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We will now have a complete change of subject. From the Council of Economic Advisers, I welcome Professor Andrew Hughes Hallett and Crawford Beveridge, who was appointed chair of the council fairly recently. I am delighted that you can join us. The committee and its predecessor committee have taken a keen interest in the council’s work. Given that it is fairly early in the life of the new council, we thought that it would be useful to ask you to say a bit about the work that the council is doing and its value.
Yes, thank you. You are right. The first meeting of the new council took place in the middle of February, so we are not very far into things. The three big themes that we want to get through over the next few years are, as you might imagine, recovery and jobs and what can be done in that arena; internationalisation and how we can do a better job of exporting and securing inward investment in the Scottish economy; and the economic levers that exist and what opportunities there might be for changing some of those.
Thank you.
The previous council had its first meeting in September 2007 and it met 10 times between then and the last election. Over that period, we made some 57 recommendations to the Government, 46 of which were accepted and put into policy in some form or other. Those recommendations covered a wide range of issues. We discussed areas such as life sciences and education, and we spent a lot of time on things that could be done on innovation and productivity. We worked on the planning system and on bits of the environment.
Looking forward, what are your objectives for the work programme that you have identified for the council? What do you hope to achieve? At the end of four years, what will you be able to say is different because of your advice?
From my perspective, on each of the three areas that I identified, we would like to make some positive recommendations that are based on all our views about measures that might be taken to help us to move ahead.
Do you want to say anything at this stage, Professor Hughes Hallett?
I substantially agree with that. In more concrete terms, if people look back after four years and ask what we achieved, we would like to be able to say that the recession was shallower and, if we can, that we recovered.
I am happy to throw the discussion open to members.
Good morning, Professor Hughes Hallett. It is nice to see you again, Crawford.
Scottish Development International and Scottish Enterprise have been doing some good work in the BRIC countries and elsewhere to try to figure out how we can deal with them more effectively. As you said, they all have their own methods: some want co-operative ventures, while others want shares in companies that are set up there. We can learn a lot from them.
SDI is doing an outstanding job and is perhaps outperforming some other inward investment and exporting agencies on the global stage. What contact do you have with the globalscot network to gather information for the council or the Scottish Government? Is the globalscot network effective?
I am a globalscot. We have not particularly drawn on the globalscot network, but there is no reason why we cannot do that if we believe that it could contribute. The group in Scottish Enterprise that runs it is pretty active in getting us involved when it wants us to help it with companies in Scotland that are going to other places. Although we have not used the network yet, there is no reason why we should not do so.
Other members want to ask questions on internationalisation.
Good morning, gentlemen. SDI has had a good record in recent years, but could the agencies do more? Are there any particular things that they could change to make them more efficient and effective for Scotland?
They could always do more. Like everybody else, they are constrained from a budgetary perspective. I am sure that, if they were asked whether they could do more, they would reply, “If you gave us more money, we could start things in other places.”
That leads me to my second area of questioning. Our predecessor committee undertook an inquiry into internationalisation during the previous session, and there were three key issues: the markets for Scottish business, the payments in other countries and regions—some have longer-term payments, so some Scottish companies might not want to invest in or export to them—and the co-ordinated approach to international delegations.
I will let Andrew Hughes Hallett speak to this issue, too. Under normal circumstances, when companies deal with the more unusual countries, they can ask for letters of credit that they can take to the banks, and have the banks fund them in some way. We are not in normal circumstances, so that might not be so effective at present, but, in principle, that is the route. We need to encourage the banks to open up a bit for those places from which they are sure that payment will be forthcoming, even if it will be a while before it arrives.
The previous council talked about export guarantee schemes. I do not know enough about the ins and outs of how they are used in what Crawford Beveridge called normal circumstances, so I do not know what the possible scope for such schemes would be now. However, they could be important and it was suggested that we should look into that.
Has there been a change in the approach to delegations from Scotland? Is it more co-ordinated than it was in the past?
It appears so to me, in that more delegations seem to be bound up with visits that the First Minister or other ministers are making anyway. That always opens a lot more doors than when someone just turns up and tries to set up meetings with people. The more that we take some of our key companies—we have quite a lot of them—and bind them to political opportunities, the better. Countries such as China, Vietnam, India and bits of South America react well to politicians arriving on the scene to try to do something. We generally get a much better hearing if we co-ordinate business delegations around such visits.
That point was reiterated during the previous committee’s inquiry. The approach at that time seemed to be quite sporadic and it was either sector specific or area specific. Many people vociferously made the point about the involvement of political leadership. I also accept that every delegation will be different so we cannot take a one-size-fits-all approach.
With the possible exception of one, I am sure that committee members will always be interested in being involved in delegations in support of Scottish industry overseas.
You can get to some of these places by train as well.
Yes, or boat, possibly.
Indeed.
Stuart, are you finished?
Yes, thank you.
A couple more members want to ask questions about internationalisation.
I will be brief. Professor Hughes Hallett has been referring to the BRICS countries: Turkey is our European version of a BRICS country. I was sent a link to an article in a Turkish newspaper—unfortunately, I have not read it all but wish I had, given today’s debate—that says that Scotland is the fourth-largest investor in Turkey. It might be worth checking that out. It is worth bearing it in mind that Turkey will be the fourth-largest economy in the world by 2023. I believe that a delegation that has been organised by SDI is going out there in either June or July. There are clear opportunities in the southern end of Europe that must be taken and Turkey is, by all accounts, the economy to watch and invest in at the moment. Is any of that in the advice that you are giving to SDI?
We have not talked about Turkey specifically, but we suggest that SDI look frequently at where the growing economies are and at how its resource is aligned. We need to keep pressing it on that. It is sometimes too easy to say, “Yes, but we’ve always had an office in Germany, so we just have to have all our resources there.” If we are going to be short on resource, we need to start putting it where the growing economies are. We should not ignore the other ones by any means—they are important to us—but we must start to focus some of our resource on where the growth opportunities are.
All this—the internationalisation issue—is very important, and one of the key elements is our ability to connect with countries through direct flights. I was upset this morning when I heard an interview about what is happening in Edinburgh with reference to Ryanair, and someone suggested that Prestwick, in which I have a particular interest, is really part of Glasgow. I state, for the public’s benefit, that it is not. I know that the First Minister discussed the matter in China, but in general terms, what advice has been given to the Government on our having more direct connectivity with our global enterprises?
You are spot on. One of the things that makes it hard even to get people to visit us is the difficulty in getting here. It is a problem that someone who has made the 12-hour flight from Beijing, California or anywhere else to London has then to hang around for another two or three hours to get a flight up here. If there are easier places to get to, many executives will go to those places. I do not know whether we are still doing this, but in the past we gave some aid to airlines to allow them to set up direct flights to see whether they could build a market here.
I will add one further thought on that. Far be it from me to be provocative on the question of autonomy, but I have heard it argued that it would be possible to use air passenger duty to encourage flights to come directly to Scotland. If air passenger duty in Scotland were different from elsewhere, that would be one way—
You mean if it was lower than elsewhere. If it was higher, that would be a deterrent.
I was trying not to be provocative.
Well, I will be. We could even scrap air passenger duty. I had a conversation about it with an airline yesterday. The increased charges are an absolute nonsense, and they impact on flights and passengers leaving Scotland.
I am sure that Patrick Harvie is ready to explode at this point.
I am far too used to it.
Members have other topics to raise, but I have a final question on internationalisation. The Government’s economic strategy sets out a target to increase the value of Scottish exports by 50 per cent by 2017, which is an ambitious target in the current financial climate at home and overseas. How realistic is it?
I will let Andrew Hughes Hallett answer in a minute. Having talked to the SDI folks, I think that the target is realistic if the resources are aligned in the right places. We have things to offer in many sectors. I do not know that we cannot do it. It is good to set an aspirational target; the target is high and everybody knows that. I hope that, if we get to 38 per cent, the newspapers do not all say that we have failed again. People are headed in the right direction. There is good reason to believe that we could do it with the effort that we are putting in.
I do not have a big problem with the target, which is only for an increase of 10 per cent a year. Many countries expand their exports faster than that. It is always a little worrying to see exports increasing fast when gross domestic product growth is not so fast. However, the target is not an outrageous number. The only thing that I would say is that we would be helped enormously if there was not a focus on selling to the euro zone, because it is not a tremendously good prospect. If the focus was on selling to BRICS countries, it would in principle be a lot easier to meet the target. If you tried hard, you could probably do it through exporting malt whisky to China alone.
In recent years, the growth rate has been nearer 1 or 2 per cent a year, never mind 10 per cent. Meeting the target will require a major step up.
It will be a sea change, but that is the point, I think.
Thank you. We will move on to another subject.
A big element of increasing jobs and the recovery will be to try to get people to invest in Scotland and to create facilities and make job-related investments here. As Mr Beveridge will know, during the 1990s, a significant number of inward investors came to Scotland, while many manufacturing companies in other parts of the economy found it difficult. The companies that came, such as Chunghwa Picture Tubes and Motorola, eventually moved out of the country and went to lower-wage economies. However, at the time, those jobs were welcome and they were relatively skilled and well paid. That gave people transferable skills and the opportunity to work in the wider economy when the difficulties of redundancies and job losses had to be dealt with.
Andrew Hughes Hallett can start on that.
No—you can start and I will come in after.
That allows him to think.
John Park is absolutely right. It is certainly true that what happens depends on the industry. The bifurcation point is important.
Absolutely. I am not knocking Amazon by any stretch of the imagination. However, when public investment goes into such a company, we have to ask about the level of job security for people if we are genuinely going to climb the productivity ladder. It is not only about people feeling secure in their employment and what that means for them outside work, but about the company feeling that it can take investment decisions that will help people to upskill, stay in work and progress in their careers. We had such successes in the 1990s, although I admit that the global marketplace then was completely different from the current one.
That is absolutely right. Speaking for myself as well as for the council, I would take a personal interest in that. I have done work on productivity, so I have a personal interest as well as a professional one. It is an important matter.
I will comment on John Park’s recollection of the 1990s—particularly the late 1990s—and the success of Lite-On Ltd, Chunghwa Picture Tubes and Eurocentral. My direct experience of such investment and agency involvement in securing it gives me a different perspective.
I could not agree more. One of the great lessons from that period was that trying to compete on cost will not make it. I have been on the board of a company in one of whose Chinese factories, which has a couple of thousand people, there has been a large strike about wage rates for the past month. Wage rates in China are starting to go up, and as Andrew Hughes Hallett rightly said, the move is on to other places, such as Vietnam, where people are paid less than half the rate that people in China would be paid, which is only a tenth of what people in Scotland would be paid. Our competing on a wage basis here is long gone. We cannot do that. When people were competing on wage rates against Ireland rather than China, perhaps they could get away with it, but they cannot do so now.
I agree. The particular example of the life sciences is generalisable. Life sciences firms are interested in coming in at the high-tech end because of higher education here, and they want all sorts of other things. They want the access to seminars and libraries that we can offer which, of course, means that they are locked in, to some degree. If they were to decide to move to Vietnam they could not get those things there, so they will not do that. There is protection, in a sense. It is clear that, if public money is going into such ventures, the people who are making the decisions need to consider those aspects.
We are discussing jobs and recovery. I want to ask about the second word, which is used frequently. The Government and the media talk about economic recovery, and we will have a debate on recovery later this week in Parliament. What is recovery? What does it mean?
That is a good question. Andrew Hughes Hallett is much more capable of answering it than are we simple business grunts, but I will try to answer it from my perspective.
You are identifying areas in which you say recovery is happening, so you must know what you recognise as recovery.
The recovery there means that people are spending more money and that gross domestic product is in growth mode rather than in decline mode and is not the zig-zag that we are currently seeing, with one quarter up and the next quarter down, but sustained over a number of months. That is how we would recognise it here too, but it looks as though that will not happen for a while. Things in the whole United Kingdom are still moving up and down.
What I am driving at and wanting to explore is whether recovery simply means getting back to business as usual. We have been talking for 40 minutes or so, and most of the discussion has involved fairly narrow terms such as “GDP” and “growth”, and has focused on business success and exports. Those are important parts of the economy, but they are not the whole economy. Even the Government’s own economic strategy on paper does not focus on that: it talks about making
They do. I will let Andrew Hughes Hallett answer that, because I know that he discussed the subject in his conversation with Professor Stiglitz. We are interested in some broader answers about what growth is, not only in terms of company profits and revenues, but with regard to sustainability and what it might mean. How do we measure companies on broader things to do with society rather than simply on the earnings per share that they put out for the stock market? We will have that on the agenda for one of our meetings, which we are starting to think about now.
We talked about the matter on Saturday without coming to firm conclusions. It is obviously a longer-term conversation, because we want sustainable growth and not just growth that goes up very quickly. Part of our conversation was about how we can persuade firms to take a longer-term view in their decision making, and to be more responsible in their social policies in order to benefit society as a whole, rather than focus on the narrow balance-sheet stuff. We then went off into areas such as green housing and the prospects for enhancing that in Scotland. There were several different ideas.
I am grateful to both witnesses for their answers. However, this is the beginning of a longer-term discussion and the world is not yet clear about where the discussion will go. I hope that it will involve a challenge role—you will be challenged and you will have a role in challenging Government about assumptions.
This is turning into a speech, Patrick.
If we do not move beyond competition and think about tax co-operation, we will not be able to shut down the tax havens. Perhaps at some point we might see a Council of Economic Advisers whose members all pay income tax, for example.
Do we not all pay income tax?
Some choose to live in places that do not charge income tax.
Oh. Okay. Lucky them.
Tax co-operation is the only way to flush out that kind of legal tax avoidance.
As you know, this is a very difficult subject. I know of a few companies in the US that have taken the whole social and environmental new economy thing very seriously. What they have in common is that they are all private companies. The problem is, as you know, that once you put companies out into the stock market, stockbrokers, investors and big equity players will say nice things about all the things that you have just said, Mr Harvie, but at the end of the day they just want to see what the earnings per share are. That is what drives everything.
I have a brief question. Will you look at any particular models or countries in order to help the debate here in Scotland?
We will not do that yet, but it will emerge as we go through the next several meetings and start to ask where we can examine people doing things differently, which might help us here.
Before we move on, Chic Brodie wants to come in briefly.
I heard what Patrick Harvie said, but Mr Beveridge is right that in the current environment it is the economic base of progress that we must talk about.
I do not have views at the moment on your last question. If we got a serious sea-change in the mental make-up of how people run businesses, we may need a Scottish stock exchange because we would be different from the rest of the world and there would be quite some mileage to be made from that.
Okay, thank you very much. We are moving on to a different topic with Mike MacKenzie.
I was very interested to hear Mr Beveridge talk about the council’s concerns and advice about the planning system. I was reminded of reading the minutes of the council’s first meeting, in 2007, which the chief planner attended and when planning was discussed. That was shortly after the Planning etc (Scotland) Act 2006 was passed. Since then, the act has come into force and bedded down to an extent. You might be aware of the recent Audit Scotland report on the planning system, which looked at the cost of running the system and its internal efficiency. Do you have thoughts about the economic effects of the 2006 act and of planning generally? What lessons can we learn from how other countries operate their planning systems and from beneficial effects of that on their economies?
I have not looked recently at what change has gone on since we started the discussions on the planning system. Planning is difficult, because we want it to be protective—we do not want to be in one of those countries where things are just signed through, buildings fall down and people get killed—but we want it not to be so punitive on business that it takes for ever to do anything. Trying to start a business in California, for example, is a nightmare. Work needs to continue on planning, to strike the right balance.
Like Crawford Beveridge, I am not entirely sure of the economic effects from the change in the planning regulations—I do not think that any study has been done to give the economic effects in numbers. I understood that the regulations had eased up some, so perceptible benefits could be pointed to. Maybe we should do an audit of that, to try to tie that down more specifically. I have given my impression, but I do not have the detail.
You mentioned in passing economic levers. A lively constitutional debate is going on in Scotland. Does the council take a position on the debate about devolution of economic levers and about independence?
The council has taken no position on independence. The previous council did work on borrowing, which had some effect, although it is hard to quantify exactly. The effect was that the amount that can be borrowed for capital purposes was raised. The business of being able to move capital expenditures up in time, which the Government has used, also came from such debates. There are general propositions that allow a bit more flexibility in using policy instruments—I should put that phrase in inverted commas, because the instruments are not very strong, but they can be moved around a bit.
I asked the question because I was interested to read last month in the Financial Times that Professor John Kay, who is a former member of the Council of Economic Advisers, said that plans to entice global investors to Scotland with low corporation tax were “a fantasy” because they would not be permitted by the European Union. Do you agree with Professor Kay’s analysis?
I would suggest that he goes to Ireland. That is a strong case. I hope that I am getting the right one of the Baltic countries, but I believe that Estonia has a policy on corporation tax that has had quite an effect. I imagine that there would be high blood pressure in Brussels if it happened here, but it is perfectly allowable under EU rules.
To be fair, Professor Kay’s point—if I read the article correctly—was that it happened in Ireland but would not be allowed to happen again.
It would be difficult to find a legal way to say that it could not happen. There might be political pressure, but it would be up to the political leadership to say, “Yes, thank you very much but we’re going to do it.”
I am happy for other members to pursue this line of argument. I raise the EU only because, as you will be well aware, there is serious pressure within the EU at the moment to harmonise tax rates as a result of what is happening in the euro zone. The situation that occurred in Ireland may not occur again.
Yes, but I put it to you that that is political pressure rather than a legal arrangement. If the EU wants to write a new treaty, that is another matter.
It may happen.
Treaties do not go through so easily.
You are being asked to assess something that might or might not happen in the future. Part of your work is to assess the effectiveness of policies that the Scottish Government is taking forward.
I do not have that on my list, but there is no reason why we could not look at some of the current policies.
If members have specific ideas for future agenda items, we could forward them to you.
Yes.
We are up against the clock. Patrick Harvie wants to come in, followed by John Wilson.
Thank you, convener. I will briefly follow up your point on corporation tax. I assure John Park that I do not particularly want to knock Amazon, either. I just wish that it would pay a fair amount of corporation tax. Nine times out of 10, when someone orders something from Amazon, it is posted to them from a tax haven, not because the warehouses are cheap there, but because Amazon is doing everything that it can to avoid making a fair contribution to the common good.
I can understand that that would be a major problem. “A race to the bottom” is a phrase that comes up all the time, but if we look at the evidence of those who have moved their corporation taxes around, we find that there is no evidence of a race to the bottom. Obviously, if the corporation tax rate went to zero, no revenue would come in and expenditure would have to be cut. Firms, and the population, are interested in the services that are being paid for, so there is a natural tendency not to go too far in that regard.
I have to point out that they can be used well or badly.
Yes. I take the point that you are making.
The key is how the tax code is written. How many loopholes have been left in? How much have we listened to lobbyists for particular industries? What have we done about where people keep their cash? That is why it is important, as Andrew Hughes Hallett says, to think the whole thing through in terms of both the rate and the tax base, and to decide what we want to achieve.
My only point is that, without international co-operation on tax—at a European level, for example—we are very ineffective at preventing people from exploiting those loopholes.
Yes. It seems to me that the clever stuff for Scotland is to try to figure out how we can take a lead in writing a tax code that makes sense to people, that is acceptable to industries, and that we can reasonably persuade others to follow. Somebody has to make a start on that, but nobody is doing it at present. The nonsensical position that the US has, whereby as long as cash does not come back from overseas it does not get taxed, is a ridiculous unintended consequence, because it means that US companies spend that money outwith the United States. We would not want a system such as that. We want a system that regenerates the economy. We need to spend a lot of time up front and think through what the tax code should look like and what we will allow and not allow.
Thank you.
Good afternoon, gentlemen. I would like some information on the functioning of the council. Mr Beveridge, you said in your opening remarks that the council will meet twice a year, and in an earlier response to John Park you said that you will meet civil servants to draw up the agenda for the next meeting and look at issues that you can take forward. Has the council established sub-committees or groups of advisers that are working on specific areas? You mentioned four areas in your introductory remarks. Are sub-committees or individual council members looking at those issues? If so, how do they feed in to the council meetings? In particular, how do they feed in to the Scottish Government’s agenda on economic recovery between council meetings?
We do not have many such groups yet, but I will outline how that will work in principle. We think that it might make sense for the economists on the council to spend a little more time on the issue of fiscal levers and so on. We already have an agreement that Susan Rice and Professor Stiglitz will do a little work on what the totality of a company should look like in terms of its social and environmental responsibilities rather than anything else. We will ask either individuals or small groups who have expertise to go off and look at specific topics for us, which will then become the subject of major papers that will come to the council, and in that way get into the policy making of the First Minister.
On the timing, if you meet only twice a year over the next four years, input will be an issue. You mentioned earlier that the previous Council of Economic Advisers made 57 recommendations. It met much more regularly than what is being proposed, and 46 of those recommendations were accepted by the Scottish Government and put into play. At what point will the impact of the council’s advice and recommendations start to kick in? Given the economic situation in Scotland—we are looking at various ways of driving it forward—how quickly can the council start making recommendations that push the Scottish Government in the desired direction and, I hope, influence decisions south of the border?
We can probably move a little more quickly than the two meetings a year. One of the things that we did not do in the previous council was to use any kind of videoconferencing. We were in one of those modes whereby if we could not all get into a room together, there would be no meeting. This time we are thinking about how we can use technologies so that, rather than have people fly in from Hong Kong or Washington, we can have a quick meeting with them in order to make progress.
Those are all the questions that we have this morning. On behalf of the committee, I thank you, Mr Beveridge and Professor Hughes Hallett, for coming along. This has been an extremely useful meeting. I am sure that the committee will want to keep a liaison going with the Council of Economic Advisers, so perhaps we can see you again in a year or two and keep in touch with your work.