Council of Economic Advisers
Item 3 is an update on the work of the Scottish Government's Council of Economic Advisers. I am pleased to welcome Sir George Mathewson, the chair of the council, along with his colleagues Professor John Kay and Jim McColl. The council's annual report has just been published. Sir George will present some of the report's key findings before taking questions from members.
Sir George Mathewson (Council of Economic Advisers):
I am pleased to be here, following the issue of the first annual report of the Scottish Council of Economic Advisers. I am delighted to be joined by two of my council colleagues, Professor John Kay and Mr Jim McColl.
Our remit is simple—to advise the First Minister directly on increasing sustainable economic growth in Scotland. The council met for the first time in September last year, at the same time that excessive lending in the US sub-prime market triggered the start of the credit crunch. Since then, we have seen the bursting of one of the largest asset bubbles in history and the onset of the most severe financial crisis in this and, possibly, the last century. The economic impacts of the credit crunch have been compounded by rising commodity prices and high rates of inflation, which are forecast to bring an increasing threat of deflation. We have seen the sudden shock of the financial crisis in September, followed by the—hopefully—co-ordinated international Government response to stabilise the financial system. Now the slowdown is spreading to all economies, including ours.
To my mind, the speed with which events have unfolded makes this economic downturn different. We might consider the reason for that. Is it globalisation, or the faster methods of communication that exist today? Whatever the reason, we have experienced and recovered from economic downturns before and we will do so again. Scotland is a country with strong economic assets. However, the current difficulties make the case for action to promote sustainable growth all the more compelling, and, we believe, the creation of our council even more timely.
Although the council has offered the Government advice on navigating recent events, most of our work has focused on the longer-term strategic thinking that is required to put Scotland on a higher growth path. The council fundamentally endorses the approach that is set out in "The Government Economic Strategy", which remains relevant.
In the past year, we focused on four key work streams. First, in the work stream on promoting sustainable economic growth, we advised the Scottish Government on how best to achieve Scotland's 2011 growth and emissions target, which is set out in the economic strategy, and we conducted some initial work on productivity. Secondly, on developing Scotland's comparative advantage, we advised on the longer-term contributions of planning, education and infrastructure to economic growth in Scotland. Thirdly, on addressing the inhibitors to Scotland's economic growth, we considered how to address the high levels of economic inactivity that exist in some parts of Scotland, particularly Glasgow. Fourthly, we focused on how Scotland's economic statistics can be enhanced so that we have a clearer idea of how policies are working and how the Scottish economy is performing.
Those work streams are reflected throughout our annual report, which gives an overview of our thinking and conversations during the four meetings that we have had in the past year. Our report makes 22 recommendations to the Scottish Government and includes 22 additional considerations. I draw the committee's attention to four key areas that we believe are particularly important.
Planning was the first issue that we discussed, because we believe that it should be seized upon as a significant driver for increasing the level of sustainable economic growth in Scotland. The business community regards the inefficiency of the planning system as an obstacle to economic growth in Scotland. We share that concern, but we believe that the issues around planning go beyond inefficiency. We believe that a more proactive approach is needed and we have recommended that the Scottish Government finds a way to financially incentivise local authorities to promote and facilitate sustainable development projects. Reducing barriers and creating incentives for business will give Scotland a comparative advantage and enable it to attract local, national and international investment.
We recommended that the Scottish Government change the culture of planning so that planners regard themselves as facilitators and enablers of high-quality developments in the right places—people who make a positive contribution to sustainable economic growth—rather than as regulators.
We also discussed education. The council readily agreed with the Scottish Government that education policy is central to the delivery of the Government's economic strategy. Higher education is a high-cost area of Government policy and it requires a long-term perspective. Given the scale of the costs and other demands on limited budgetary resources, the council has asked the Scottish Government how it plans to fund a higher education policy that is fit for purpose in the 21st century. That is not just a Scottish challenge. The scale of funding is so large that almost every country is grappling with it. Ultimately, the Scottish Government needs to decide whether it will focus on creating world-class universities or world-class university departments, and to consider how it can afford to develop either of those.
We have offered to explore the financial and system implications at future council meetings. In the meantime, we have presented a number of quite radical actions that the Scottish Government could consider taking to develop the higher education system as a real competitive strength for Scotland.
The failure of some areas of Scotland, particularly Glasgow, to contribute and be an integral part of Scotland's economic progress is a matter of serious concern to us.
The council recognises that responsibility for addressing the key factors that have a major effect on Scotland's employment performance is divided between different levels of Government. Although we acknowledge the steps that have been taken in recent years to improve the co-ordination of those responsibilities, especially through the more local and partnership-based approach to service delivery, we believe that more needs to be done to resolve the tensions between Scottish and UK policy responsibilities. That is why we recommended that options to devolve Jobcentre Plus to the Scottish Government be explored and that further consideration be given to the gains and costs of bringing together benefits and skills policy within Scotland.
We also recommended that the current partnership arrangements be strengthened through a radical change in the use of funding to drive better outcomes and that public bodies that are tasked with delivering on employability issues agree a way in which to improve significantly their data-sharing practices. We believe that those actions are required if the Scottish Government's aspirations for the reduction of economic inactivity are to be achieved.
The final area to which I draw the committee's attention is public sector infrastructure. The council has begun a review of the economic role, current condition and means of provision of infrastructure in Scotland. We are concerned about the long-term underinvestment in Scottish infrastructure, and we believe that increased expenditure on infrastructure is required. That is a key recommendation in our report. We recommended that the Scottish Government pursue with the UK Government revisions to the current fiscal arrangements, which would enable it to plan more efficiently and meet Scotland's overall infrastructure needs. We would like the Scottish Government to explore the possibility of new means of borrowing outside private finance initiatives, to help to finance public sector infrastructure.
The council has noted that the real and nominal interest rates for long-term borrowing have, by historical standards, fallen to exceptionally low levels. It has also noted that the recent financial crisis has widened substantially the spread between the costs of Government borrowing and the costs of other borrowing. Although those conditions create many problems, they also create a favourable environment for funding the renewal of Scotland's infrastructure. We will return to that issue as the current problems resolve themselves.
In the coming year, we will keep exploring how to secure greater comparative advantage for the Scottish economy to boost sustainable growth. We will advise the Scottish Government on how to achieve some of the longer-term purpose targets that are set out in "The Government Economic Strategy". Those include the 2017 economic growth target; the 2017 productivity target; the 2017 population target; and the 2050 emissions target. Further work is planned on the key sectors that are set out in the strategy, which have the potential to boost productivity and, hence, growth in Scotland. We will highlight future challenges for each sector and identify how Government policies can be more supportive. We will also continue to advise on planning, infrastructure and Scottish economic statistics.
In our annual report, we set out 22 recommendations and 22 considerations for the Scottish Government, which we believe will help to deliver increased sustainable economic growth for Scotland. It is now up to the Scottish Government to consider those, and we look forward to receiving the Government's response in the new year.
We will now take any questions that you have.
Thank you for that, Sir George.
In the introduction to your report, you emphasise that the council's main objective is to look to the long term and the structural changes that are needed. However, the committee is concerned about the current economic situation and the significant change that has occurred since the council was established—indeed, since the spending review, when the Government established its budget. To what extent has the council considered whether public sector spending in Scotland—which is substantial—needs to be changed and whether there needs to be a shift in emphasis within that budget to deal with the current economic crisis and to put Scotland in a stronger position to enjoy sustainable economic growth in the future? What advice have you given to the Government on those matters?
Our consideration of those issues has been limited. Most of the levers that can improve the short-term economic situation are in the hands of the UK Government rather than the hands of the Scottish Government. However, anything that can accelerate quality investment—investment that has a meaningful return—in Scotland is to be applauded. I am sure that the Scottish Government is investigating how it can do as much as it can and how it can encourage local authorities to do as much as they can. John Kay may have something to add to that.
Professor John Kay (Council of Economic Advisers):
I do not have much to add. The basic point, which Sir George has made, is that the levers that are relevant to short-term policy are mainly in the field of fiscal and monetary policy, which is substantially under the control of the UK Government. The things that affect sustainable economic growth in the long run are to do with the underlying competitiveness of the economy and the behaviour of firms and industries, and those are areas in which the Scottish Government has substantial freedom of action. So, it is not only in our brief but inevitable, given the structure of devolution, that we will focus on the longer-term issues.
Of the issues on which we have focused, the one that is probably most relevant to action in the short term is the possibility of doing more on the infrastructure side. There may be opportunities in that area for the Government to move in ways that will at least ameliorate the imminent recession.
Planning also presents opportunities for accelerating investment over the next few years.
I will expand the question slightly. The Scottish Government's budget will have grown to around £35 billion by the end of the spending review period, but when decisions on Government spending are taken there is rarely a root-and-branch look at how the Government spends its money. Might the council consider that in the future, to determine whether spending in Scotland by the Scottish Government is focused on delivering the overall aims of the Government? I ask that not from a political perspective, but as a general question.
Yes. We will look at the balance of spending—how the money is invested in different areas of the economy. The answer to your question is definitely yes.
If I were to be critical of the clarity of some of the top-level recommendations—I am thinking of recommendations 1 to 3, on productivity—I might suggest that they are a statement of a commonly shared set of priorities. Productivity is a priority, and the recommendations are around skills, training, levels of productivity and the key clusters in the economy that have been in place for a decade or more. What lies behind your top-level recommendations? For example, what do you have in mind when you advise the Government to improve
"capital and total factor productivity"
and to improve "labour productivity"?
Productivity is an area in which we looked more from the top down than we did in other areas of the report. It aligns itself with our recommendations on education, training and so on. We focused on areas in which we can achieve comparative advantage, and I would say that we have more work to do in that area.
For me, the most important part of the council's approach so far is contained in recommendation 2, which reinforces the idea that the competitive advantage of a country such as Scotland rests, in essence, on its having strong sectors that compete aggressively and effectively in global markets. We have talked about some specific sectors in that regard—financial services, food and drink, tourism, life sciences, and so on.
At its next meeting, the council will begin a sector-by-sector review, because what Government can do to support the sectors varies considerably from sector to sector. For example, what one would look to in financial services differs from what one would look to in tourism or in food and drink. I attach a lot of importance to the sectoral review, which I hope will be a continuing part of the council's work.
At a meeting of the committee in October last year, I recall Sir George Mathewson describing employment regulations and red tape as "horrific". Paragraph 2.6 of the council's report looks behind some of the top-level targets and indicates that the council seeks
"increasing flexibility in labour market practices".
There is a good deal of evidence that the level of employment regulation across the UK is relatively light and is combined with relatively high levels of economic success. When I read that suggestion in paragraph 2.6, I wondered whether I should be anxious about what the council might have in mind in relation to increased labour-market flexibility.
I have a predilection against bureaucracy and red tape. Part of that has come through in our recommendations on planning. In my view, it is important to simplify that process to help increase economic growth in Scotland. However, we have not discussed in depth how to increase labour flexibility, nor have we visited yet the different kinds of employment regulation.
Will you do that?
We might, because increased flexibility in a labour force is vital. In fact, it will be vital in helping us to come out of the recession. However, I see no reason for people to be alarmed by our recommendations for dismantling regulations on people in work, because we are not there.
That is not where you are.
That is not where we are.
That is helpful.
I want to ask about the somewhat related recommendation on Jobcentre Plus. I know that Jim McColl has been involved in some of the work on that around the west of Scotland. What is the evidence base for the suggestion that the Government should look again at Jobcentre Plus's accountability?
Jim McColl (Council of Economic Advisers):
We have tried various models in Glasgow to get people back into work. The latest model involves a civic consortium in which everybody is focused on agreeing what the real challenges are locally, with funds being channeled through the consortium at that level. That seems to be working well.
Jobcentre Plus has changed recently. Benefits are centralised, so that is not an issue any more. However, given that everyone who is unemployed or could claim benefits comes through Jobcentre Plus, which has offices all over Scotland, the logical thing to do would be to link up the Jobcentre Plus offices with the other members of the local consortia including skills and careers services. We work closely with Jobcentre Plus in the Glasgow area in trying to do that. We want to link up the offices so that when someone comes through the door they can be directed to the skills person, for example. The offices should be joined up; if they are not, we have separate silos. If the information that one needs on an individual is held exclusively in Jobcentre Plus, it cannot be shared with people who are trying hard to design appropriate training programmes to help people get back into work quickly. There is, therefore, a separate, inefficient silo in the skills sector and there are many careers offices. It would make sense for them all to work together as a team, much in the same way that we are putting together the civic consortium in Glasgow.
There is also an initiative from the Department for Work and Pensions on the city strategies in Glasgow, Dundee and Edinburgh; the purpose of the initiative, which is working well, is to join everything up. In a Scottish context, that could be done with Jobcentre Plus—there are various models that could be used. That activity would not have to be devolved; it could be outsourced. At one time, the DWP was considering outsourcing some of the Jobcentre Plus activity or incentivising private firms to get people into work. There could be an agreement with the Westminster Government that the area was not going to be devolved, but the activity would be outsourced. In the Scottish context, it would help if we had a more effective model for putting people on the right path and giving them the right support to get back into work.
If I have picked it up correctly, you are not saying that the system is in trouble and needs to be changed; you are saying that the model works, but it could do with being improved.
It is hugely inefficient. I will give you an example. A lot of initiatives on engagement come out of the DWP. The DWP spends a lot of money on getting companies to go out and engage people. We have the silly situation in Easterhouse where staff are going into pubs, knocking on doors and meeting people in the supermarkets to try to identify whether they are unemployed and what kind of help they need. The local Jobcentre Plus office has all the details, but it cannot share them. We spend money to get people out there to identify whether people are unemployed and what their needs are. The amount of money that we spend is not insignificant; it is a lot of money that could be used more effectively in programmes to help people who are unemployed.
So, there is an issue about the sharing of information for Governments to address.
There is a significant economic issue to address. There is quite a bit of waste, because the activity falls between authorities. Local authorities have an interest, too. I have to say that all those involved are working well locally. The issue is not confined to Glasgow; it arises in other areas, such as Clackmannanshire and the west of Scotland in general. We really need a better co-ordinated approach.
I was most instructed by the eloquent report, which diverted me from my study of J K Galbraith and the great slump. One of the first things that you say in the report is:
"we have seen the bursting of the largest asset bubble in history and, in its wake, the onset of both the most severe financial crisis since the outbreak of the First World War and a recessionary pandemic that has swept across the world's advanced economies."
I congratulate you on that moderate judgment. As an economic historian by trade, I think that the current situation leaves 1929 rather in the shade. Remember that in 1929 the world was on the edge of motorisation, the telephone, the talking movie and the airliner. All those things are more or less indicted because of conservation issues.
It was useful to go first to John Kay in this morning's edition of the Financial Times—my addiction to sensational literature is like that of Oscar Wilde's Cecily.
Big institutions, hitherto of great clout, will turn up on Downing Street's doorstep expecting to get themselves bailed out. We can all think of various candidates who will be there. Given that Scotland has to exist in its current relationship, how do we get in with sufficiently great clout to induce a step-change in priorities in the acceleration of activity? As an historian of North Sea oil, I saw how that happened with great rapidity during the 1970s. It can be done, but how do we do it, given the divided responsibilities?
I am thinking, in particular, of your conclusions on infrastructural planning and of the need to have some simple and—these days—economic method whereby the Scottish Government can borrow, in one form or another, to accelerate economic and infrastructural activity and also offer a home to savers such as myself who, confronted with a money market in which accounts pay zilch interest, would be only too glad to put their money into bond financing.
In education, should we not think about more acceleration of technical education so that our unquestioned leading position in certain scientific research—for example, into renewables—can be transmitted into our project engineering? Should we not think about establishing linkages with European industrial regions that have the training capacity that we, alas, no longer have? Baden-Württemberg has 35 per cent of its gross domestic product in manufacture, whereas the equivalent figure for Scotland is perhaps 14.7 per cent.
I am certain that acceleration of planning will follow such initiatives, but how do we batter our way to the first position on the Downing Street doorstep in the immediate future?
Discuss.
You raise quite a lot of issues. The first is about lobbying by the big firms that have clout. That has been on my mind since I wrote—and you read—the FT piece this morning. A large part of the problem that exists at the moment is the fact that there are two elements that are tipping the UK economy as a whole into recession. One is the rather dramatic collapse in confidence that we have seen over the past few months; the other is the reluctance of banks to lend even to rather bankable projects.
The issue of big firms and small firms that you talked about relates primarily to the second of those elements. As we have noted, large firms have been banging on Government doors and demanding direct funding in a way that small firms are unable to do. Action on that issue is not much within the capacity of the Scottish Government. The Scottish Government has been exhortatory but cannot do much more than that. It is important that the UK Government is in the process of acquiring rather large shareholdings in Scotland's two major banks. It seems to me that it ought to be a more activist shareholder than it currently plans to be in ensuring that these things are delivered.
The second set of issues that you raise is to do with infrastructure, to which we may want to return for discussion as a separate topic. The council is strongly supportive of the general line that you take in saying that Scotland's infrastructure has received insufficient investment over the past 30 years and that, in many ways, the current depression can provide an opportunity to act in ways that will relieve the depths of the depression and start the process of renewing infrastructure.
The third issue that you mentioned concerns skills and training. There is probably less to offer there in terms of immediate relief. I pass that issue over to my colleagues, who may have more to say about it than I do.
Jim, do you have anything to add to that?
No.
I do not think that I have, either.
I would just like to add that Baden-Württemberg produces 10,000 qualified engineers a years, whereas we produce about 2,000. Although Baden-Württemberg has a population that is double the size of Scotland's, that is still a big gap. That comes from its having a large manufacturing sector. We must work out some method of bringing in the people who are skilled in renewables on target and on time, and I believe that that will involve collaboration with Europe. I do not believe that we can do it on a stand-alone basis.
We hear you.
I will raise two issues. I convene the cross-party group on construction. This committee has taken evidence from the construction sector. I do not know whether you have read that sector's evidence or followed what it has said, but it believes that the single biggest thing that the Government could do would be immediately to bring forward infrastructure projects and to consider investment in affordable housing. Very senior individuals in the construction sector told us that that was needed now and that no delays are possible—we cannot wait six months until an inquiry has been held.
I return to what Christopher Harvie said about skills and training. A flight of skills from the construction industry is happening now—every day. Given the crisis in the sector, people worry about whether existing apprenticeships will continue. What are your comments on the construction industry's view of the current situation? What role do you have to play? What discussions are you having with bodies such as the Scottish construction forum? I am interested to hear what consultation is taking place.
My other point is about skills and training. Jim McColl needs to come to Fife to see the opportunity centres, which are one-stop shops that involve Jobcentre Plus, the careers service and local colleges. They are located in my constituency, in the convener's constituency and throughout Fife. People have found solutions to delivering one-stop advice on education and training. I ask Jim McColl to examine the successful model that is working in Fife.
On the recommendations for higher education, what cognisance did you take of the role of Scottish colleges, which deliver 40 per cent of higher education in Scotland? If we are to have inclusion and to get people on to degree courses, consultation is needed with the Association of Scotland's Colleges and college principals. What consultation have you had? I have not been involved in all the discussions but, after reading the report, I think that the colleges are a huge omission. What are you doing to examine all the education and training that feeds the university sector? To involve local people in areas that have no universities, we rely heavily on further and higher education colleges.
I would like to hear your views on those matters.
I will start with construction. Our opinion is that infrastructure projects should be brought forward as quickly as possible. We have not had discussions with the construction industry and I do not think that we need to: we can see clearly how severe the problem is.
My personal view—the council has not discussed this—is that it is anomalous to charge zero VAT on new houses but full VAT on repairs, extensions and installation. I do not understand how imposing a 2.5 per cent VAT reduction across the board can ever make a difference, but that is a personal view. The council has not discussed the matter, so I probably should not even have mentioned it, to be honest. However, the point is constructive. I am simply saying that an anomaly exists. We have no argument with bringing forward infrastructure investment as quickly as possible.
Members must remember that we have had only four meetings. We do not pretend to have solved all Scotland's issues and we have not yet discussed the supply side of the educational system—the supply to universities. We have made suggestions about higher education, but we have not looked at other aspects. However, we will do that—it is in the system.
If you are considering the higher education system, you cannot ignore Scotland's colleges.
We are not. There are no plans to ignore them.
They are not mentioned.
It is because we have not considered them yet.
But they deliver 40 per cent of Scotland's higher education.
That is correct. We have not considered them yet. We have considered specifically the problems of the universities rather than the colleges.
I will respond on the Fife model. I agree that it is working quite well. I have been to see the opportunity centres, and I stress that they represent a major move forward from where we were, but we can make great improvements if we join things up even more. There is wasteful activity, and we could gain significant economic benefits and savings if things were more joined up. Fife has taken a big step forward. Other areas of the country are taking it too, but the civic consortia that are doing well just now could be doing a lot better.
I welcome the establishment of the council. I see that others are following suit, which must be a good thing. The opportunity for the council to improve government in Scotland is partly about building a dynamic relationship with Government, not simply publishing an annual report.
As I knew that you were coming, I read the minutes of the council's meeting in June, which state:
"The Council advised the First Minister to:
commission external consultants to conduct an assessment of the costs of various energy options which could then be reported back to the Council".
I wonder whether that matter was reported back on at your October meeting or whether now, in December, you have any idea whether that work has been commissioned.
First, on the dynamic relationship with Government, there is a balance to be struck between advice and implementation. We are advisers and we do not govern, and it is important that it remains that way. However, we have very open discussions with Government at our meetings, some of which are not minuted, because the ideas fly back and forward, and are contradictory and so on.
The energy study is being commissioned and will be reported on in due course. The concept is to get an independent view. I have found it difficult to gain a real understanding of the comparisons of the different sources of energy. That is what we are setting out to do.
That is helpful.
Does the Government have an agreed mechanism for responding to the recommendations and considerations in your report?
Yes. It will respond at our next meeting—our fifth meeting—which will be held on 16 January next year.
That is useful to know.
On the point that Sir George ended with, which is the availability of data, I was delighted to see the report's recommendations on improving the quality of data on the Scottish economy. Chris Harvie rather stole my thunder on the hyperbole that is deployed in the report. I suppose that I was disappointed that there was no recommendation that the Scottish Government should attempt to provide gross domestic product statistics—albeit, I hope, improved ones—on a comparable timescale to those that are available for the UK as a whole. As the council knows, the data for Scotland lag considerably behind those for the UK.
Also, you made no recommendation that the Scottish Government should attempt to forecast the future performance of the Scottish economy. It is impossible to plan for the future, or indeed to speculate about whether we will perform worse or better than the rest of the UK, if the Government makes no forecasts at its own hand. Has the council taken a view on whether GDP data for Scotland should be produced on the same timescale as that for the rest of the UK, and whether the Scottish Government should develop some forecasting capacity for the performance of the Scottish economy?
I will ask John Kay to answer that. As far as forecasting is concerned, you must have today's data before you can forecast the future. The problem is that we do not really have today's data. It is very difficult to get them, because of the interlinking of companies across the border and so on.
I emphasise what Sir George has just said. It is a mistake for us to attach a lot of weight to, for example, the quarterly GDP data as they are currently presented. We have to go through a much longer process of improving the quality of the underlying data in Scotland before we think about accelerating the provision of GDP information. Forecasting involves various issues, but the basic point is that we need firmer knowledge of the past before we can talk intelligently about the future.
My view, which has achieved substantial agreement in the council, is that we should probably attach more significance to harder economics statistics, such as earnings data, than to speculative GDP data. One can see the difficulties involved in teasing out simply the impact of the tribulations of Scotland's financial sector on the short and long-term measurement of GDP. One also finds questions about the quality of the data on sectors such as catering and tourism, on which it should be a lot easier to get data than on the financial sector.
We have a lot of work to do in Scotland to get the data that we need for the committee and the Government to make the required recommendations and decisions. I hope that we can act as a catalyst in encouraging people to obtain those data.
Postgraduate arms can be twisted.
We wish the council luck with that work, because it is long overdue.
It is fair to say that the council's status will rest in part on the extent to which people perceive it to be an independent and relevant voice. I read with some interest Sir George's preface to the annual report, in which he states:
"It is our belief that any conversation on fiscal powers should be undertaken with the clear ambition of making Scotland more internationally competitive."
I could not agree more, so I was somewhat surprised that I struggled to find any mention in the report of the plans for a local income tax.
The local income tax is to be the single greatest fiscal change since devolution. It has generated more responses than any proposal since the smoking ban. The Government is saying that it will produce no figures on the costs to employers of introducing the local income tax until we reach the financial memorandum stage. It is fair to say that the fact that the Government will not even tell employers how much it will cost them to implement the system has generated outrage among them.
Given that background, why is there no mention in the report or the work programme of the impact of Scotland—uniquely among countries in the Organisation for Economic Co-operation and Development—saying that it wants no domestic property taxation and wants to replace it with a supplemental tax on earnings? Why does that not feature, especially given that the preface to the report says, rightly, that the ambition of any conversation on fiscal powers should be to increase international competitiveness?
To be honest, we have just not discussed it.
Has nobody raised it as a relevant issue for the future work programme?
I feel that it will be in the future work programme, but we have not yet discussed it.
I will leave it at that, although I want to raise another issue in the same vein, which is the independence and relevance of the council's work. I note that, on infrastructure, the report says:
"The erratic management of the overall fiscal position has led to both feasts and famines in the availability of funds to the Scottish Government."
There has certainly been feast, but the Scottish budget has risen every year since devolution, with no famine of any kind at all. One could argue about the merits of the current financing system for Scotland, but when we consider that the receipts to the UK Treasury this year are down by £79 billion on the forecast, and that Scotland's spending has been entirely insulated from that fall in revenues, it seems that the problem with infrastructure spending in Scotland is not famine. There has been no famine at any point during the past 10 years. The balance between current and capital spending is an issue, but choices relating to that reside in Scotland and have to be addressed in Scotland.
Why does the Scottish Futures Trust get but one mention in the entire report? As others have suggested, uncertainty is created when an organisation has no chief executive, has a board to which some appointments have yet to be made, and has no management statement as to what should guide future infrastructure investment.
When I read an assertion that famine characterises the funding of the Scottish Government, I do not agree with it. People have expressed high hopes that the Scottish Futures Trust will come up with an alternative model of finance, but the report contains no mention of the uncertainty that is created when an organisation is without a chief executive, most of its board, or a statement of funding objectives. Business representatives tell us of that uncertainty, so it would have been helpful if the report had teased out that point more.
The issue that you raise is an implementation issue rather than a strategic issue. John Kay might amplify this point, but I see the role of the Scottish Futures Trust as being to evaluate and produce different methods of financing infrastructure investment in Scotland. An opportunity exists to create different methods from those that have been used.
We referred to "feasts and famines", and what you say, Ms Alexander, about the current expenditure of the Scottish Government is right. To put it bluntly, it has been rather generously funded over the period since devolution. The famine is in prospect, rather than in the past. However, you mentioned the balance between current and capital expenditure, and there has been famine in relation to capital expenditure over quite a long period.
I feel—and the council shares the view—that the relationship between current and capital expenditure in the current devolution arrangements will have to be thought through rather more carefully than it may have been at the time of devolution. As we say in the report, we still have a structure that, in effect, treats the Scottish Government as if, for these purposes, it were an English Government department with a mixture of current and capital controls from the UK Treasury. A sensible devolution arrangement would inevitably give the Scottish Government more discretion on current and capital expenditure than it has at present.
For the council, all of that is work in progress. We had one substantive discussion on infrastructure issues at our most recent meeting, which has been reflected in our report. Because of the urgency of infrastructure issues, we will have to return to that discussion.
It is clear that not very much has happened so far on the Scottish Futures Trust, but it is a possible mechanism for making progress with infrastructure and other investments. It is not the only possible mechanism, but it should certainly play a role. If we can contribute to putting some drive behind it and other initiatives in the area, we will be doing our job and answering the criticisms that you are making of us.
As Sir George Mathewson has rightly said, implementation is a matter for the Government, not for the council. We can make noises, which is what we are doing, but that is all that our remit permits.
I point out—very briefly and in all candour—that those of us who wish you well feel that, as it currently presents itself in Scotland, the famine issue is not to do with underfunding. People have testified to the committee that in each of the past five years, £1 billion was spent on procurement in Scotland, but that figure has now fallen to less than £200 million. Of course, that might change because of some of the capital expenditure that is being brought forward, but the fact is that, as a result, advisory teams have simply left Scotland. That procurement in the market has been reduced to less than a fifth of its level one, two or three years ago is not merely a matter of implementation at our own hand, and over the next year the council could bring its expertise to bear on striking a balance between finding the location of the famine and addressing it.
Given that Government in Scotland is undertaking more and more tasks, and given the public's expectations with regard to the delivery of aspects of the devolved settlement, I am fascinated by paragraph 33 of the executive summary which, as Professor John Kay has noted, says that the fiscal framework of Scottish Government departments
"has not changed since devolution."
Do you think that Government is organised and deployed in a way that best meets the current challenges or do you think that, 10 years on from the creation of the Parliament and the Scottish Government, this is an appropriate time to examine the issue in detail?
We are not suggesting that there needs to be a revolution; we are simply saying that we should review the current structure for implementing capital expenditure.
Have you delved into how the structure of the civil service relates to greener, fairer, healthier, smarter and other objectives as a means of focusing on policies, the delivery of the capital expenditure that you have mentioned, the efficiency of revenue spending and so on?
No.
Do you intend to think about that issue? After all, it opens up the question whether there are other ways of organising the structure of Government.
The structure of Government and the overall constitutional position are not properly for us to examine. We raised this particular issue to focus on infrastructure and capital spending matters, although it also leads into the nature and implementation of the devolution settlement. The machinery of Government as a whole is neither an issue that falls within the council's remit nor something that I feel competent to discuss.
To take a specific example related to the greener, wealthier and smarter objectives, I wonder whether you think that the Government in Scotland could be better organised with regard to, say, devolved powers over the development of electricity infrastructure and power generation. Should number 10 think about giving us more powers over certain elements of those matters?
We have not reviewed or thought about that, although we might do so at some point.
In that case, I merely put the suggestion in your mind.
It is inevitable that, in the course of our review of energy options, which was discussed earlier, we will review the implications of the regulation of transmission arrangements and perhaps the broader issue of the regulation of electricity and other prices.
I was taken by paragraph 8.16, which says:
"The Council believes that the critical question for the Scottish Government is the degree to which current commitments imply future increases in expenditure above the levels implied by current funding."
That led on to the council's consideration—as opposed to recommendation—that
"the Scottish Government should secure independent monitoring of this reporting and of its overall fiscal stance".
Will you elaborate on how you think that that independent monitoring might work in practice? Should the independent monitors have any powers or teeth?
I do not believe that we can discuss that in detail; we have put forward a principle.
You have put forward a principle, but you have no specific ideas about how it might work in practice. I am referring to your second consideration in paragraph 8.22 on page 53.
We asked the Government to consider that proposal.
So it had not been discussed in any detail.
No.
Recommendation 20, which is on the same page, states:
"the Council would like the Scottish Government to explore the possibility of new means of borrowing, outside PFI, to help finance public sector infrastructure."
Specific reference is made to the Scottish Futures Trust elsewhere in the text. Does the Council of Economic Advisers have a view on how quickly progress needs to be made on the SFT, given some of the discussions that we have had so far?
We would like progress to be made as quickly as possible. That would always be our view.
Okay.
I return to your final recommendation on statistics, which has already been mentioned. You say that although GDP is an important piece of the jigsaw, it should not make up the entire jigsaw. You recommend that the Government should consider other measures. If you had a blank sheet of paper, what specific measures would you recommend that the Government should consider first when judging our overall economic performance?
John Kay made a point about the use of income rather than gross national product as a measure.
Do you have any other specific examples?
We are in a strange position. If Scotland were an independent country that had its own independent statistics office, it would naturally produce GDP figures for Scotland using the United Nations system of national accounts, which is used by all countries around the world. Intriguingly, because we are not in that position, we could in some ways have more freedom.
Comparability considerations are powerful reasons for all countries to adopt that structure, but given the context in which we operate, I am inclined to think that perhaps we should put less emphasis on GDP because, in truth, if one could revisit the set of statistical conventions, one would probably not start from the same place. I am talking about a system that can be thought of as much more of a management information system that is about generating for the Scottish Government the data that are most relevant to Scottish Government decisions. I suspect that GDP is probably not that. That is why I would like us to focus rather more on some of the hard data that I have described, such as those that show what is happening to earnings or in individual sectors. If we had a better handle on microeconomic issues, we would have a better understanding of what is happening in financial services, on which the picture is, frankly, a bit of a mess. We have aggregate figures for the UK, which are not terribly meaningful in themselves, which are then disaggregated in rather arbitrary ways to generate data for Scotland. One feels that rather thin cards are being piled on top of the already rather thin cards of the existing data. Understanding the microeconomics of what is happening in Scotland's financial services sector might be a better way to proceed.
Similarly, we could consider the other sectors that I have mentioned on which we have queries about the data, for example we could understand better, at a more micro level, what is going on in catering and tourism. I hope that that will be part of the work of the council over time, and that, as we consider those individual sectors, we will generate a variety of indicators and data that fulfil a management information systems function and enable the Scottish Government and this committee to do their jobs more effectively.
There are numbers that would be far more meaningful.
Professor Kay has just answered one of my questions. That is one of the problems of being at the end of the queue. I need to get my hand up really early in future.
First, given what has just been said, does the panel think that it would be a good thing if we had a strong, independent Scottish statistical service that produced all the data that we need?
Secondly, I would like to elaborate a wee bit on PFI/PPP and its replacement by the SFT. What Wendy Alexander said is true. PFI projects have dropped from about £1 billion to £200 million. Of course, about £14 billion of other capital projects are going on in Scotland outwith PFI/PPP. What is your view about the change in the accounting rules that will come into play next year, which will force all that sort of borrowing to go on the books? How important will that be in pushing the Scottish Government and the UK Government into different forms of borrowing? How will it change things?
I mentioned that to John Kay this morning before the meeting. He made the point that, previously, the Government had to some extent been complicit in schemes that took liabilities off the national balance sheet, although there was clearly an on-going liability in many PFI schemes. The accounting profession appears to have caught up, in the national situation, with where it got to some time ago in the commercial situation.
John Kay made the point that the national balance sheet is all to pot at the moment anyway, because of the rather extreme conditions that the world is under. That applies not only to the UK balance sheet but to everybody's balance sheet, so the situation might be less significant than it would have been. However, while PFI has improved the deliverability of some projects, it has resulted in extensive long-term liabilities for the Government that might have been less if the Government had indulged in simple borrowing. There is no real difference between a liability on PFI and a liability on borrowing.
We should focus on the reality of the situation rather than the cosmetics. I am not sure whether the accounting thing will make all that much difference. However, on pure cost to the taxpayer, PFI has so far not been the best solution. We must ensure that any further solutions improve the deliverability and management of projects.
I do not have much to add to those basic points. I would simply pick up the point that Gavin Brown raised earlier, when he quoted the recommendation that we should look to the implications of current activities and projects for future expenditure and tax levels. That is a far more important thing for us to focus on than a notional figure for what a national balance sheet looks like. Indeed, if we had focused on that right from the beginning, we would not have had the enthusiasm for PFI that was generated and we would have been clearer about the implications of PFI for future expenditure levels in Scotland.
As Sir George Mathewson said, the balance sheet issue has been blown out of the water by the various other events that have happened in the past year anyway. However, if events have one other lesson for us all, it is that such complex and ostensibly clever financing packages were not quite as clever as people tended to think they were. That is even more relevant to how the Government finances itself than it is to the private sector. As George Mathewson mentioned at the beginning, the gap between Government borrowing costs and the costs of more complex financial arrangements is bigger than it has been for a very long time. We should take advantage of that.
As we are entering a period in which public spending growth will inevitably be more constrained, the temptation to focus on current rather than capital spend will be more intense than it has perhaps been for a decade. Just this afternoon, the Parliament will discuss its strategic transport projects review. I hesitate to guess, but probably more than three quarters of the financial liabilities that are associated with those projects will fall to be due after the end of this parliamentary session. That creates all sorts of perverse incentives for politicians of all sorts.
Whatever we do with the balance between current and capital spend, we are likely to continue to have a comprehensive spending review programme that runs over three years. Most long-term infrastructure liabilities fall well beyond that time horizon. It would be immensely helpful if the council could think in a little more detail about the recommendation on accounting for
"the implications of current decisions for future spending",
so that one was clear about the profile of spending and acknowledged when that became due for the Southern general, which will be the second-largest hospital in western Europe; the Forth bridge, which is the most significant infrastructure project; or the upgrading of the A9.
I note in passing that it has not historically been in the interests of politicians or officials for such long-term profiled spending commitments to be laid out. However, that is undoubtedly in the Scottish economy's interests as a whole. Precision on that in the next two years would be hugely valuable.
That is exactly what was in our minds for the recommendation on independent monitoring that Mr Brown mentioned.
Such a practice is not in the interests of politicians and officials, but what has happened has not been in the interests of the quality of projects. A tension has always existed with a politician's decisions in their period of office. Our motorway system has suffered from that over the years. People have said, "Just get it built, guys—we don't care how many cars will go down it 10 years from now." The issue is not new. The council and I agree totally with what has been said.
Sir George Mathewson said a moment ago that no real difference existed in the cost to the taxpayer between PFI and borrowing—
No—I did not. A difference exists. One can argue about risk sharing, but in most cases, a risk was not involved and the Government gave an implied guarantee. In those cases, the cost to the taxpayer of a PFI solution was higher than that of a borrowing solution.
On the same basis, does any difference exist between the current PFI model and the non-profit-distributing model, which is operating in one or two places and is the basis for the Scottish Futures Trust?
I think so. I understand that the Scottish Futures Trust has not embraced a single model and that we will judge various solutions, one of which is the model that you named, on their long-term cost to the taxpayer and on effective project management. We need to take steps to ensure an effective project management system in the public sector.
Are you saying that we should disregard the suggestion that has been made in the Parliament that the Scottish Futures Trust's primary funding mechanism will be the non-profit-distributing model?
I ask John Kay to answer, but I see no limitation.
The Scottish Futures Trust could not meet the objectives of our recommendations in the area by using an NPD model alone. We are clear about that. As we see it, the weaknesses of PFI are that it has been expensive and inflexible and, least obvious but most important, it has not contributed to the development of better project management skills in the public sector. Public sector skills have been focused on the complex financing packages, rather than on the management of the project. Our hope is that an SFT or other arrangement that can be put in place to better manage infrastructure projects will achieve all three objectives. The NPD model does not take us far down any of those roads. In that sense, it is a rather minor twist on the existing PFI model.
I am interested in recommendation 20, which is that Government
"explores the possibility of new means of borrowing … to help finance public sector infrastructure."
It seems from the evidence that you have given us this morning that implicit in that recommendation is the idea that the Government should not continue to pursue the private finance initiative. We have heard from witnesses from the business community that the difficulty is that, in the absence of an alternative, nothing is being done. Are you advising Government not to pursue the existing model? Does it trouble you that a consequence of that might be that no new infrastructure projects are developed?
It would trouble me if that were a consequence of the advice, but I do not believe that it is. If no new projects are being developed, that might be the consequence of Government's views, but not of our advice.
When you advise on such matters, do you take cognisance of the views of the construction and development sectors and of those whose business it is to carry forward projects of that kind?
We have had no consultations with the construction sector.
Do you envisage consulting it, given the current economic circumstances?
I envisage the Scottish Futures Trust doing that; I am not sure that it is our role to do it.
I return to a point that was made earlier. I think that you said that you envisaged looking at local income tax and its impact on competitiveness.
I said that we would do so, if that were possible.
Will you determine that matter around the table, or will you consult ministers or external bodies?
Primarily around the table, but we then consult ministers. There has never been any issue about what we look at; questions have never been asked about why we are or are not looking at something.
If, for example, the business community felt that the impact on competitiveness of the local income tax would be a valid area to which your collective expertise might be applied, would you take seriously any approach from it?
We would take it seriously, as we take seriously any approach from anybody.
That is helpful. To help me better understand that point, when you say that you would take seriously any approach from anybody, has much contact been initiated by others—for example, the business community or other players in the economy?
No, not really.
There has not been much engagement with the trade unions, the business community or the banking sector.
No. In a way, we are trying to take an independent view. If you get involved with the various trade bodies and so on, you find that they all have—quite correctly—their own points of view. We try to stand back from that to come up with as good an independent view as we can.
I have one specific question about that: do you engage with the national economic forum, which has a range of stakeholders and which Government supports?
We do not engage with it, but I know what its role is.
I will ask one final question, on university funding. In recommendation 17 of the report, and in the considerations listed in paragraph 7.17, you stress the need to consider increased contributions from a number of stakeholders, including students. In the third consideration, you ask the Government to
"explore how to encourage higher education students to develop positive attitudes towards investing in their own education, building on the principle that the greater the level of personal investment they make, the more focused and effective the educational outcomes will be".
Does that mean that you would ask any Government to consider the reintroduction of tuition fees?
No, it does not, actually. Certainly not necessarily. However, I feel—and I think that the council as a whole felt the same—that investment in education is not just about money. There is also investment of time and effort.
I lived for a while in the United States, and it seemed to me that the professionals there invested more of their own time in pursuing their subjects than currently happens in the United Kingdom. What we are saying in the report is that we must all value education. Just because we do not have fees, it should not mean that we devalue education. I am not certain that everybody in Scotland puts the same value on education as they used to. The importance of education to individuals cannot be overrated.
What we are saying is that nothing is out of consideration.
So there could be a financial contribution from students for their own—
No, I think—
I am just trying to clarify what is meant by the recommendation.
I know that the political arguments have focused on student fees and on whether funding could involve some contribution from students. I do not know. What we are saying is that we have to ensure, through all our measures, that people value their education and consider it a great thing in their lives and a great gain for them.
I do not think that anyone would dispute that philosophy, but I am just trying to clarify what the recommendation and the considerations in the report actually mean, so that the committee can understand.
As Sir Lyon Playfair said in about 1869, an education at Oxford or Cambridge would cost a student £10,000 for his time there, and an education at a Scottish university would enable him to earn £10,000.
Times have perhaps moved on.
As there are no further questions, I thank Sir George Mathewson, Jim McColl and Professor Kay for coming to the committee today. It has been a useful opportunity to get clarification on some of the details of your report, and I am sure that the committee will seek a copy of the First Minister's response to your recommendations and considerations, so that we can give our thoughts.
Meeting suspended.
On resuming—