Finance Committee, 23 Nov 2004

Meeting date: Tuesday, November 23, 2004

Official Report 288KB pdf

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Cross-cutting Review of Economic Development

Agenda item 2 is the first oral evidence session for our cross-cutting review of economic development. I welcome various officials from the Scottish Executive.

I take the opportunity to remind members of the overall structure of our four scheduled evidence sessions. Today, we will examine the Executive's main economic strategy documents to give us an idea of the overall strategic framework for economic development. In the second and third evidence sessions, we will focus on their effect in practice. In the second evidence session we will discuss the role of Scottish regeneration and economic development agencies and, for benchmarking purposes, comparable English and Welsh bodies. In the third evidence session we will examine the impact of the economic development strategy on the business sector and get advice from expert commentators. In the final session we intend to question ministers to determine how funding allocations are made.

I welcome to the committee Dr Andrew Goudie, the head of the Scottish Executive Finance and Central Services Department and chief economic adviser to the First Minister; Fiona Robertson, senior economic adviser and the head of the office of the chief economic adviser; and David Stewart, assistant director in the finance expenditure policy division of the Finance and Central Services Department. They are here to talk about the "Framework for Economic Development in Scotland"—FEDS. I also welcome Jane Morgan, head of the enterprise networks division in the Enterprise, Transport and Lifelong Learning Department, who is here to talk about "A Smart, Successful Scotland", and Jim Mackinnon, the chief planner in the Development Department, who is here to talk about the national planning framework.

Given the requirements of the members' interests order, I should declare that Jane Morgan is my wife.

We have received submissions from the Executive that focus on FEDS and include some comments on "A Smart, Successful Scotland" and the national planning framework. I ask the officials to make a brief opening statement—they should agree among themselves who goes first.

Thank you for giving us the opportunity to come and talk about the economic framework. I have two opening comments. One is about the consultation process, which I gather the committee is interested in hearing about, and the other is an overall comment about FEDS.

I genuinely think that we have a process of continuous consultation with the external community on most of our economic approaches. We talk regularly to the academic and business communities. We maintain a pretty good idea of what the thinking is within the external community. That is a very important part of our job. Members may recall that, for FEDS, we made a particular effort to go out and talk to the wider community, to widen the debate and to encourage wider participation through the launch of a discussion paper at the start of the process. As we did with "The Way Forward: Framework for Economic Development in Scotland"—FEDS 1—we talked to the key organisations, business people and academics, to build on the earlier process.

The other input that I will mention is the new knowledge that has come to light over the past few years from academic publications and presentations, which are all very important to us. We also draw on the evaluation work that we have done ourselves. We take a substantial body of new knowledge and new ideas into the process.

Members of the committee are probably familiar with a couple of conclusions that come from that evidence. First, there was very little demand in the external community for us to undertake a fundamental rewrite of FEDS. The view was that FEDS 1 had stood up pretty well and there was widespread endorsement of its fundamental approach. Nonetheless, we felt that some new emphases were worth drawing out as two or three years had rolled past.

The second point relates to an issue that is particularly relevant to the committee's inquiry. One of the key characteristics of FEDS is the recognition that the determinants of economic development are wide ranging. A broad set of factors is important, some of which are fundamental. Some of the crucial drivers are very long term in nature, which is why FEDS is a long-term, strategic approach over—as we have usually cited—five or 10 years.

Some of the crucial drivers do not impact directly on the internal operation, productivity or activities of enterprises but provide the crucial external context in which economic development takes place. However, there are other drivers that impact directly on the internal operation of enterprises. The conclusion that can be drawn from that is that there are few parts of the Executive whose work does not impact on economic development. That is an important point, which has implications for the complexity of the work that the committee is doing and the work that we do. If that broad approach is accepted, the identification of economic development spending, the attribution of outcomes and the prioritisation of policy and spend become very difficult.

However, FEDS provides clarity about the Executive's vision for economic development, the key outcome objectives and the intermediary or enabling objectives. FEDS therefore provides a framework and a context for both the policy and the consideration of spending decisions.

On the priority areas, page 7 of the Executive's written evidence states:

"The Executive is committed to seeing increases in business investment in R&D".

We know that Scotland has a poor record of private investment in research and development. What is the Executive's thinking as to how such investment can be encouraged? I know that there is no direct funding capability to do that, but how can increased investment in research and development be encouraged?

Jane Morgan might say something about Scottish Enterprise in that context, but I endorse your point. The data indicate that spending on business R and D in Scotland is well down on the level in the rest of the United Kingdom—it is about half the UK level and about a quarter of the level of the leading quartile of Organisation for Economic Co-operation and Development countries, with which we are often compared.

I will make a couple of points. First, important things are happening at UK level that feed into the area. For example, the R and D tax credits seem to play an important role. We are conscious that there is an important complementarity between what happens in the rest of the UK and what we are trying to do in Scotland. Secondly, we use our devolved powers. Many of the channels that we use run through Scottish Enterprise—Jane Morgan can speak about those. There is a sense that public policy has a role to play in promoting R and D, because aspects of the chain between the generation of knowledge and the innovative use of knowledge in enterprises are not particularly easy and might be subject to different types of market failure. Jane Morgan might add some detail.

I will add a little detail. Along with Scottish Enterprise and Andrew Goudie's department, we recently considered R and D support. The main finding was that we need a range of measures, rather than a focus on a particular measure such as tax credits. That finding has informed the attempt to create a pipeline of support that takes people through different stages. As Andrew Goudie said, the R and D tax credits operate at Great Britain level. There is also a range of support for small companies in the early stages of research and development. Some of that support is directly administered by the Executive, so its budget falls into the "other" category rather than the enterprise networks budget. The enterprise networks use a number of measures, some of which are directly oriented to companies, such as the proof-of-concept scheme. Also relevant is the funding for the intermediary technology institutes to carry out more commercially oriented research. Such research might be undertaken by universities, but the intention is to identify intellectual property that can be developed by companies.

More recently, European approval has been secured for support for large companies—I do not know about that in detail. The state-aid regime mainly allows us to support small and medium-sized companies, but R and D plus is now allowing Scottish Enterprise to support research and development in larger companies. There is quite a wide-ranging system of support, which should be able to help especially smaller companies move from the early stages of research and development to production.

Paragraph 1.3 of the FEDS document, under the heading "The Scale of the Challenge", includes a table of gross domestic product per hour worked—I do not know whether that is the right measurement to indicate how the economy is doing, but I will assume that it is, given that FEDS allocates almost a page to it. If we leave aside Germany, Scotland is performing poorly even in comparison with the rest of the UK and it is clear that since 1996 there has been about a 5 per cent fall in GDP per hour worked. Do you expect your strategies to change the situation? If so, how soon will the figures improve? What is the lag?

You are correct to say that the table shows a lag over the past few years. That is very much a function of the cycle that we have been through and the structural change that we have experienced during part of that cycle. It is undoubtedly true that areas of the economy that would typically have higher productivity, such as electronics, have taken a bit of a hit. It is equally true that parts of the service sector, which tend to have lower levels of productivity, have been a smaller part of that.

Your question relates to a point that I made in my opening remarks. One of the key points in FEDS is the attempt to reduce the emphasis on short-term interventions. This is a caricature, but historically the view has been that short-term subsidies to companies were not the way to build long-term strength in the economy, so the emphasis in FEDS has been very much on a broad range of measures. For example, big changes are being introduced in relation to enterprise in the education curriculum, which is regarded as an important part of building up children's understanding of the economy. We would realistically expect the impacts of such changes to be felt over quite long timescales—perhaps in 15 years' time if we are talking about children who are now 10 years old. Quite deliberately, parts of the FEDS agenda are very long term and acknowledge the need to address deep-seated attitudes and behaviours.

However, in principle, some of the measures that Jane Morgan mentioned can have an impact in the shorter term. The universities sector in Scotland is strong in research in some areas. Whereas measures in education might take 15 or 20 years to have an impact, the capture and mobilisation of research and the intermediation between knowledge generators and new and existing businesses can in principle be done on a much shorter timescale—5 to 10 years is a realistic timescale. I am sure that ministers want that to happen.

I am trying to get you to set yourself a target. The budget is full of targets for other departments, but the Finance Committee—before I became a member—complained that the budget sets no target for economic growth. Are you setting yourselves a target for the next five to 10 years? If so, what indicators would you like to see at the end of that period?

Ministers have taken the view for quite a while that setting an aggregate target for growth is not necessarily the direction in which they want to go. FEDS is pretty explicit in setting a target, in that it talks about the wish for

"an accelerated and sustainable rate of economic growth."

Ministers have taken the view that that is a strong enough indicator of direction and intention to stimulate the underlying policy. They think that the design and implementation of the policy would not be the better for including a quantitative figure. In other words, the qualitative target is sufficiently strong to generate a particular set of policies and implementations.

The other part of the answer to your question is that ministers have taken the matter down a couple of levels and identified the key drivers of economic development. On those drivers, we aspire to the best that there is among the OECD countries, which are our key competitors in many senses. You will be aware that the analysis of the progress measures in "A Smart, Successful Scotland" provides—as well as the data allow—a detailed account of how we compare to the OECD countries on a range of indicators. The commitment is to aim towards being in the first quartile of OECD countries.

My question was phrased in quantitative terms because the Executive included the figures to which I referred in the FEDS document. If such a document is produced in five years' time, do you expect the figures for Scotland in relation to other countries to be significantly better?

Yes. I mentioned cycles and we must always be careful about cyclical effects, because they can disrupt the figures, as they have done this time. However, I hope that over the course of eight or nine years the cyclical effects will be evened out and shorter-term policy instruments such as R and D will be having an impact. That is certainly the intention and I am sure that ministers take that view.

The target issue is important. When Professors Bell and Lapsley gave evidence to the Finance Committee, I asked them whether it would be

"reasonable for the Scottish people to expect Holyrood ministers to sit down with Westminster ministers to produce a target"

for economic growth for Scotland. Professor Lapsley replied:

"That is an interesting observation."—[Official Report, Finance Committee, 2 November 2004; c 1821.]

Is that what is lacking?

I have mentioned what I believe is ministers' attitude to what drives policy and the seriousness with which policy is taken. Ministers regard the qualitative commitment that is made in FEDS as being strong enough. In addition, some in the academic community have shared with us the view that, because the mechanisms that are at play are, as you know, incredibly complicated, it is difficult to create a model that can capture the way in which policy and spend link to an outcome. Some groups in our universities attempt to do that, but most agree that it is extremely difficult to capture such relationships. The question has always been partly how much effort and resources we should put into trying to do such modelling work, given that it is not clear how much it would affect the direction of policy, but also whether we have the knowledge to capture the detail of the mechanisms that are at play within the economic system.

I understand the potential to penetrate the complexity and enter the morass of cause and effect, but I do not see that happening in other countries, such as Ireland, New Zealand or the Czech Republic. Would they succeed as well as they have done with an absence of targets and a similarly relaxed long-term approach to remedial outcomes?

Ministers would not regard their approach to the outcomes as relaxed.

We are talking about very long-term drivers.

The long-term nature is not related to any degree of relaxation. There is a view that the economic mechanisms that are at play are long term; the education example is perhaps the best one to give us a feel for that, but there are others in the system. For example, on physical infrastructure, there are significant lags between the moment of decision and the moment when infrastructure is in place. There is realism that some such measures will necessarily take longer, unlike shorter-term solutions such as appearing to subsidise companies for the immediate future.

Perhaps I can draw you on some short-term issues. In July or August next year, the International Institute for Management Development, which is based in Switzerland, will bring out a report that will examine Scottish competitiveness. In its previous report, Scotland was ranked 36th out of 60 and the UK was 22nd, which suggests a gap in competitiveness, which might be wider between London and the south-east of England on one hand and the Highlands and Islands on the other. However, what was depressing about that report was that Government macroeconomic policy was placed 39th—which is what dragged us down to 36th place—and Government microeconomic policy was placed 38th. Do you have plans in place to get a better outcome when that assessment is redone in 2005?

I will make a couple of points about that. First, in my mind, there are questions about the robustness of the exercise to which you refer. Some of the indicators that are used have difficulties. For example, it appears from what the researchers write up about their methodology that the total size of employment in an economy has a bearing on the ranking of the country, which I find difficult to understand.

It did not work that way for Estonia, which was ranked 28th.

Let the witness respond.

Leaving aside the questions about the methodology and taking the point about macro policy, I think that ministers' judgment is that, over the past five or 10 years, the conduct of macro policy at the UK level has been beneficial to the Scottish economy. The Scottish business community has been receptive to the view that stability in macroeconomic policy is extremely important and that stability in the outcomes to do with inflation and growth has been important in providing the context for the investment decisions. My understanding from talking to the business community is that it is supportive of the stability that we have had during the past five or 10 years.

On microeconomic policy, some of the levers in the Executive's devolved powers are fundamental to economic development, and the priorities that are set out in FEDS—which, for obvious reasons, focuses on the powers that the Scottish ministers have—are recognised throughout the world and the academic literature as the most important ones for bringing about economic development. In that sense, it is appropriate that FEDS focuses on those levers.

I suspect that you are talking more to organisational leaders than to individual business people, because that is not the feedback that I get, and the recent Ernst & Young survey that showed that 46 per cent of Scottish businesses wanted more power for the Parliament and 26 per cent were neutral on the issue suggests that there is a different undercurrent in the business community. I will home on one thing—

Just one thing, Jim.

With the multiplicity of different initiatives that are on the go, how will the formula that you are working on now close the economic gap and reverse our current population decline and when will that happen?

It is difficult to resolve what the formula's impact will be on the demographic trends. I am sure that we can find examples in which economic development and buoyancy lead to stronger migratory trends that are favourable, but there are other examples in which the migratory trends have themselves stimulated economic development, so the causality can run in both directions. As you know, the First Minister is pursuing the latter of those directions through the fresh talent initiative, which focuses on trying to bolster the skills and entrepreneurial spirit in the country to try to contribute to the overall picture. The population question is complicated, but it has obviously been addressed through some of the Executive's initiatives.

On timing, I am not sure that I have a great deal to add to the answer that I gave to Alasdair Morgan. We have to break it down into which piece of policy we are talking about, because FEDS is explicitly designed to hit at different points through the process. I reiterate the point that FEDS deliberately does not talk about reserved policy areas in any detail except to the extent to which they complement the devolved ones. It is taken as a given that that is the remit for the strategy.

I understand that point.

I will pursue you slightly on that, Dr Goudie. There is a Treasury view on the long-term sustainable growth of the UK economy, which is embodied in, for example, budget forecasts. Does the Executive consider that the sustainable growth rate for the Scottish economy is above, below or at the same level as the UK rate?

At the moment, the long-term growth rate for Scotland is about 1.6 per cent and the latest for the UK is, I think, 2.1 per cent. The Executive's view is that the sustainable rate is higher than the 1.6 per cent growth rate that we have at the moment, but I do not think that ministers have taken a clear view on what that long-term rate might be. There is a qualitative view about the fact that it can sustainably be accelerated, but there has been no discussion of any particular figure.

You said that you had an aspirational target of getting into the OECD's top quartile.

The aspirational target for the contributory drivers of productivity and growth is certainly to get in towards the top quartile and you will know the structure for that from the analysis that we have done in "A Smart, Successful Scotland".

Dr Goudie, excuse my ignorance, but you said that the growth rate in Scotland is 1.6 per cent, and the Scottish ministers believe that it is higher. Will you clarify that?

I am sorry; I will clarify that. Our estimate of the long-term trend in the rate of growth, based on the period 1974 to 2003, is 1.6 per cent. The figure for the UK is 2.1 per cent. The intention is to abstract from the cycles over the period 1974 to 2003 and get a feel for the long-term structure. The point that I was making was that, as is set out in FEDS, ministers are sure that we can accelerate that long-term rate of growth to something that is sustainable but higher than 1.6 per cent and towards the UK figure.

In your written submission to the committee, you say that one of the principal outcome objectives is economic growth and talk about it being

"accelerated and sustained through greater competitiveness in the global economy".

One of the drivers of that is productivity, which we have touched on, but the figures in your submission show that our productivity is lagging quite a way behind that of other countries and not catching up. I was interested in what you said about productivity in particular sectors. Regardless of sectors, how much is productivity an indicator? I thought that productivity meant output per hour worked. Therefore, productivity will not necessarily be affected by the small size of a sector. There might be higher productivity in a smaller sector that is in decline but which is more efficient and potentially more profitable for the Scottish economy. Will you clarify what you said?

Typically, it might be expected that productivity levels in manufacturing would be higher than in service areas of the economy, although that is, of course, a generalisation. However, the point about FEDS is that, whether we are talking about manufacturing or services, raising productivity in those sectors to the extent that we can do so will make them more competitive within their own market. We have taken an uncontentious view throughout FEDS that the market that we must talk about is the global economy, as that is the market in which internationally traded services and manufacturing compete. Even if we are talking about an area of the economy in which there is no international trading—obviously, we can think of quite a few such areas; construction is usually cited as an obvious example—the competitiveness and productivity of that area are important, as they bear on the costs of sectors that trade. Therefore, putting productivity at the centre of things is crucial, whether we are talking about the traded, non-traded, manufacturing or service parts of the economy.

As you know, the review is a cross-cutting review. How much work is being done across all the Executive departments to look in more detail at productivity problems? I have asked the minister parliamentary questions about productivity, and I want to give an example. If my recollection is correct, more than 8 million days are lost to the Scottish economy through absenteeism for one reason or another, which is a considerably higher figure than that for economies of an equivalent size.

I share your suspicion of the report that Jim Mather mentioned. However, one aspect of that report with which I agree relates to productivity and the indicator that we have a higher share of alcohol and drugs misuse, for example, in the work force than other countries have. Our public health record speaks for itself. How many discussions that are specifically about productivity are there with the Health Department, for example? At what level do they take place? Do you regularly speak to the head of the Health Department about work force health and absenteeism?

I agree very much with the general thrust of what you say, and will pick up a couple of threads.

I refer to what I said earlier. It is important that FEDS, as a matter of principle, tries to understand and set out why different parts of the Executive have an important role to play in economic development. I agree that we can develop much stronger linkages in respect of health. I do not want to put the blame elsewhere, but one frustration has been that academic work that tries to make links between health and the economy is not as developed as we would like it to be. I do not personally speak about such matters with the Health Department, but there are analytical divisions in each department whose role is to make the linkage between subject areas, analytical work and evidence.

You mentioned absenteeism. There is great awareness of absenteeism in the Executive. I point to the fact that one of the aspects of the work on efficient government in which the Minister for Finance and Public Sector Reform is extremely interested is the degree of absenteeism in organisations and its knock-on effects on the costs of providing services or whatever. Therefore, we are aware of the general issue that you raise and we try to take it into account. I accept that we could do more.

Jane Morgan wants to say something about the details.

One piece of work that is signalled in "A Smart, Successful Scotland: Ambitions for the Enterprise Networks" is the building up of an employability framework. The document recognises the issue of economic inactivity, so as to identify roles of a whole range of organisations in helping inactive people who may be able to get back into work. For example, there already are, and there will continue to be, close discussions between the Health Department, which may be concerned about people with mental health problems getting back into work, and the Development Department, which has a particular interest in other groups. Many client groups need to be addressed in an integral fashion, and cross-working is happening in working towards the employability framework.

We must move on. I want to ensure that Jim Mackinnon is not forgotten, so I remind members that they can talk about "A Smart, Successful Scotland" or the national planning framework.

I want to deal with FEDS, although I do not want to pass up the opportunity to discuss the national planning framework.

I would like to continue from where Jeremy Purvis left off. Obviously, one encouraging sign from the FEDS document and the FEDS background document is the recognition of the role of the public sector in delivering growth in Scotland. The Executive highlighted the productivity of public services as the centrepiece of the strategy on the day of the strategy's launch. The background paper that officials have circulated to us helpfully confirms that

"the Efficient Government plan will be published shortly, setting out annual efficiency savings rising to at least £650m by 2007-08."

That confirms that there will be an annual efficiency savings target for year 3 of the spending review, but there is no mention any target for years 1 and 2.

The "Background Analysis to the Framework for Economic Development in Scotland" states:

"Ministers are looking … to deliver around 2-3 per cent real-term savings from the Executive budget as a whole (that is, at least £500 million per year) as part of the SR2004 process … Departments will need to define strategies for delivering their stated savings by the start of 2006-07."

It appears that there were no savings targets for year 1, but that there were some for year 2 in that background document, which was published in September. It now appears that things have lagged behind a year. Has the target slipped a year since September? If so, why?

I will not challenge your quotations, which I am sure are correct. However, I will describe what I think the current picture is, as I do not think that it has changed from what it was. In our work on efficient government, we have put together an implementation plan that will be launched either at the end of this month or early in December, which will set out much more detail on what is going on.

The question of when things get up and running fundamentally relates to the 2004 spending review period, which is 2005-06 to 2007-08. The target that we have set so far is that, by 2007-08, there will be a figure for savings of £650 million. As you probably know, there is also a second target of £1 billion, which relates to 2010. Targets for the intermediate years—years 1 and 2—have not been put back at all. On the contrary, some things have been accelerated, which is why the original target of £500 million was increased to £650 million. I am pretty sure that ministers have not stated intermediate targets for years 1 and 2 that lead up to the £650 million figure, but the work to reach £650 million is set on the basis that we must get into the process rapidly, which will generate significant savings in years 1 and 2. I think that ministers are looking for a fairly rapid acceleration of savings, so that the £650 million in year 3 is secured.

I have a follow-up question. We received a helpful departmental letter last week that confirmed that it had been agreed with the Treasury that we were pursuing comparable efficiency savings programmes in the spending review. In addition, Tom McCabe said in response to a parliamentary question that the Executive

"will seek to secure comparable or greater gains in efficiency."

If we were doing so over the same spending horizon as the rest of the UK, and we know that the savings are £21.3 billion for UK departments, what would be the order of magnitude of the Scottish equivalent of those savings over the 2004 spending review period?

I am not sure that I can give you a precise answer.

An order of magnitude will be sufficient.

The important point in this discussion is the comparison of like with like. Ministers have been keen to focus on the deliverability of what they have called the cash-releasing savings. Obviously there are two sides to productivity: cash releasing and time releasing. The focus has been on cash releasing and ensuring the robustness of that. The £650 million that you quote relates entirely to cash-releasing savings, as does the £1 billion.

Including the local government element?

Yes.

We might want to write to you about that, but I am happy to leave that question for another day.

The plan will be published in a matter of days. You might want to have a look at that and then come back to us on that point.

I have a final question. I concur about the need for like-for-like comparisons, so when a parliamentary question gets an answer that refers to securing

"comparable or greater gains in efficiency",

is that over the same time horizon as SR2004?

I am not familiar with that exact parliamentary question.

Many parliamentary questions have received answers that the Scottish Executive is undertaking an efficiency initiative that is as ambitious as the Gershon review in its scope, and it has said that it and will seek

"to secure comparable or greater gains in efficiency."—[Official Report, Written Answers, 27 October 2004; S2W-10531.]

Is that over the same time horizon?

It will be over the same time horizon in the sense that Gershon goes up only to 2007-08 at the moment. It will not be comparable in the sense that the Scottish ministers are already looking at taking the efficiency work up to 2010 and have already set out their targets for that period. Comparisons have to be made over the same time period.

I want to talk about the refreshed version of "A Smart, Successful Scotland" and contemplate the four years that have gone before. There has been much criticism that the strategy has been neither smart nor successful and that it has choked, rather than helped, our economy. Are you able to point to a single measurable achievement of the smart, successful Scotland strategy during those four years?

First of all, we have to decide whether we are talking about outputs or outcomes. We could list many outputs and I will give you one or two. There are also some issues about the time period during which those outputs will impact on the economy. There are many outputs, such as the businesses that have been supported or have undertaken research and development, or the young people who have undertaken modern apprenticeships. All those outputs are designed to improve the productivity of the skills base and the technology that contributes to the improvement in productivity.

As Andrew Goudie said, economists will undertake a range of measures of the impact on the economy. We have a range of indicators that reflect the smart, successful Scotland strategy in particular. They show some slow progress to date, but that is after measuring for two to three years and the important thing is to consider it over that time horizon.

One of the indicators that you outlined that you are determined to resolve is the one on entrepreneurialism. Even using such a basic measurement, we seem to be going backwards. The number of new companies in Scotland fell in the year to the end of June.

It might have done; I do not have the exact figure. However, it is not helpful to consider one short time period. The SSS report shows that between 1999 and 2002 there was some positive progress.

We need to be careful about the years that we look at. I strongly emphasise that the nature of this strategic approach is to take a longer-term, non-cyclical look at the way in which the economy is running. Ministers' intention not to respond immediately to the economic cycle is an important difference, and an important characteristic of FEDS is to take a longer-term, strategic view. So if, in the course of a difficult period of global or Scottish growth, fewer companies are being formed, that has to be accepted as part of the strategy. I do not think that there is any sense in which the strategy is aiming to counter that cycle; it is focused on trying to counter the long-term structural position of the past 20 to 30 years.

Would you not accept that even a simple measure such as lowering business rates might have had a tremendous effect? It seems that we are now going in that direction.

Ministers have taken the view that business rates have an effect on corporate behaviour. They are a relatively small part of total corporate costs but the revenues that are raised from business rates have a role to play in supporting other forms of public expenditure. The priorities that are set out in FEDS entail public expenditure and ministers have taken the view that some of the drivers of economic development set out in that framework need to be well funded, and they are content with the balance between business rates and the funding of those important programmes.

In view of the long-term view that you are taking—which is quite right in many ways—why was it necessary to refresh and reissue the document if, by its very nature, we were not going to have the results of the first version, or be able to tell whether the strategy was working, for a much longer period than has elapsed since it was first published?

That is a fair question. The reason why we refreshed the document and why ministers requested that we undertake the consultation was to confirm that other people shared our view. Ministers were of the view that there had been some fairly dramatic changes in the global economy during that period of time, as you will recollect, and that there was an important question about whether those major global developments could have had an impact on the type of strategy that we were pursuing. It is only fair to say that ministers' starting point was that they felt that such an impact was unlikely, but that it was only correct that after those four years of quite serious global upheaval, we should revisit the question. That was why we did so.

The other point is that ministers would not suggest that the first version of FEDS was a perfect document. There were some emphases that had not had the attention that they deserved in the document and which had become clear over a period of time. The second version of FEDS is an opportunity to try and improve the balance a little bit.

We have just discussed one of the key areas; the first version of FEDS gave very little attention to public sector productivity. That is not because the subject was not considered to be important but because the balance was not quite right in the document. The second version of FEDS has allowed the importance of both private sector and public sector productivity to be rebalanced and we now have a much stronger overall picture of what drives economic development.

I will be a little more direct than Alasdair Morgan. In a sense, it is always important to do a little bit more horizon scanning but, instead of a refresh of FEDS, would ministers not have preferred an integrated action or implementation plan that says what ministers are now going to do?

The approach that was adopted with the first version of FEDS is still the current approach. FEDS is a strategic framework for the direction of activities, but not the action plan itself. The action plan should come from different portfolios in the Executive in relation to how they interpret and implement FEDS. For example, an obvious example is the way in which the action plans for the enterprise network implement FEDS. Similarly, we expect other departments, such as the Education Department, to capture the key principles or drivers in FEDS in the work that they do. It has never really been the intention that FEDS, or a second supporting document for FEDS, should try to provide that action programme for the Executive as whole. The intention was always that that should be embedded in departments or portfolios and in the way in which they define their strategic approach, with FEDS as a clear objective—alongside others, no doubt. Jane Morgan might want to say some more about the enterprise action programmes.

Obviously, the smart, successful Scotland strategy develops some of the strands of FEDS in greater detail. It is for the enterprise networks to produce corporate plans that are, in a sense, the action plan that takes that forward. The enterprise networks are best placed to do that, but they do so in dialogue with the Executive. The process involves FEDS, then the smart, successful Scotland strategy and then the corporate plans, which set out the action plan in detail.

The question that I want to ask on the back of that might be best put to Jim Mackinnon. In west-central Scotland, since the second world war, we have had a series of planning frameworks that have had an effect on, for example, the regional council's structural plan, and which sought to tie together issues of economic development, transport, water and sewerage investment and regeneration plans. For some reason, housing was excluded, but it should not have been. The frameworks for implementation were partly to do with scanning the circumstances but they were also designed to present strategic choices. How the national planning framework, FEDS and the smart, successful Scotland strategy contribute to an integrated programme of decision making is not clear to me. In what way do they allow us to determine what is needed and how we can prioritise the spending across the various portfolios? If we view such decisions as being a matter for the portfolios, there is no drive from the strategy framework towards a strategy.

Jim Mackinnon might want to comment on the planning framework.

Although I would argue that the main emphasis is for departments and portfolios to develop their policies in support of the economic development framework, the prime responsibility for which lies with the departments, that does not imply that there is no collective interest in what they are doing or in the way in which they contribute. For example, in the discussions in the Cabinet around various areas of policy, ministers are conscious that all areas of the Executive have to contribute to what the Executive has stated as being its number 1 priority, which is economic development. The fact that ministerial responsibility for departments is the primary starting point for the application of FEDS detracts from the fact that, once the Executive has made proposals—whether they are policy or spending proposals—there is a collective consideration of the way in which those proposals contribute to ministers' cross-cutting objectives.

The national planning framework was a first attempt to examine Scotland as a place, how it was changing, what the drivers of change were and what the implications of that were for the various parts of Scotland. We were clear about the fact that the policy had geographic implications and that some areas were growing rapidly while others were in need of regeneration.

We wanted to develop the process in an inclusive way and ensure that the framework was not just a local planning document. We wanted it to reflect a national view on where we were going. Many of the implementation mechanisms are often at the local level. There are issues about the implications for various parts of the Executive portfolios, but many of the matters have to be resolved locally, for example, getting the balance of land use and infrastructure provision right in the east side of Glasgow. A lot of work has to be done in that regard, but the fact that those are important issues has been signalled. The national planning framework takes as read what is happening over the next five years and accepts that funding relating to infrastructure is already committed in those areas. However, it looks to the period beyond that to determine what the priorities and choices will be. Although the national planning framework does not make those choices at this stage, we will review it in four years' time and might give it a harder edge. There has to be a much greater recognition that the fact that planning for infrastructure takes a long time and is controversial means that we have to take decisions sooner rather than later, so that we can approach the issue more systematically and strategically.

Other members will want to pursue this issue but I am interested in how we get from the creation of the planning framework—which is a consensual piece of work—to making decisions and saying, "We could do a variety of things but we are going to do this for these reasons." I am not sure how we get to that point or what mechanisms exist between ministers to ensure that we can get to that point.

Jim Mackinnon's answer to the convener's question captured precisely the contradiction that he is outlining. In Mr Mackinnon's paper, there is a legitimate claim that support for cities is needed as they are the main drivers of the economy and, in Dr Goudie's paper, there is an identification of the intractable problems of persistent high levels of unemployment in areas such as my constituency. How can the latter issue come to be reflected in the expenditure plan?

According to the information that we have seen, there is a reduction in the money that is being spent on urban Scotland and the dominant spend is on rural Scotland. That is contrary to some of the debates that we have had in the Parliament about the dominant philosophy with regard to policy direction. How can those two views be squared? I noted that there might be some room for influence in that regard, which is good because it is utterly perverse that, although we recognise where the intractable problems are, some of the spend does not follow that. We should explore that issue a bit further in the committee.

I have seen the review papers that you received as background information and I have some difficulties with some parts of them in relation to the urban-rural issue that you mention.

In the conclusions, there is a strong emphasis on the proportion of the economic development spend that goes on the rural areas. I would make a couple of points in that regard. The way in which the common agricultural policy is considered is important. If the emphasis of your work is more to do with the way in which the Executive determines its spend, I suggest that you view CAP money as being more to do with the UK spend than the Scottish spend.

The background papers make a division between primary and support expenditure. That raises some difficult—and uncomfortable—questions in regard to the rural-urban issue that you raised. If you take FEDS as the starting point—which, I think, ministers would do—the question does not relate to which policies and spend are predominantly interested in a particular outcome because, for example, education has multiple objectives, including an important economic objective. I would turn the issue around and suggest that you should consider the outcomes more. For example, you should ask what are the most important elements that could contribute to the economic development outcome that you want. That way of considering the spend is a little bit more helpful because it will allow you to pin down which parts of the Executive's spend that it controls are focused on economic development.

Of course, incredibly difficult questions are involved in such an approach—because, for example, education has multiple objectives—but it is more helpful to start with the outcome and determine the key elements that influence it than to start with the inputs. Obviously, the Executive would do that using the priorities in FEDS.

I mention that because, in your background papers, there is no division of the support expenditures into urban and rural areas. The primary expenditure is split that way, but not the support expenditure. Therefore, it is difficult to get a feel for what the figures mean. Some of the expenditure in rural areas is designed to benefit the rest of Scotland. For example, expenditure on the environment bears upon tourism in Edinburgh. Similarly, many of the projects that might be called urban have implications for the rest of Scotland. Are you more interested in where the spend takes place or in where the beneficiaries of that spend reside in Scotland? There are difficult questions around that division. Whether the background paper suggests that 60 per cent or 40 per cent of the spend goes on rural Scotland depends on whether CAP spend is included. As soon as the totality of the expenditure that bears on economic development is considered, the number is much lower. To be honest, I find it difficult to say whether some of the items are rural spend or urban spend.

Irrespective of how you arrive at that number, how the adviser arrives at it or how 20 other economists arrive at it, is the balance right at the moment?

The balance that the Executive is worried about is not so much to do with the urban-rural thing, although that is important, but to do with economic development. Discussions have been much more focused on whether the balance between the key components of skills and education, infrastructure and direct enterprise is right. That is where the main emphasis has come. Cutting across that, however, has been the important question whether the rural interest and the support that comes from the European Union side and through the Scottish Executive Environment and Rural Affairs Department is adequate for the sort of development that is sought.

There are two ways in which the Executive has come to that position—through the FEDS priorities and through concern about the urban-rural balance. The cities growth fund and the work done around the cities were trying to pick up the cities end of the equation. Work is also going on in SEERAD to concentrate not only on a narrow interpretation of the rural areas and their development but on the full range of economic activities that can generate development in the rural areas.

I want to come back to Jim Mackinnon on planning.

Your background paper states:

"It identifies West Edinburgh and the Clyde Corridor as areas where major change is already occurring and … co-ordinated action is needed in the national interest."

My recollection is that in February 2002, two years and nine months ago, we committed to a national planning policy guideline specifically for west Edinburgh. Two years and nine months on, where are we in terms of a comparable NPPG for the other area that is mentioned, the Clyde corridor?

We published the west Edinburgh planning framework last March, with the agreement of all the stakeholders. The framework has been well received and that has been helpful in the debate on heavy rail and tram systems for the city. To reinforce the point that Andrew Goudie made, within two hours you can get from west Edinburgh to very many parts of Scotland.

We are in the process of revising the west Edinburgh planning framework because there was an air transport white paper that said that we need a second runway at Edinburgh. That has implications for the Royal Highland showground, and we are working with the Royal Highland and Agricultural Society of Scotland to look at options for relocation.

As you probably know, a lot of work is under way on the Clyde. Scottish Enterprise Glasgow and the local authority are actively bringing forward plans for the Clyde gateway with the Glasgow and Clyde valley structure plan team. As I said to Frank McAveety on the disposition of land uses, there is a commitment to the M74 extension on the east side of the city, but there are significant water and drainage issues as well as issues of poverty and dereliction. Andrew Goudie mentioned the cities growth fund, and money is being made available for vacant and derelict land to support regeneration in Glasgow. However, the decision on where precisely to put that is for Glasgow City Council.

You have just confirmed that it took two years from when the Executive announced its intention to have an NPPG for west Edinburgh for all the stakeholders to agree, and you reached an NPPG in March 2004—

No. It actually took a year.

So it took a year from the announcement of the intention for the Executive—

That involved working with the stakeholders, with a three or four-month consultation period, and getting the document finalised. Given that most local plans in Scotland take the best part of five years to produce, and given that 40 per cent of local plans are more than 10 years out of date, I think that doing such a strategic document with considerable stakeholder support in a year is quite an achievement.

Sure. Is there an intention for the Clyde corridor yet? How long do you expect that to take? Given that the intention to pursue such a plan in both areas was announced two years ago, what is your timescale?

Jane Morgan might be able to say more about the Clyde corridor, as she has been closer to Clyde regeneration than I have been.

Do we have a policy intention for an NPPG or not? I am just trying to establish the position.

There is no intention and no commitment to do a Clyde corridor planning framework at the moment.

The Executive's target for the processing of major applications, both industrial and residential, is that 80 per cent of major applications should be determined in four months. It is clear that delays in the system are a problem. It would not be possible for any member of the public to determine, from looking at the current planning audit that the Executive publishes, where our performance is against that target over any recent time horizon, because major applications have two composite elements. Could the Executive publish data on its own performance in relation to major applications against its own target, to elucidate the debate in the run-up to the discussions on planning that lie ahead of us? It is unfortunate that the published planning audit of performance does not let us look at trend performance against the Executive's target. That may be an oversight, but I think that it would help the current debate.

We publish figures, and not just for local performance, but I am not sure whether we do so on a trend basis. We also publish figures on our own performance, which are quite commendable in relation to the processing of major applications. That includes notified applications, which we have the option to clear back to the councils—for example, the application for the world headquarters of the Royal Bank of Scotland was cleared back to City of Edinburgh Council within three weeks—and appeals that are recalled for decision by ministers. Our performance targets for those things are in the public domain, and I think that they are quite commendable.

I do not want to pursue the matter now, but it would be helpful if Jim Mackinnon could write to the committee to clarify where we can find performance data on the target of 80 per cent of major applications being dealt with over four months, that being a composite of both industrial and residential applications. It would interest the committee to see those data, but I am happy to receive the information in writing.

I am happy to write with more data on that if it would be helpful. The other thing that I should say is that the Glasgow and Clyde valley structure plan team is taking an active interest in providing and articulating a framework for the regeneration of that area.

With regard to the spatial work that is being done, I am slightly alarmed by some parts of the paper that you have presented to us. I understand the Commission wanting more spatial work to be done, which will shape decisions on distributing expenditure, and you also have a strategy that is predominantly based on the cities. What mechanism will there be in the spatial work for deciding on the distribution of expenditure? What will be the process and the decisions on that? Your planning policy is stated in black and white, but there is uncertainty with regard to how the spatial work will be put together.

I shall deal first with the first point, about the European Commission. Strong signs are emanating from the Commission that suggest that it wants to see spatial frameworks being prepared so that it can see how resource allocation fits, not just in Scotland but in other parts of Europe. That was one of the drivers for the work that has been undertaken.

On the point about cities, it is important to recognise—as the planning framework does—that we are talking about not just cities, but city regions. The Scottish Borders area has a distinctive Borders identity, but it also has a distinctive identity as part of Edinburgh city region. That is not true of all of the Borders; I guess that the southern Borders area does not relate to Edinburgh to the same extent.

This is the first time that we have drawn up the national planning framework. We started with a blank sheet of paper and we had to try to articulate where Scotland was going and what choices Scotland faced. Growth and regeneration come with a price tag, and we are trying to hold a debate on what the relative priorities are. That is why we said that ministers will take that into account in future spending decisions, because simply defining an issue in spatial terms does not resolve the dilemmas that ministers face.

There are lots of other ways of looking at the problem and of making an input to the debate, which has already had implications for specific concerns in the development industry about investment in water and drainage. We now see services in developments as a key priority rather than as something that is less important, so the framework is beginning to have an effect. However, it was produced only six months ago and, in the longer term, it must feed into other decisions. We are not trying to question decisions and commitments that have already been made. It is about the longer term and thinking about where we get the biggest bang for our buck.

I am like Jeremy Purvis in some respects, because my area of Dumfries and Galloway does not identify with any Scottish cities. The identification at the Dumfries end is with Carlisle, not Glasgow or Edinburgh.

I am pleased that progress has been made towards a spatial strategy. In looking at relocation, we felt that an overarching strategy was necessary. Your submission states:

"Scottish Enterprise has identified business locations which have the potential to become the focus for key industries and clusters."

How many of those locations are there, where are they and what criteria were used to identify them? Were they identified because they are already well equipped with infrastructure, or was consideration taken of need?

Page 12 of your submission states that the national planning framework

"is being taken forward through … The statutory planning system, community planning and the programmes of the Enterprise Networks."

How is that happening? Current planning mechanisms within local authorities are, quite rightly, about authorities doing the best they can for their own areas. They are not part of a spatial strategy at all, other than being part of the council's own plans.

The remit and way of working of Highlands and Islands Enterprise are different from those of Scottish Enterprise. How can you develop a national strategy with two enterprise networks that operate in different ways?

Your point about the position of Dumfries and Galloway is absolutely right, and it is reflected in the national planning framework, which recognises that Ayrshire and the south-west form an important gateway to Scotland. We have become terribly interested in connections to continental Europe, which are important for Scotland, but connections to Ireland are critical and it is important that we do not lose sight of that. Ayrshire and the south-west are critical. We also recognise the important economic generator in the south-west that is Crichton campus. In terms of devolved education and being a generator of economic development, the campus has been hugely impressive. We recognise other opportunities, which often are small scale, such as Wigtown as the national book town.

Economic development zones, which are shown in map 15 of the national planning framework, were identified by the enterprise networks as priorities. It might be worth pursuing that with the networks when they give evidence.

You are right that the Scottish Enterprise and Highlands and Islands Enterprise networks work in different ways and face different challenges. That is reflected in the framework, which recognises for the first time that Inverness and the inner Moray firth are key drivers of change in the area. Particular challenges are associated with fragile areas and communities. The map recognises those, from the Shetlands down to parts of Orkney and the Western Isles. Initiative at the edge—the fragile areas programme—is designed to support such communities.

The national planning framework tries to recognise Scotland's diversity without interfering with local authority subsidiarity. It is horses for courses. The problems of the Highlands are not those of the Borders or the south-west. The issues are different, and they have to be responded to differently.

We all agree that small businesses are an important part of economic growth and development in Scotland. Great emphasis is placed on that in various ways. What analysis has been made of the failure of small businesses, to prevent such businesses from failing in the future? Every business is a potential failure. Unless the matter is properly analysed, how can we stop the domino effect?

I am not sure whether Scottish Enterprise has done any work on that. About two years ago, the University of Strathclyde reviewed the Scottish Executive's business birth rate strategy, which focused on why we had not succeeded in increasing the business birth rate at the rate that we had hoped. I am not sure whether that went into detail on what you ask; Jane Morgan may remember.

I do not, but I know that the problems that companies face in the early stages and later have been addressed over the past few years. One such issue is access to finance. Over the past five years, there has been a considerable increase, for example, in helping companies to access equity investors such as business angels. That is a particular problem area, which is increasingly being addressed, for example through the co-investment fund.

Surely a good way of helping to grow the economy would be to examine the obvious pitfalls that many small companies face and to highlight them for the future benefit of new start-ups.

Yes. We might have to look back over that and give you an answer in writing on what has been done, because many issues contribute to business failure. However, one would always expect to see a degree of churn. One will never get to the stage at which there are no business failures. The important point is to increase the volume and accept that there will be a degree of churn.

Margaret Curran's introduction to the planning framework states:

"The framework is, however, one of the factors we will take into account in coming to difficult decisions on policy and spending priorities as well as providing a context for development plans and planning decisions."

I am not sure that I picked up Jim Mackinnon correctly. He seems to be using the framework as a celebration of diversity throughout Scotland, but I am not clear how the framework helps us to reach those decisions, or what links there are between the national planning framework and FEDS and "A Smart, Successful Scotland".

At the end of the national planning framework we talk about making it happen. The framework covers a wide range of subjects. Many of the issues are decisions not for the Executive, but for agencies, local authorities and the private sector. We have posed some of the choices for Scotland in terms of regeneration and development. Andrew Goudie might be able to say more about how that has begun to feed through into the framework for economic development. We have already seen it have an impact on, for example, the work of Scottish Water, in terms of the priority that has been afforded to servicing development, which is a key concern of the development industry.

We want to engage with those who are investing in development in Scotland, including other parts of the Executive, as we bring forward the revised national planning framework in four years' time. The framework was our first toe in the water. It was something that we had never done before, and it was not a spending document. However, it is beginning to be picked up in FEDS and other documents, and that should feed into further versions of the national planning framework.

Scottish Enterprise, for example, fed views to Jim Mackinnon for the national planning framework. Those views are reflected in two main ways—first, in the provision of bespoke business infrastructure, such as science parks, and secondly in more integrated, wide-ranging regeneration projects, in which the networks require to work with other partners. Analysis will feed through to expenditure on property and, to an extent, to the allocations to local enterprise companies, in recognition of the opportunities and challenges that they face in their areas.

I presume that that applies to transport issues and across the broad expenditure framework.

That is broadly right. I return to the point that FEDS is designed to set a relatively high-level framework for activity, and to raise the priorities for consideration within portfolios and departments. It is important that the interaction between the planning framework and FEDS has had an iteration over the past four or five years. It feeds through to transport in the same way. That is a good example.

I thank the witnesses for coming along. I remind members that our next three evidence sessions will be next week, 7 December and 14 December.

We will pause for a minute or two to get the next group of witnesses in.

Meeting suspended.

On resuming—