialise in areas that are perhaps not as conducive to international trade as others. Our manufacturing sector is now about a third of the size that it was 40 years ago. Public sector support has generally been pretty good in that regard. I could cite loads of instances in which Scottish firms went to Scottish Development International and other networks and received useful support with internationalisation.
There is something to be said for ambition and a willingness to take risks, because a firm starting to export is undertaking a risky endeavour. The issue is very tightly related to the business growth point that I mentioned earlier. We simply have not been able to develop companies of the scale that other countries seem able to produce on a reasonably regular basis.
I do not have much to add to that. To go back to the point about enterprise agencies, there was a time when, under Lena Wilson, the big focus of Scottish Enterprise was internationalisation. Scottish Enterprise has iterated through successive leadership regimes, with quite different focal points. That was a priority of the organisation in the past, but you could argue that that has not been the case for a while, as it has pursued other priorities.
Looking at international trade in a bit more detail, goods exports to the European Union are lower now than they were in 2019. How much of that can reasonably be attributed to Brexit, and how much to other factors?
I am now embarrassed that I did not mention Brexit in my initial comments. It would be fair to assume that the vast majority of that can be attributed to Brexit. Exporting to the rest of the EU has become much more difficult than it used to be, so it is not surprising that we see the impact of that in the statistics.
You will find—the Scottish Parliament information centre might have already provided you with this information—that the Scottish Government’s office of the chief economic adviser undertakes ongoing analysis in its updates of Scotland’s trade before and after Brexit. It does a bit of technical analysis behind the scenes to try to show, relative to a counterfactual, the impact, and that impact is clear.
The UK now has in force its first major international trade agreement since Brexit. I do not know whether you have seen the Scottish Government’s “Scotland-India Strategic Market Insight Report”, which seemed to be a very well-written paper, with a lot of good direction in it. Do we have sufficient permanent overseas representation to deliver that programme?
We have much stronger overseas representation than we used to. I am not entirely sure what it looks like in India. I have known a lot of the Scottish Enterprise and SDI people who have worked in Asia over the past 10 to 15 years, and they are doing a really good job there.
We need firms in Scotland with the capacity to export, and the public sector can help them to exploit those markets. Looking at the public sector side of things is entirely appropriate for the committee, but that will never provide the full answer.
I am unfamiliar with the extent of our representation in India.
I want to pick up on some of Martyn Day’s points. When the First Minister talks about the economy, he says that foreign direct investment is stronger in Scotland compared with the rest of the UK. Why do we not see the benefits of that FDI in the economy? Why is it that Scotland’s business investment, as a percentage of GDP, is among the lowest of the countries in the Organisation for Economic Co-operation and Development? Do those things correlate?
I will kick things off and then hand over to Stephen Boyd. The stats to which you refer are produced by, I think, EY—it is one of the big four accounting firms. Essentially, they measure the number of FDI projects. They say nothing about the number of jobs or the economic value that is associated with those projects. We do well in terms of the number of projects, but that does not really tell us anything else about their nature. Earlier, we discussed health warnings about economic statistics. That is one of them.
However, I reiterate the point that I made earlier about the fact that the 4 per cent of businesses that are responsible for 55 per cent of our turnover and about 37 per cent of our employment are owned outside of Scotland. You could view that as FDI, and, as I say, it is 55 per cent or so of our turnover.
I agree that there is an unhealthy focus on the EY statistics that come out every year, because they do not really tell us what the Scottish Government sometimes suggests that they tell us. I do not think that the FDI projects are having no effect, but they are clearly insufficient to overcome long-term structural problems in Scotland. However, we are in a better place because we are receiving the projects than we would be if we were not receiving them.
Why Scottish business investment has been structurally low—for ever, pretty much—is another of those questions that we have never really nailed. The factors that are most commonly identified are tax and regulation. You can have a debate about various tax and regulatory instruments, but, when you look at the tax and regulatory burdens that Scottish businesses face compared with other countries that have much higher rates of investment, that does not seem to be the story. There are other countries with significantly higher taxes, significantly higher product market regulation, and labour market regulation that is at least as high as it is across the UK, yet they invest much more. Therefore, there is clearly something about the business environment—how Scottish and UK companies are owned and controlled, and the incentives for the executives that run them—that is a factor. However, it is a really complex question, and anyone who offers you a simple answer to it is not to be trusted.
I am very—
Apologies, but I just want to come in with a clarifying question. The high turnover of foreign-owned businesses was mentioned a couple of times. Oil and gas is obviously a sector with an extremely high turnover. Does that skew the figure somewhat? I am from an oil and gas background, so I am interested in that. Do exports skew the figures? We are in the decline phase for the volume of oil and gas exports; they used to be very significant, but they have declined. It is the same with ownership, which tended to be large international oil companies with huge turnovers. Will that make a difference in the future?
As far as I understand the definition of the stats, that is about the onshore economy. There will be an impact from oil and gas because of its onshore elements, but the offshore element—the oil itself, which is kept separate in the national accounts—is separate. However, to the extent that there is onshore activity, it might well have an impact. I do not know what it is; I cannot quantify that for you.
Thank you—I just wanted to bring that up. Rachael, please come back in.
Thank you. Stephen Boyd, you disagree with Muscatelli where he talks about regulation hampering economic growth in Scotland, as well as growth in relation to the tax base performance gap. However, we have seen evidence that with a different approach, £1 billion would have been put back into the public sector over the course of the period of fiscal drag when the gap appeared. Will you explain a little bit more about your thinking on that?
I am certainly not arguing that all regulation is as efficiently applied in Scotland as it should be. However, as an answer to your previous question on why business investment in Scotland is structurally low, I do not find the point about regulation very convincing given that we are being compared with a range of other countries where the tax burden and regulatory burden—the OECD does really detailed work on this in terms of product and labour market regulation—is often significantly higher than it is in Scotland. That is not to say that every regulatory move that happens in Scotland is necessarily desirable or as efficiently implemented as it might be. There is always a reasonable debate about specific regulations. Are they necessary? Are they being efficiently applied?
10:45
Over the past few years, the business community has raised a range of concerns about various regulatory mechanisms, and it has sometimes been right to do so. Are any of those mechanisms, in and of themselves, sufficient to explain Scotland’s relatively weak economic performance vis-à-vis that of the other countries to which I referred? I really do not think so. The changes that the business community wants may be desirable, and they might accumulate to make a very small difference, at the margins, on economic growth. However, the argument that those regulatory mechanisms are the final explanation for Scotland’s relatively weak performance does not stand up.
That brings me to the substance of what I hope will be my final question—I say that to give the convener an idea of time. It is about decentralisation of economic policy, which seems to be being discussed in many circles at the moment.
In the programme for government, the First Minister announced his intention to have a high-growth unit and a major projects office. Ivan McKee is looking at public sector reform but is perhaps not looking at the Christie commission’s recommendation that we should use preventative spending to deal with the health issues that Professor McIntyre talked about. What is the right approach here? Should we have more centralisation or less centralisation?
I return to what I said to Daniel Johnson: we need to think about what the appropriate level is at which to exercise such policies. We might well want them to be exercised centrally in some cases, but, equally, for other things, a much more local approach might be needed.
On the moves that have been announced in the past 24 hours, I do not know how much thought has gone into how what the Government is proposing aligns with the appropriate level at which to exercise particular policies. The Government talks about the fact that we have existing regional partnerships. Are the areas for those existing regional partnerships to become the same for whatever the upper tier is, or are they to be something different, as is the case with the three enterprise agencies, which do not align with the city region deal areas? Is the plan to try to align the various bodies and to give a bit of thought to what the appropriate level at which to exercise the policies should be?
I do not know the answer, but that should be part of the conversation, because we need to think quite deliberately about whether we want particular types of policy to be operated across a whole region, which might bring efficiencies and economies of scale, whether we want them to be operated much more locally or whether we want them to be held centrally. We have not yet had that conversation, and, like Stephen Boyd, I am worried that three months might not give us enough space to do so.
The high-growth unit and the major projects office are potentially very welcome additions, but establishing the institutional structures, in and of itself, will not achieve very much. We look forward to hearing much more about what those offices will do and how they will do things differently from what has gone on in the past. In particular, what the high-growth unit understands the problem to be and how it intends to go about addressing it will be crucial.
I have very little to add to what Stuart McIntyre said. All that I would say is that we need to have a credible and coherent national economic strategy from which we might choose to decentralise components, and I do not think that we have that at the moment.
Thank you for what has been a very thought-provoking discussion. You have presented us with quite a few challenges that we will not get answers on today but will need to reflect on.
I want to pick up on the issue that Stephen Boyd raised in his opening remarks about how, since 2015, there has been no clarity in the economic strategy on specialisms and capabilities and how those should be prioritised. You came back to that in one of your subsequent answers. As a committee, what can we do to help in that regard? Who should be responsible for identifying the priorities for those specialisms and capabilities? In your view, what should that prioritisation look like?
Should we be prioritising employability or education opportunities? Is it about how we look at regulation in those particular sectors? I am interested in the detail of how you would see that working.
There is quite a lot in there. Again—I am sorry; I am at risk of repeating myself here—I go back to the first three economic strategies that were published since devolution: the framework for economic development in 2003 and the first two strategies that were published under the Scottish National Party Administrations in 2007 and 2011. Those strategies all articulated what they understood Scotland’s economic strengths to be, and they had a story to tell about how the Government would support Scotland to develop and extend those strengths.
Although the 2015 strategy was far from being a bad strategy, at that point we started to lose some of that clarity. We have gone through a range of stages since then, such as the wellbeing economy, community wealth building and the national strategy for economic transformation, which tried to cover myriad different areas. The type of clarity that we had previously on what Scotland is good at and how the Government can support us to be better in those areas has now been lost.
The reason that I talk about specialised capabilities is because that language is used by an economist called Richard Baldwin, who is one of the world’s main trade experts. He argues that in the current world, it makes no real sense to talk about comparative advantage, because very few countries can produce the final product. At the end of the day, there is a whole supply chain that goes into making a product. Countries should therefore think about their specialisms and capabilities and where they fit into global supply chains.
At the moment, with Scotland remaining in the UK but out of the European Union, and with the world’s biggest and most powerful economic countries becoming increasingly interventionist, there is a rich debate to be had about what that means. I do not think that we have had that debate.
I will give an example. There is a lot of talk about how the Scottish Government has supported Alexander Dennis in Falkirk, which is our only bus manufacturer of any scale—it is almost solely responsible for the line on vehicle manufacturing in Scotland’s gross domestic product statistics. When the company’s only main competitors are based in China and they are being flooded with cash from a Government that wants to dominate every manufacturing supply chain, what does that mean for it? It raises profound questions about the extent to which we can support firms that are up against that kind of competition. I am not pretending to have a final answer to that, but we need to have that debate.
That brings me to your second question about who should be responsible for doing that thinking. The Scottish Government has to take the lead, but it can do so effectively only by working in close partnership with the academic, business and trade union communities, and others.
We should be trying to form something that looks like a national consensus around these issues. We do not have to agree on everything, but there should be some kind of agreement about where we should be focusing our limited economic support and means in helping with development. That would be useful.
I think that you asked me something else, which I have forgotten.
It was mainly about the what and the how. I will not put you on the spot and ask which sectors we should prioritise; I am thinking in a broader sense—ach, it is just so hard. Are we thinking about where we sit globally, and therefore about things that we can export? Are we thinking about our own internal economy and things such as services and building homes?
How do we make those comparisons? You have set us a big challenge to think about our economy. We often think about our economy within itself, but thinking about where we sit globally and about the challenges, as you have outlined, creates a whole new set of problems that we have to consider. How should we, as a committee, approach that?
We have to think globally at the moment. The world has changed profoundly in the period since the financial crisis. We can look at how the current US Administration approaches the economy, and at the incredible success of China’s 2025 industrial strategy and that country’s ability. As we sit here today, it looks as though China, if it puts its mind to it, can dominate any manufacturing supply chain. There are profound questions for Scotland around that.
As you also say, there is a range of other issues that we need to think about. There has been an unhelpful discussion around industrial strategy in which industrial is synonymous with manufacturing. We are good at financial and professional services, and any industrial strategy must look at the services that we are good at providing.
On what the committee could do, we are reluctant to tell you your job.
You can make a suggestion.
Some of these questions should be put to ministers and to all stakeholders. Our economic debate is much too insular and parochial at times, and I think that people should be tested on the issue. I understand the political imperative. The national strategy was a 10-year plan, so you do not want to dump it after four or five years—I get that—but the changes in the world economy since 2022 have been really profound. Ministers should be tested on why they believe that their current economic strategy remains fit for purpose, where they see Scotland fitting into global supply chains and what they think we are good at. The public sector does not have to support everything that we are good at; some of those sectors will take care of themselves. We need to consider how we can support and nurture the sectors that really need that support and where we should be putting our money.
You spoke about focusing on what we are good at, and you were, I do not want to say disparaging, but slightly dismissive of there being too much inclusion of the wellbeing economy, for example. I will give you an opportunity to respond to that.
To me, it feels important that the things that we are good at are also things that are good for us. When it comes to any analysis of what Scotland is good at and how we should support those areas or sectors in the economy, should we also be thinking about how those parts of the economy contribute to Scotland in terms of good employment, well-paid jobs, not taking too much out of the environment or our resources, and other such factors? I feel that they are important parts of how we consider the economy.
Absolutely. I was not being dismissive of the wellbeing economy as such; it is just that there was a flurry of different strategies between about 2017 and 2022 that I think introduced a lack of clarity to what the Scottish Government was trying to achieve around economic development.
In my opening comments, I spoke about the great demographic, environmental, technological and distributional challenges of the 21st century, and I would emphasise the last one, which is very often overlooked. We talk a lot about AI, but, again, much of the debate is profoundly unhelpful. We know that technology companies have very concentrated ownership structures, and the wealth derived from those concentrated ownership structures has been used to influence politics and the structure of the economy; therefore, we must be very clear about those issues.
I will try to run through a few points quickly.
I will talk to you another time about the 4 per cent and 96 per cent of businesses, but I probably disagree with what you said about that. The international companies have been using AI, but they understand it; they have good staff, so they retrain and upskill them. That is my personal experience with a couple of those companies. Councils are also doing a bit of that, so I think that the 96 per cent is probably where the work is. I think that you are pushing at an open door with the 4 per cent.
There are many things that I could ask you, but you have already covered a number of points. Taking into account the banking crash and then austerity, followed by Brexit and the pandemic, I understand why there have been a number of changes since 2007, so I will take your recommendation and take time to read the 2007 strategy.
On the higher rates of investment in other places—although we have more projects—are energy costs part of the issue in bringing large industry here? We all know the problems that we have with energy costs in Scotland.
11:00
I am the MSP for Falkirk West, and I live in a place called Larbert. You brought up Alexander Dennis. The situation there concerned me before I became an MSP. I was in meetings with the people at Alexander’s where subsidy control and purchasing regulations often came up, but those things are not in Scotland’s hands. Beyond Alexander’s, the fact that we do not get to give that support to industry in Scotland presents us with a problem. I had a look at purchasing for Alexander’s, which provides a good example. The Scottish Government tried to put in some sort of local support. I know that the UK Government was talking about putting 10 per cent on, but I think that 20 per cent is already in the contract, so I do not know whether 10 per cent coming from the UK is going to help.
The big question really is: how is regulation that is not in Scotland’s control, particularly the Subsidy Control Act 2022 and the purchasing regulations, affecting investment? I know that that is a huge question—apologies.
I will take the first couple of those questions and maybe Stephen Boyd can take the latter ones.
I am not sure that we disagree on the point about 96 per cent versus 4 per cent of businesses. Our point was that those 4 per cent of firms operate globally and do not require to be told what to do or to receive much support in that sense. They are operating in global markets, recruiting and seeking to retain staff globally. I am not sure that we disagree on that.
One of the good things about the 2007 strategy, like the previous strategies, was that it recognised that the powers that sit with the Scottish Parliament, then and now, are focused predominantly on the supply side of the economy, so the strategy’s emphasis ought to be on the supply side, too. It told the public sector “If you are coming forward with policies or proposals and taking action, you should be thinking about how they help to strengthen the supply side of the economy, because the powers to do that sit with you.” That clarity was important. The strategy asked, “What can we influence?” and then challenged the agencies to align with that.
To pick up Kate Campbell’s point about the wellbeing economy, none of that changed the Government’s focus on caring about a series of other issues. It simply started to quantify whether the Government had as its core focus the supply-side drivers that it could influence through policy, as opposed to a broader basket of policies that would influence a wider range of outcomes in which it had an interest but that were not core to its economic powers.
With regard to UK regulations, of course they affect Scottish businesses. The majority of regulations that Scottish businesses face come from the UK Government, which has total control over labour market regulation and the vast majority of product market regulation. I think it is entirely legitimate for the committee that is hearing from businesses in Scotland that are affected by UK regulations to articulate that in its reports.
You were hinting at procurement law in relation to the situation at Alexander Dennis. That feeds back into my previous comments about how the Scottish Government, and indeed the UK Government, can best support local producers in a world where China and other countries are significantly subsidising their producers. I do not think there are any easy answers to that. There is a real risk that the Government gets into a situation where it is handing out subsidies with very little demand on employers, which I do not think is in anybody’s long-term interests. It is also about whether it is just and fair to allow firms to go to the wall when they are facing what I would argue is generally unfair competition. Those are really profound questions.
That is a good point. I mentioned the Subsidy Control Act 2022 in particular, but procurement regulations have also been a big challenge. We were talking about Alexander Dennis, but I am also thinking about large industry throughout Scotland, where that is an absolutely massive challenge. What you said about China and the way that it is looking to go with markets goes back to 2007, and that is the circle of my questions.
I am cognisant of time and the need to bring the discussion to a close.
In very high-level debates such as this we tend just to scratch the surface, but a number of really good themes have come out. There was quite a good comment about the lack of clarity on Scotland’s strengths in this version of the economic strategy, and good context was provided by the reflections on the changing nature of the global economy, especially with the emergence of China’s industrial economy, an emerging Indian economy and an emerging African economy.
Martyn Day asked an excellent question about how we should consider the programme for government. In your answer, Mr Boyd, you tended to focus on the public sector reform agenda, which is slightly outwith the scope of this committee. I understand the point that you were making, but if you were to speak directly to the cabinet secretary about economic issues, what would be your criticisms of the current programme for government? How would you phrase those?
The cabinet secretary and I have already spoken, but I would be looking for more clarity on some key points. The high-growth unit and the major projects office are really interesting, but I do not understand what the Government perceives to be the problem and how it will address it through those new offices.
Related to that, there is no published remit yet for the national council for economic growth, which was in the SNP manifesto and has now met. The council was established in a similar fashion to the long list of such councils that have been formed during devolution, none of which have left a particularly strong mark on the Scottish economy. I would be looking for more clarity about what the First Minister and cabinet secretary expect to achieve through the council, how they are going to achieve it and what the council’s remit will be. I am looking for additional detail and clarity on what the Government is trying to achieve on the economic side of the PFG.
That goes back to something that I was going to say earlier. It is about understanding what you are able to influence, what you are able to do and what you need to work in partnership with others on, whether internationally, with the rest of the UK or with local authorities. In a broader sense, this is an area in which we have to collaborate, because powers lie in different places, and local needs are different from national priorities. There have been various iterations of the council over the years—I do not remember all the acronyms for them—but perhaps yesterday’s announcement will lead to a conversation about the implications for local and regional economic development.
Before the most recent Scottish election, my colleagues and I raised the issue of working with the UK Government, which, although it does not have the policy levers that are devolved, still has a stake in the performance of the Scottish economy. It has other powers, and even where it does not have powers, it is still doing things in the economic space. Whether that is high-profile levelling-up initiatives or interventions, there needs to be a degree of recognition that not all the powers that we need to deliver all of this are in Edinburgh, and that we have to work in partnership.
I will conclude the evidence session there. It was another tremendous session, and I thank our witnesses for answering our questions. There were a lot of wide-ranging questions, which you answered extremely well.
As we have said to the other experts that have come before the committee, if you have reports or anything that you would like to draw to our attention, we are very open to that, and the committee may want you to address questions that result from that. Thanks again for your time.
11:10
Meeting suspended.
11:18
On resuming—